It is the mix of debt and equity capital maintained by a firm. This study makes several important contributions to the existing studies of capital structure. To evaluate the interrelationship between capital structure and performance to determine the determinants of a capital structure 5. Introduction capital structure refers to the different options used by a firm in financing its assets bhaduri, 2002. Capital structure denotes means a firm funds its operations using some blend of equity plus debt. The capital structure of the firm refers to the sources of funding used to finance a firms investments. Pdf capital structure is still a puzzle among finance scholars. Relationship between capital structure and performance of. Ten independent variables and three dependent variables have been tested using regression analysis. The determinants of capital structure evidence from commercial banks in ethiopia by kibrom mehari fisseha reg. The impact of capital structure on financial performance. The issue of external equity is seen as being the most expensive and also dangerous in terms of potential loss of control of the enterprise by the original ownermanagers. It is important not only from a return maximization point of view, but also this. Wealth maximization is the first objective of the firms, and capital structure proposition shows how a firm plans to finance its projects to meet its first objective.
There is also significant theory on the capital structure of firms and its determinants. 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. The thesis consists of seven chapters, including five main standalone research papers. This is to certify this is thesis prepared by mohammed getahun, entitled.
The capital structure theory was pioneered by modigliani and miller 1958. The theory provides insight into a firms capital structure decision in a capital market free of taxes, transaction costs, and other frictions. The modern theory of capital structure began with the celebrated paper of modigliani and miller 1958. The survey would then proceed to document the answers available in the litera ture. In this thesis, the researcher will enhance understanding in the area of capital structure. Kaumbuthu 2011 carried out a study to determine the relationship between capital structure and return on equity for industrial and allied sectors in the nairobi securities exchange during the period 2004 to 2008. Trade off theory assumes that firms have one optimal debt ratio and firm trade off the. Determinants of capital structure mba knowledge base. Capital structure and firm performance gupea goteborgs. In their study, modigliani and miller 1958 argued that capital structure was irrelevant to firm value. The impact of capital structure on financial performance of commercial banks in ethiopia by mathewos woldemariam birru jimma university. Modigliani and miller 1958 were the first ones to landmark the topic of capital structure and they argued that capital structure.
Relationship between capital structure and performance of non. A panel data approach in partial fulfillment of the. This thesis is made of standalone essays on the capital structure and financing of small and medium enterprises smes in ghana and south africa. Capital structure is the composite of borrowed fund and owners fund that adds up to total capital employed of the business organization. He found out empirical evidence on capital structure and its impact on overall cost of capital k o and market value of the firm. Ubira etheses capital structure and dividend policy. The thesis contributes to the explanation of the firms financing decisions by combining different theories. This refers to the choice between equity financing and debt financing. Therefore, firms whose activities are based on tangible assets obtain debt more easily. The influence of capital structure on firm performance. Bogdan stacescu examination code and name gra 19003 master thesis program.
Various capital structure researches have come to the conclusion that the combination of leverage related cost and tax advantage of the debt, results in an optimal capital structure. The capital structure decision can affect the value of the firm either by changing the expected earnings or the cost of capital or both. Evidence from commercial banks in ethiopia submitted by me for the award of the degree of master of science in finance and investment of mekelle university, is original work and it hasnt been presented. Master of science in business and economics major in finance this thesis is a part of the msc programme at bi norwegian business school. Hypotheses the following hypothesis is formulated for the study h 0. The capital structure at which the over all cost of capital of the firm is minimum is known as optimal capital structure. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. Chapter iii concepts and theories of capital structure and profitability. Capital structure is the specific mix of debt and equity that a firm uses to finance its operations abor, 2005.
Pdf capital structure choice is an important decision for a firm. Due to the homogeneous accounting standard, singlecountry study is preferable over multicountry studies. This optimal capital structure is below 100% debt since the tax advantage is traded against the probability of bankruptcy cost. The study of capital structure attempts to explain how listed firms utilise the mix of various forms of securities in order to finance investment. There are some studies examine the relationship between capital structure, size, growth rate, and stock return e. Determinants of capital structure in nigerian banking sector. 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. This thesis analyses the explanatory power of established theories and firmspecific factors from the literature in explaining the choice of capital structure across norwegian listed firms. This study investigates relationship between the capital structure and firm performance.
Abstract capital structure decisions are among the most important and crucial decisions for any business because of their effect on the performance of firms. Capital structure was proxied by debt equity ratio while performance focused on return on equity. We would like to thank many people who have contributed to our thesis. This thesis examines the impact of capital structure on firms financial performance.
Firms that incur external financing costs face a complex decision when they optimize the capital structure. Diamond and rajan 2000 found that a banks capital structure affects its stability as well as ability to provide liquidity and credits effectively. The capital structure, ownership and survival of newly. Thesis for the master of management in finance and. The study has dealt much on the large manufacturing companies which according to. One of the most significant articles for the bank capital structure is this of reint gropp and florian heider 2010. This thesis aims to add empirical evidence to the corporate finance literature by looking at two main financing issues, namely firms payout policies and capital structure decisions, in the context of emerging markets. Optimal corporate investments and capital structure martin schultznielsen a dissertation submitted to the school of business and social sciences, aarhus university in partial fulfillment of the requirements for the degree of doctor of philosophy in economics and business march 2014. The value of an enterprise depends on expected earnings and cost of capital. There is a negative relationship between capital structure and financial performance. Determinants of capital structure in small and mediumsized enterprises in malaysia a thesis submitted for the degree of doctor of philosophy by hafizah mat nawi brunel business school brunel university london may 2015. This dissertation is going to study the determinants of capital structure of. The importance of this study comes from the importance of the relationship between capital structure and stock return. Developments in capital structure during the last 30 years have resulted in a number of capital structure theories.
