Does Capital Structure Influence Company Profitability?

Open access

Abstract

Every company has a different structure of balance sheet. Some of the companies have more liabilities than equity. Considering the industry or debt-to-equity ratio, the balance sheet structure affects the company profitability measured by DuPont system. The main objective of the paper is to analyze the structure of balance sheet and to identify some optimal levels in order to increase company profitability. The DuPont returns like ROA (return on assets) and ROE (return on equity) will be used to measure the company profitability, while the debt-to-equity ratio will be used as a measure (reflection) of capital structure. The samples consist on the most profitable non-financial companies ranked in Fortune Global 500. The companies will be grouped in clusters (based on industry or debt-to-equity ratio) in order to identify the signification of the correlation between the profit and the balance sheet structure. The main results of the paper refer to the company profitability that can be increased by using an optimal structure of liabilities and equity.

Abor, J. (2005). The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana. The journal of risk finance, 6(5), 438-445.

Abor, J. (2008), Determinants of the capital structure of Ghanaian firms, AERC Research paper 176, African Economic Research Consortium, Nairobi.

Ardalan, K. (2017). Capital structure theory: Reconsidered. Research in International Business and Finance, 39, 696-710.

Batchimeg, B. (2017). Financial Performance Determinants of Organi-zations: The Case of Mongolian Companies. JOURNAL OF COMPETITIVENESS, 9(3), 22-33.

Bockova, N., & Zizlavsky, O. (2016). Innovation and financial performance of a company: a study from Czech manufacturing industry. Transformation in Business & Economics, 15(3).

Bradley, M., Jarrell, G. A., & Kim, E. (1984). On the existence of an optimal capital structure: Theory and evidence. The journal of Finance, 39(3), 857-878.

Brealey, R.A. & Myers, S.C. (2000). Principles of Corporate Finance, 6th ed. Burr Ridge, IL: Irwin McGraw-Hil

Brigham, E. F. (1991). Financial management theory and practice. Atlantic Publishers & Distri.

Cho, H. J., & Pucik, V. (2005). Relationship between innovativeness, quality, growth, profitability, and market value. Strategic management journal, 26(6), 555-575.

Christensen, H. K., & Montgomery, C. A. (1981). Corporate economic performance: Diversification strategy versus market structure. Strategic Management Journal, 2(4), 327-343.

Danis, A., Rettl, D. A., & Whited, T. M. (2014). Refinancing, profitability, and capital structure. Journal of Financial Economics, 114(3), 424-443.

Dewenter, K. L., & Malatesta, P. H. (2001). State-owned and privately owned firms: An empirical analysis of profitability, leverage, and labor intensity. The American Economic Review, 91(1), 320-334.

Enqvist, J., Graham, M., & Nikkinen, J. (2014). The impact of working capital management on firm profitability in different business cycles: Evidence from Finland. Research in International Business and Finance, 32, 36-49.

Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: which factors are reliably important?. Financial management, 38(1), 1-37.

Gedajlovic, E., & Shapiro, D. M. (2002). Ownership structure and firm profitability in Japan. Academy of Management Journal, 45(3), 565-575.

Gill, A., Biger, N., & Mathur, N. (2011). The effect of capital structure on profitability: Evidence from the United States. International Journal of Management, 28(4), 3.

Joh, S. W. (2003). Corporate governance and firm profitability: evidence from Korea before the economic crisis. Journal of financial Economics, 68(2), 287-322.

Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal of Banking & Finance, 34(3), 621-632.

Mithas, S., Tafti, A. R., Bardhan, I., & Goh, J. M. (2012). Information technology and firm profitability: mechanisms and empirical evidence. MIS Quarterly Vol. 36 No. 1. 205-224.

Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American economic review, 48(3), 261-297.

Myers, S. C. (1984). The capital structure puzzle. The journal of finance, 39(3), 574-592.

Myers, S. C. (1989). Still searching for optimal capital structure. Are the distinctions between debt and equity disappearing, 80-95.

Myers, S. C. (2001). Capital structure. The journal of economic perspectives, 15(2), 81-102.

Öztekin, Ö. (2015). Capital structure decisions around the world: which factors are reliably important?. Journal of Financial and Quantitative Analysis, 50(3), 301-323.

Pastusiak, R., Bolek, M., Malaczewski, M., & Kacprzyk, M. (2016). Company Profitability Before and After IPO. Is it a Windows Dressing or Equity Dilution Effect?,„. Prague Economic Papers, 2016(1), 112-124.

Rose, C. (2016). Firm performance and comply or explain disclosure in corporate governance. European Management Journal, 34(3), 202-222.

Scott Jr, J. H. (1976). A theory of optimal capital structure. The Bell Journal of Economics, 33-54.

Seo, S. W., & Chung, H. J. (2017). Capital structure and corporate reaction to negative stock return shocks. International Review of Economics & Finance, 49, 292-312.

Sharma, A. K., & Kumar, S. (2011). Effect of working capital management on firm profitability: Empirical evidence from India. Global Business Review, 12(1), 159-173.

Singh, B., & Singh, M. (2016). Impact of Capital Structure on Firm's Profitability: A Study of selected listed Cement Companies in India. PACIFIC BUSINESS REVIEW

Stoneman, P., & Kwon, M. J. (1996). Technology adoption and firm profitability. The Economic Journal, 952-962.

Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of finance, 43(1), 1-19.

Velnampy, T., & Niresh, J. A. (2012). The relationship between capital structure and profitability. Available at http://repo.lib.jfn.ac.lk/ujrr/handle/123456789/639

Welch, I. (2009), Corporate finance: an introduction, Prentice Hall, Pearson Education, USA.

Weston, J. F., & Brigham, E. F. (1990). Essentials of managerial finance. Dryden Press.

Journal Information

Metrics

All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 519 519 23
PDF Downloads 401 401 28