The purpose of this paper is to study the status of studies on capital structure determinants in the past 40 years. The emphasis on human capital in organisations reflects the view that market value depends less on tangible resources. There is a significance impact of capital structure. Capital structure planning, which aims at the maximisation of profits and the wealth of the shareholders, ensures the maximum value of a firm or the minimum cost of capital. Several researchers argue that the determinants of capital structure are significantly affected by factors such as the laws and regulations of the country, corporate and personal tax systems and corporate governance. Abstractwe investigate the determinants of capital structure of public listed companies on bursa malaysia, singapore stock exchange and thailand stock exchange from 2004 to 20. Capital structure is also referred to as the degree of debts in the financing or capital of a business firm. Debt comes in the form of bond issues or longterm notes payable, while equity is classified as common stock, preferred stock or retained earnings. The impact of capital structure on financial performance in. The impact of capital structure on financial performance of commercial banks in ethiopia by mathewos woldemariam birru jimma university. There is a significance impact of capital structure on financial performance. Williamson 1988 williamson in his article, corporate finance and corporate governance, analyzed the effects of tangible assets and probability of bankruptcy on the relationship between capital structure, leverage, and asset liquidity. The capital structure decisions of new firms nber working. Olayemi3 1department of economics, osun state university, oshogbo, nigeria 2 departments of economics, obafemiawolowo university, ileife, nigeria 3corresponding author.
Most of the research on capital structure has focused on the proportions of debt vs. An overview kennedy prince modugu department of accounting faculty of management sciences university of benin nigeria abstract capital structure decision poses a lot of challenges to firms. This paper surveys capital structure theories based on agency costs, asymmetric information, productinput market interactions, and corporate control considerations but excluding tax. This study aims to examine whether profitability, firm size, institutional ownership, growth affect the capital structure and whether profitability, firm size, institutional ownership, growth affect the value of the company through the capital structure. This article examines the international determinants of capital structure using a large sample of firms from 37 countries. The impact of capital structure on financial performance of. There is a negative relationship between capital structure and financial performance. Emerging markets queries in finance and business the impact of capital structure on financial performance in romanian listed companies sorana. Jun 01, 2002 the three principles garrison deploys as the launching pad for his excursion into these issues are scarcity, the market for loanable funds, and the time structure of production. Abdel rahman hussein, ahmed sakr, alaa abdel barie. In addition, capital structure may vary across time e. They concluded that the capital structure of the firms has a. We just figure out the proportions of capital the company has at present.
Determining an appropriate mix of equity and debt is one of the most strategic decisions public interest entities are confronted. The reliable determinants for leverage are firm size, tangibility, industry leverage, profits, and inflation. To evaluate the interrelationship between capital structure and performance to determine the determinants of a capital structure 5. It is concerned with making the array of the sources of the funds in a proper manner, which is in relative magnitude and proportion. The impact of capital structure on firms performance in. Capital structure is defined as the mix of debt and equity securities used to finance real. The alternative o ered by conventional wisdom is that informal capital dominates the capital. There are two broad views on the impact of capital structure on the performance of firms, while one asserts the significance of capital structure in determining firms. Capital structure theory the theory behind capital structure is to find the right mix of longterm funds that minimizes the costs of capital and maximizes the value of the organization. The textile industry starting from yarn manufacturing industry spinning, cloth. It is very important for the financial manager to determine the proper mix of debt and equity for his firm. Nov 29, 2019 in this article, we look at an analysis of the capital structure for starbucks for the yearoveryear yoy period from december 2017 to december 2018, with an update using 3q 2018 data to see how.
Abstract capital structure decisions are among the most important and crucial decisions for any business because of their effect on the performance of firms. The capital structure decision can affect the value of the firm either by changing the expected earnings or the cost of capital or both. The most important among them is the agency problem that exists because ownership shareholders. Capital structure chapter 15 and chapter 16 contents i. The study of capital structure attempts to explain how listed firms utilise the mix of various forms of securities in order to finance investment. Capital structure that maximizes the value of company or stock prices is the best capital structure husnan and pudjiastuti, 1994. Analyzing a companys capital structure investopedia. View capital structure research papers on academia. The combination of debt and equity used to finance a companys projects is referred to as capital structure. Taxes and capital structure journal of financial and. Watch this short video to quickly understand the main concepts covered in this guide, including the definition of capital structure, what is the optimal capital structure, and the calculation of the weighted average cost of capital wacc.
The capital structure is how a firm finances its overall operations and growth by using different sources of funds. In theory, it may be possible to reduce capital structure to a financial calculation to get the most tax benefits by favoring debt, for example, or to boost earnings per. We also investigate how firmspecific factors such as profitability, firm size, tangibility of assets and depreciation to total assets along with the macroeconomic factor such as inflation influence the capital. Critical reexaminations on the relationships among capital structure, costs of capital, and firm value. Starting from the capital structure irrelevance theory of modigliani and. Capital structure and stock returns journal of political. Capital structure, a reading prepared by pamela peterson drake 1. The term capital structure refers to the percentage of capital money at work in a business by type. The objective of the firm should be directed towards the maximization of the value of the firm the capital structure, or average, decision should be examined from the point of view of its impact on the value of the firm. This paper investigates the impact of capital structure on profitability of the manufacturing companies in india and attempts to establish the hypothesized relationship as to how far the capital structure variables affect the business revenue of companies and what the interrelationship is between capital structure variable and profitability.
