Statistical Analysis of Causality between Capital Structure and Firm Profitability: Evidence from Bosnia and Herzegovina

Abstract

This research is designed to examine the relationship between the capital structure and profitability of non-financial firms in Bosnia and Herzegovina during the ten years period, from 2003-2012. The goal is to prove the existence of the relationship between the firm’s capital structure choice and its profitability. The analysis is extended by including the debt structure and differentiating between the types of debt such as the long-term and the short-term ones. Canonical correlation and multiple regression analysis are used. The results of the multivariate canonical correlation analysis provide support to a hypothesis that the capital structure and profitability have statistically significant relationships. Furthermore, the findings provide support that firms develop different patterns of profitability depending on the capital structure choice. We found that an increasing proportion of short-term debt and long-term debt in the overall liability of the firm reduces its profitability.

Determinants of Debt Financing and Their Moderating Role to Leverage-Performance Relation: An Emerging Market Review

“…These adverse features could be the reason of negative leverage-performance relation in developing economies as found by many of prior studies given in Table 1. (Hailu, 2015) Ethiopia - (Hedayatzadeh, 2015) Tehran - (Alipour & Pejman, 2015) Iran - (Boadi & Li, 2015) Ghana - (Vătavu, 2015) Romania - (Mule & Mukras, 2015) Kenya - (Nakhaei & Jafari, 2015) Tehran - (Nguyen & Nguyen, 2015) Vietnam - (Ramadan & Ramadan, 2015) Jordan - (Resić, Mangafić, & Peric, 2015) Bosnia and Herzegovina - (Rouf, 2015) Bangladesh - (Vithessonthi & Tongurai, 2015) Thailand -(Akinlo & Asaolu, 2012) Nigeria -(Ebaid, 2009) Egypt - (Chen, Chen, Liao, & Chen, 2009) Taiwan - (Memon, Bhutto, & Abbas, 2012) Pakistan - (Umar, Tanveer, Aslam, & Sajid, 2012) Pakistan -Abor, (2005) Ghana - (Hung, Albert, & Eddie, 2002) Hong Kong -However, it is argued that study of direct leverage-performance relation is not useful as it depends on various contingencies and moderating factors (Farooq, Ashraf, & Ahmad, 2014). Intensity and even direction of leverage-performance relation can change because of these contingencies factors.…”