The Effect of Golden Ratio-Based Capital Structure on Firm’s Financial Performance

Abstract

This study aims to apply the golden ratio to the capital structure of non-financial institutions in France and the United Kingdom to find the effect of the golden ratio’s deviation from the capital structure on financial performance. A golden ratio is an irrational number with an approximate value of 1.618. In this paper, the golden ratio was applied to develop the assumption that the firm should use debt at a percentage of 61.8% and equity at 38.2%, which deviates from the capital structure variables. The final study sample consisted of 150 non-financial institution firms from France and 200 from the U.K. between 2002 and 2021. In addition, the general method of movement (GMM) was chosen to estimate the effect of capital structure variables deviating from the golden ratio on firms’ financial performance. The study results show that when a firm uses equity at a percentage of 38.2% in its capital structure, it can have a positive and significant impact on its financial performance in both France and the U.K. However, the results show that the debt-to-equity ratio deviated from the golden ratio and had a negative and statistically significant effect on both countries’ TOBQ, EPS, ROA, and ROE. Moreover, the firms’ adoption of IFRS can positively and significantly impact financial performance in France and the UK. Generally, managers in France are encouraged to use 38.2% equity and 61.8% debt in their capital structure. However, managers in the U.K. should apply equity of 38.2% and debt of 61.8%, depending on the performance measurement demanded.

Sound Corporate Governance and Financial Performance: Is There a Link? Evidence from Manufacturing Companies in South Africa, Nigeria, and Ghana

“…The data used for the study from South Africa were downloaded from Thomson Reuters Eikon DataStream, and that of Ghana and Nigeria were extracted from their annual reports published. Amin and Cek [50] used data from Thomson Reuters Eikon to examine the effect of capital structure deviation from the golden ratio on the financial performance of firms in the UK and French stock markets. Boachie [43], Musah and Adutwumwaa [42] and Arhinful, Mensah Owusu-Sarfo [51] also extracted data from the annual report of firms listed in the Ghana Stock Market to find the effect of the corporate governance system on financial performance, and in Nigeria, Urhoghide, and Omolaye [40] and Yusuf, Bambale, and Abdullahi [41] also used data from firms listed on the Nigerian Stock Market for the same purpose.…”

Enhancing Financial Performance and Market Acceptance Through Golden Ratio-Based Capital Structure Decisions: An Empirical Investigation in the Manufacturing and Services Sectors

“…The golden ratio can help firms decide how much debt and equity financing to utilize in their capital structure when the market price share declines, and thus, they by explore using debt financing. Similarly, Amin and Cek (2023) document that a firm uses equity at a percentage of 38.2%, and its capital structure reports a positive and significant impact on the firm financial performance. Further, it also reports that deviation from the debt-to-equity ratio is negative and significantly affects the firm financial performance (ROA, EPS, etc.…”

“…Vu Thi and Phung (2021) find a negative and significant association between debt ratio and firm performance by using both ROA and ROE. Therefore, properly selecting the percentage of debt and equity in the firm capital structure leads to better financial performance (Amin & Cek, 2023;Suu et al, 2021).…”

The Impact of Financial Leverage on the Financial Performance of the Firms Listed on the Tokyo Stock Exchange

“…We sourced our data from Thomson Reuters Eikon DataStream, a reputable data provider widely utilized for similar research purposes (Amin & Cek, 2023; Arhinful & Radmehr, 2023; Mensah & Bein, 2023). Data from DataStream is renowned for its reliability and accuracy.…”