This study adds to existing literatures to verify the claim of traditional theory of capital structure. Capital structure list of high impact articles ppts. The purpose of this paper is to scrutinize and appreciate the theories of capital structure starting from theory of miller and modigliani 1958 of capital structure, which is also known as. For each type of model, a brief overview of the papers surveyed and. Capital structure is still a puzzle among finance scholars. Jun 25, 2019 the debt capital in a companys capital structure refers to borrowed money that is at work in the business. Although corporate net issuing activity is lively and although it can explain 60 percent of debt ratio dynamics long. Making capital structure support strategy the issue is more nuanced than some pundits suggest. It is synonymously used as financial leverage or financing mix.
Capital structure is determined by trading off these benefits of debt against costs of debt. The cost depends on the health of the companys balance sheeta triple aaa rated firm can borrow at extremely low rates vs. Capital structure and its 4 important theories ni, noi. In this article, we focus on analyzing the balance sheet based on a companys capital structure. Making capital structure support strategy mckinsey. A study on determinants of capital structure in india. The theory of capital structure harris 1991 the journal. The journal of online education, new york, january 2009. External finance, journal of finance 52 july 1997, 111150. It is accurate, well informed, breaks more stories than its peers and provides an ability to track the new issue high yield and leveraged loans universe which is.
The impact of capital structure on financial performance of the firms. Capital structure the capital structure is how a firm finances its overall operations and growth by using different sources of funds. Capital structure is essentially concerned with how the firm decides to divide its cash flows into two broad components, a fixed component that is earmarked to meet the obligations toward debt capital and a residual component that belongs to equity shareholdersp. Capitalstructure is the most essential real time news and analysis service in the european distressed space. Myers he study of capital structure attempts to explain the mix of securities and financing sources used by corporations to finance real investment. A firms judicious use of debt and equity is a key indicator of a strong balance sheet.
They developed a theoretical model to demonstrate that the pro tability of rms is not a ected by the amount of debt, assuming that the capital market is perfect. Capital structure study attempts to explain the mix of securities and financing sources used by companies to finance investments myers,2001. Chapter iii concepts and theories of capital structure and profitability. Pdf capital structure is still a puzzle among finance scholars. Capital structure refers to the different options used by a firm in financing its assets bhaduri, 2002. Firm size, capital structure, pecking order theory, tradeoff theory. This paper highlights the major gaps in the literature on determinants of capital structure and also aims to raise specific questions for future research. If we assume that the company maintains the same capital structure the mix of debt, preferred stock, and common stock throughout time, our task is simple.
It is therefore essential to study the emerging economies as individual countries rather than see them collectively as a group. Here the data is described, measures of institute of economic studies, charles university, prague and idet, department of eco. Capital structure and pro tability of rms in the corporate. It is the employment of an asset source of finance for which. Value of the firm in capital structure perspective in. Pdf the present study is aimed to investigate the determinants of capital structure of iranian. This ideal mix is called the optimal capital structure. Empirical evidence from african countries olaniyan s. Capital structure is the way in which a firm finances its operations which can either, be through debt or equity capital or a combination of both, brigham, 2004.
Interest in this topic has emerged since the seminal article bymodigliani and miller1958. Capital structure, a reading prepared by pamela peterson drake 4. The impact of capital structure on risk and firm performance. The earlier studies on capital structure mainly focuses on the analysis of certain firm characteristics e. Available formats pdf please select a format to send. In harris and raviv, the assertion of control by investors through bankruptcy entails costs related to the production of information, used in the liquidation decision, about the firms prospects. International research journal of applied and basic sciences. Modern capital structure theory begins with the irrelevance theory of. The capital structure of a firm is some mix of debt, internally generated equity, and new equity. The impact of capital structure on financial performance. This is an openaccess article distributed under the terms of the creative commons attribution license. May 29, 2019 a companys capital structure refers to how it finances its operations and growth with different sources of funds, such as bond issues, longterm notes payable, common stock, preferred stock, or.
Research paper impact of capital structure on profitability. Apr 03, 2017 the purpose of this paper is to study the status of studies on capital structure determinants in the past 40 years. Capital structure is the proportion of all types of capital viz. Capital structure and financial performance have the negative relationship. Capital structure is a part of the financial structure and refers to the proportion of the various longterm sources of financing. International journal of economics and financial issues. This is an open access article under the cc byncnd. Search the information of the editorial board members by name. Aswath damodaran 3 the objective in decision making n in traditional corporate finance, the objective in decision making is to maximize the value of the firm.
Given the plethora of forces and issues that capital structure. Hypotheses the following hypothesis is formulated for the study h 0. Pdf in this paper the authors survey capital structure theories, from the startup point, which is considered modigliani and millers capital. If the capital markets and financing systems are not supportive of hostile takeovers, stockholder power will be diluted. Each is represented throughout this work by a simple diagramproduction possibilities frontiers, supply and demand curves, and hayekian triangles, respectively. Taxes and capital structure volume 50 issue 3 mara faccio, jin xu. Generally, a firm can go for different levelsmixes of debts, equity, or other financial arrangements.
Unpublished dissertation chapter, university of illinois at urbanachampaign 2001. Determinants of capital structure mba knowledge base. Debt comes in the form of bond issues or longterm notes. When the stock is traded and markets are viewed to be efficient, the objective is. Impact of capital structure on firms profitability and. This pecking order theory suits large firms wip and which has th high enough internal funds in the form of retained earnings and depreciation. The paper tries to examine the impact of capital structure on the financial firm performance of industrial. The empirical results show that h 0 is rejected because there is positive relationship in capital structure and financial performance. The key contribution of this paper is the use of a multitude of shifts in statutory tax rates, both at the corporate and at the personal level, to assess the impact of taxes on capital structure. It can be argued that an optimal capital structure really doesnt exist since changing the mix of. Modigliani and miller 1958 were the first ones to landmark the topic of capital structure and they argued that capital structure was irrelevant in determining the firm.
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