Modigliani and miller 1958 were the first ones to landmark the topic of capital structure and they argued that capital structure was. Capital structure is a permanent type of funding that supports a companys. Chapter 3 develops a model where capital structure decisions are centered around the firms liquidity needs, while still accounting for tax benefits, the cost of financial distress and collateral. The capital structure puzzle is unravelled and a clear. Research paper impact of capital structure on profitability. Capital structure theories introduction capital structure decision is a significant decision in financial management. However, the downside of social capital has to be acknowledged as well. In other words, by capital structure decisions, firms aim at minimising their cost of capital. The main objective of the study is to determine the overall effect of capital. Corporate finance theories suggest that, agency cost influence capital structure. However, there is little literature examining the influence of the recent economic crises on the determinants of bank capital structure. They mm pointed the direction that such theories must take by showing under what conditions capital structure is irrelevant.
This is the maximum amount of credit that can be extended by lenders. The capital structure decisions of new firms nber working. Capital structure decisions are of importance when considering the. The effect of capital structure on the financial performance. The thesis will only focus on companies listed on the swedish stock exchange and with yearly sales amounting to at least sek 10m.
When the stock is traded and markets are viewed to be efficient, the objective is. Capital structure is also referred as financial structure of a firm. The optimal capital structure of a firm is often defined as the proportion of debt and equity that results in the lowest weighted average cost of capital wacc wacc wacc is a firms weighted average cost of capital and represents its blended cost of capital including equity and debt. Pdf the impact of capital structure on profitability of. It is the employment of an asset source of finance for which. Organizations with a lot of social capital have been found to exclude actors or made onboarding more difficult for new members morrow, 1999. Cbepr002501 research project submitted to the department of accounting and finance, college of business and economics, mekelle university, for the partial fulfillment of the degree of master of finance and investment. The ratio of external source borrowed to internal source is a cautious decision for corporate managers. The impact of capital structure on profitability of commercial banks in ghana article pdf available in economic modelling 61. The extent literature is full of theories on capital structure since the seminal work of modigliani and miller 1958.
Accordingly, our study began with discussing the problem background. Summary of the relationships between the determinants of capital structure. A thesis submitted in fulfilment of the requirements for the. To reveal the impact of capital structure on the financial performance. However, others examine the effect of capital structure, liquidity, size on. According to nahapiet and ghoshal 1998 three key components constitute organizational social capital. The goal of this chapter is to discuss the various theories that help to explain the determination of capital structure. Determinants of capital structure in listed norwegian firms. The capital structure of a firm is very important since it related to the ability of the firm to meet the needs of its stakeholders.
Berger board of governors of the federal reserve system washington, dc 20551 u. Capital structure describes the mix of a firms longterm capital, which consists of a combination of debt and equity. This decision in a private enterprise is directed towards the achievement of maximization of the shareholders wealth or value of the firm. 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. A study on determinants of capital structure in india. At the same time, and in spite of all research on the topic, capital structure policies were one of the reasons for many. Capital structure theories of capital structure finance essay. Capital structure study attempts to explain the mix of securities and financing sources used by companies to finance investments myers,2001. The role of organizational social capital in performance. A new approach to testing agency theory and an application to the banking industry allen n. Optimal corporate investments and capital structure. The paper identifies the most important determinants of capital structure of 870 listed indian firms comprising both private sector companies and government companies for the period 20012010. Introduction the influential paper of modigliani and miller on capital structure irrelevancy has been followed by extensive theoretical research to determine the optimal capital structure. Analyzing a companys capital structure investopedia.
The problem with organizing the survey in this way is that often a. This research led to the development of a model of capital structure. Capital structure and firm performance a study of swedish public companies background and problem. Chapter three compares the capital structures of large, quoted firms and smes in ghana. A thesis submitted in fulfilment of the requirements for the award of. The capital structure is about achieving the best mix between debt and equity to maximize the value of the organization. The alternative o ered by conventional wisdom is that informal capital dominates the capital. Given the plethora of forces and issues that capital structure. Regarding to the well research of other two capital structure theories, this study mainly focus on agency theory and try to find out agency costs related determinants which influence firms capital structure decisions.
Summary, findings and conclusion 392 ghanbari 1993 attempted to find out the cost of capital of indian industries and analyzed the relationship between capital structure and cost of capital. A comparative study of public and private firms 1 i. Since then, many economists have followed the path they mapped. There is a considerable number of theories and research on the effect of capital structure on firm value, size and profitability. The paper explores a vast body of literature in articulating critical issues in capital structure decision. Instead, the aim of this paper is to test whether capital structure affects firm performance in ukraine. Capital structure and firm performance federal reserve. The manufacturing industry is a wide industry that dealing with the changingtransformation of raw materials through a process aimed to finished goods for sale. A study of sri lankan manufacturing sector hamidon, t.
Top 4 theories of capital structure with calculations. Master thesis the capital structure, ownership and survival of newly established family firms submission date 01. Nevertheless, understanding the determinants of capital structure is as important for banks as for nonbanks firms. May, 2019 capital structure describes the mix of a firms longterm capital, which consists of a combination of debt and equity. Theories of capital structure explained with examples.