Capital Structure and Firms' Performance

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TABLE OF CONTENTS

CHAPTER I: INTRODUCTION4

1.1Background &Purpose of the Study4

1.2Rationale of the Study4

1.3Aims of the study5

1.4Research Questions5

1.5Consideration of Rigour5

1.6Ethical Concerns6

1.7Limitations of Study7

1.8Structure of the Dissertation7

1.9Summary8

CHAPTER II: LITERATURE REVIEW10

2.1. Capital Structure10

2.2. Optimal Capital Structure12

2.3. Trade-off Theory13

2.4. Agency Costs Theory14

2.5. Free Cash Flow Hypothesis16

2.6. Pecking Order Theory17

2.7. Asymmetric Information Theory18

2.8. The Market Timing Hypothesis19

2.9. The Transaction Cost Theory20

2.10. Life Stage Theory20

2.11 Comparison between different theories21

2.11. Literature Summary25

CHAPTER III: DATA & METHODOLOGY26

3.1Sample Construction26

3.2Hypothesizes Development26

3.3Variables28

3.3.1 Debt to Equity Ratio28

3.3.2Return on Investments28

3.3.3Return on Equity29

3.3.4Return on Assets29

3.4Prepositions30

3.5Regression Analysis30

3.6Data Analysis31

CHAPTER IV: DATA ANALYSIS AND DISCUSSION33

4.1Descriptive Analysis33

4.2Inferential Statistics35

4.3Analysis & Discussion37

CHAPTER V: SUMMARY & CONLUSION39

References43

CHAPTER I: INTRODUCTION

Background &Purpose of the Study

Capital structure refers to the shape or composition of funding of the assets of the company essentially distinguishing between liabilities (Borrowings) and equity.. This capital structure policy involves a trade-off between risk and returns, as using a larger amount of debt increases the risk of the profits of the company. The optimal capital structure is one that produces a balance between the risk of the company's business and performance so as to maximize the share price. The greater the risk of the company, lower its optimal debt ratio. Debt ratio can be gauged by looking at the balance sheet of the company. On the left side, there are assets which the company owned, on the right side, there are liabilities and equity that identify various sources of fund used to finance the company' assets.

The fundamental objective of the management of the company is to ensure the maximization of shareholders wealth. Since there is a trade-off between risk and return, going after higher returns also increase the overall risk of the firm. In contrast, if management decides to play completely safe and goes after lower risk, it will not be able to generate higher returns. Therefore, the ultimate goal of the managerial decision making is to optimize the risk and return of the company by selecting a optimal capital structure for financing the assets and operations. Choosing between debt and equity, once again, presents a dilemma for the management. The purpose of this study is to assess the impact of capital structure on the firm's performance.

Rationale of the Study

Funding decisions are very important in business management; they rely heavily on the viability and profitability of business. One of the key questions in finance is, therefore, the existence of an optimal structure capital and how it is located. The existing literature on the topic of capital structure and firms performance is vast. Many renowned researches have been contributed towards the subject and their findings are commendable, Even then, it doesn't resolve the dilemma in which management finds itself when making a decision between debt and equity for financing the assets. Off course, managements want lower cost while enjoying the financial flexibility in the regular operations. There is still no concrete evident that can be employed to support any specific debt to equity level for all companies.

Aims of the study

The primary aims of conducting the study is to ...