Influence of Capital Structure on

Firm Performance: Evidence from

Bangladesh
___FINANCIAL DECISION MAKING
PRESENTED BY__
MOHAMMAD IRFANUL HOQUE
FOYSHAL KHAN SHIBLU PRESENTED TO__
TABASSUM CHOWDHURY
ASSISTANT PROFESSOR
SCHOOL OF BUSINESS ADMINISTRATION
EAST DELTA UNIVERSITY
Introduction
 Capital structure firm’s long-term debt, specific short-term debt,
common equity, preferred equity and retained earnings finance overall
operations and growth.
 Capital structure Risk and return of a firm.
 Immature capital structure decision High cost of capital lowering
firm’s value
 Since many years, both researchers and academicians are performing
theoretical and empirical studies on capital structure.
 However, this study aims to examine the relationship between capital
structure choices and firm’s performance employing a sample of 36 firms
listed in Dhaka Stock Exchange for the period 2007-2012.
 Applying panel data regression analysis, we found mixed result about the
relation between them.
Literature Review
Author Year Findings
Margaritis and Psillaki 2010 Observed a significant positive relation between leverage and firm’s
performance.
Seyed and Pejman 2013 Found a significant positive link between capital structure and firm performance
in the Tehran Stock Exchange.
Samuel 2013 Investigated the association between capital structure and firm performance by
using panel data consisting of 257 South African firms over the period 1998 to
2009.
Nor and Fatihah 2012 Tried to explore the impact of debt and equity financing on the performance of
the firms listed in Bursa Malaysia.
Manawaduge, Zoysa, 2011 Concluded that most of the Sri Lankan firms employ short-term debt capital as
Chowdhury, and against the long-term debt and firm performance is negatively affected by the use
Chandarakumara of debt.
Tianyu 2013 Examined the influence of capital structure on firm’s performance in both
developed and developing markets.
Khalaf 2013 Also found negative and insignificant relationship between short-term and long-
term debt ratio, and ROA and profit margin.

So on and So forth
Data and Methodology
Data and Sample:
 This study mainly considers firms listed in Dhaka Stock Exchange (DSE)
 This sample consists of 36 firms mostly come from cement, food, fuel &
power, Pharmaceuticals and miscellaneous sectors.
 These firms are observed over 2007-2012 periods, allowing us to form a
canister of panel data of 216 observations.
 All data are amassed from secondary sources; i.e. annual reports of the
sample firms.

Variables:
 Dependent- earnings per share (EPS), return on equity (ROE),
return on asset (ROA) and Tobin’s Q are used as the
representative of firm’s performance measures.

 Independent- short-term debt to total assets (STDTA), ratio of

long-term debt to total assets (LTDTA) and the ratio of total debt to
total assets (TDTA) are employed as the representative of capital
structure.
Data and Methodology (Cont.)
Model
 To investigate the influence of capital structure on firm’s performance, this study uses pooling panel
data regression models. The basic pooling panel data ordinary least square (OLS) regression model is
given in the below:
Yit = α + Xitβ + εit

 Here, i = 1, 2,…, N; t = 1, 2,…,T Where; Yit is the dependent variable (firm’s performance) of firm i in period t.
Xit is the independent variable (capital structure) of firm i in period t. β is the regression coefficient and εit is the
error term.
 Result Analysis
Table 1. Descripted statistics
EPS ROE ROA Tobin’s Q STD LTD TD SIZE
Mean 9.4378 0.1281 0.0649 1.6825 0.4036 0.1629 0.5665 9.3644
Median 5.0000 0.1333 0.0456 1.2991 0.3940 0.1068 0.5729 9.2350
Minimum (5.8000) (3.5000) (0.1656) 0.0958 0.0432 0.0003 0.1748 7.9076
Standard 10.9680 0.3441 0.0671 1.4274 0.2267 0.1691 0.2252 0.6936
Deviation
Skewness 1.5223 (4.6551) 0.5933 1.9821 0.6371 1.4665 0.3924 0.3868
Kurtosis 1.6625 60.2020 0.9692 6.1662 (0.0794) 1.5203 (0.4520) (0.6703)
Observations 216 216 216 216 216 216 216 216
Unit Root test: -9.3161* -8.2177* -6.1087* -4.9077* -4.3008* -5.9447* -7.7274* -4.6396*
LLC Test
Note. *Significant at the 0.01 level.
Result Analysis (Cont.)
Regression Analysis

Table 2. Relations between EPS and debt levels

Models Fixed Effects Model

Coefficient T-ratio P-value

Model 1 Const -36.6287 -1.601 0.1111
STDTA 10.8613 2.389 0.0179**
Size 4.45119 1.884 0.0612*
2
Adj R 0.7511
F-Value 18.5378***
Durbin-Watson 2.9351
Model 2 Const 15.3346 0.7224 0.471
STDTA -22.7194 -3.921 0.0001***
Size -0.234605 -0.105 0.9165
2
Adj R 0.7636
F-Value 19.7664***
Durbin-Watson 2.1236 0.8449
Model 3 Const -5.03198 -0.1959 0.6197
STDTA -2.16679 -0.4971 0.5195
Size 1.67627 0.6454
Adj R2 0.7435
F-Value 17.8438***
Durbin-Watson 1.5361

Note. * significant at 0.10, ** significant at 0.05 and *** significant at 0.01 level.
Result Analysis (Cont.)
Table 3. Relations between ROE and debt levels
Models Fixed Effects Model

Coefficient T-ratio P-value

Model 4 Const 1.0348 0.7705 0.4420
STDTA -0.1256 -0.4705 0.6386
Size -0.0914 -0.6590 0.5107
Adj R2 0.1282
F-Value 1.8546***
Durbin-Watson 2.4728
Model 5 Const 0.7967 0.6226 0.5343
STDTA -0.0333 -0.0953 0.9241
Size -0.0708 -0.5257 0.5998
Adj R2 0.1272
F-Value 1.8467***
Durbin-Watson 2.4708
Model 6 Const 1.2016 0.8089 0.4197
STDTA -0.1293 -0.5131 0.6085
Size -0.1068 -0.7111 0.4780
Adj R2 0.1284
F-Value 1.8562***
Durbin-Watson 2.4764

Note. * significant at 0.10 , ** significant at 0.05 and *** significant at 0.01 level.
Result Analysis (Cont.)
Table 4. Relations between ROA and debt levels
Models Fixed Effects Model
Coefficient T-ratio P-value

Model 7 Const 0.2513 1.6810 0.0945*

STDTA -0.0538 -1.8140 0.0714*
Size -0.0175 -1.1390 0.2563
Adj R2 0.7163
F-Value 15.6749***
Durbin-Watson 2.3902

Model 8 Const 0.2654 1.8900 0.0603*

STDTA -0.1092 -2.8510 0.0049***
Size -0.0195 -1.3200 0.1880
Adj R2 0.7237
F-Value 16.2215***
Durbin-Watson 2.4350

Model 9 Const 0.4935 3.0800 0.0024***

STDTA -0.1050 -3.8620 0.0002***
Size -0.0394 -2.4320 0.016**
Adj R2 0.7334
F-Value 16.9889***
Durbin-Watson 2.4298

Note. * significant at 0.10 , ** significant at 0.05 and *** significant at 0.01 level.
Result Analysis (Cont.)
Table 5. Relations between Tobin’s Q and debt levels
Models Fixed Effects Model
Coefficient T-ratio P-value
Model 10 Const 4.4296 1.1000 0.2728
STDTA 0.4426 0.5530 0.5809
Size -0.3124 -0.7512 0.4535
Adj R2 0.5447
F-Value 7.9509***
Durbin-Watson 2.4731
Model 11 Const 7.0231 1.8380 0.0677*
STDTA -1.3144 -1.2610 0.2091
Size -0.5474 -1.3610 0.1752
Adj R2 0.5479
F-Value 8.0427***
Durbin-Watson 2.4541
Model 12 Const 6.4141 1.4390 0.1518
STDTA 0.2906 -0.3843 0.7012
Size -0.4877 -1.0820 0.2805
Adj R2 0.5443
F-Value 7.9395***
Durbin-Watson 2.4408
Note. * significant at 0.10, ** significant at 0.05 and *** significant at 0.01 level.
Conclusion

 The results of this study reveal that the firm’s performance as calculated by EPS is significantly positively
linked to capital structure as measured by STDTA. In contrast, EPS is significantly negatively related to
LTDTA while EPS has insignificant relation with TDTA. This study also finds no statistically significant
relationship between ROE and capital structure.

 On the other hand, statistically very significant relationship exists between ROA and capital structure; i.e.
ROA has significant negative relation with all debt levels (STDTA, LTDTA & TDTA). Lastly, our findings
indicate that there is no statistically significant relation between Tobin’s Q and capital structure. It is also
observed that the controlled variable; firm size has positive impact on EPS and negative impact on ROA.
Another important observation is that LTDTA has negative impact on all the measures (EPS, ROE, ROA
and Tobin’s Q) of firm’s performance.
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Thank You…