How Does a Firm's Capital Structure Affect Stock Performance? (original) (raw)
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Capital Structure and Stock Returns
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Theories linking Capital Structure with Financial Performance
2019
The choice of capital structure is one of the most important and fundamental aspects of corporate finance studies. It is a controversial topic among finance scholars. In the mid-1950s when Modigliani and Miller devised their concept of “Modigliani-Miller (MM various empirical studies are reviewed to clarify the capital structure theories. Aus. Aca. Acc & Fin. Rev Vol 4(4), Oct 2018, P 142-152
Theories Linking Capital Structure with Financial Performance 2018
2019
Maximizing firms’ shareholder wealth is an important duty of finance businesses’ managers. Scholars argue whether this goal can be reached through capital structure choices. To make this possible, firms should minimize their cost of capital and provide a return which adequately provides for the risk taken by shareholders and above the opportunity cost (Jahanzeb, 2013). Originally, Modigliani and Miller (1958) proposed that in a perfect market, capital structure is irrelevant and does not affect a firm’s value as explained in more detail in the following section. Previously, there were extensive discussions in literature on: First, the optimum capital structure choices and determinants; and second, the impact of capital structure on firms’ value and performance (Allen et al., 2013; Berger, 1995; Frank and Goyal, 2007; Myers, 1984). Following Modigliani-Miller (M&M) theory, several other theories were developed based on the assumption of the perfect market. First, trade-off theory con...
Capital Structure as Determinant of Financial Performance: Review of Literature
2019
One of the most critical decisions in corporate finance is to decide about the source of fund to be employed. The mix of debt – equity used to generate funds is termed as Capital Structure (CS). Research on Capital Structure and its impact on financial performance has gained momentum from the pioneering article of Modigliani and Miller (1958). Since then it has been one of the most debated and controversial aspects of corporate finance. Researchers have contributed in form of theories as well as empirical findings to study the relation between capital structure and financial performance. Current paper reviews the existing studies in the area of CS and financial performance and also propose a conceptual model that describes the interrelationship between CS and financial performance based on detailed discussion of widespread literature. This model reckons important variables of financial performance affected by CS which help research scholars in further investigation. Researchers can ...
Research Journal of Finance and Accounting, 2016
This study explores the determinants of capital structure of UK FTSE 100 firms. The aim is to examine the impact of profitability (ROA), non-debt tax shield (NDTS), tangibility (TANG), liquidity (LIQ), growth(GR) and size on the choice of debt in the capital structure of firms. The study uses a panel data fixed effect approach to examine the determinants of capital structure over a ten year period, from 2003 to 2012. The results show that profitability has a negative relationship with the long term debt, short term debt and total debt, consistent with the Pecking Order Theory (POT) of capital structure which states that a firm's desire to use leverage is driven by internal forces and information asymmetry and thus, managers rely on internal funding or retained earnings to finance assets or investment opportunity. Size and NDTS show a positive relationship. The Non debt tax shield rejected the Trade-off Theory (TOT) of capital structure. However, the positive effect of size is co...
The Impact of Capital Structure on Firm Performance: Evidence from Tehran Stock Exchange
2013
The purpose of this paper is to empirically investigate the impact of capital structure on firm performance. Multiple regression analysis is used in the study in estimating the relationship between the leverage level and firm's performance. Using four of accounting-based measures of financial performance (i.e. return on equity (ROE), return on assets (ROA), market value of equity to the book value of equity (MBVR), Tobin's Q ), and based on a sample of 85 firms listed in Tehran Stock Exchange from 2006 to 2011. The results indicate that firm performance, which is measured by (ROE,MBVR & Tobin's Q) is significantly and positively associated with capital structure, while report a negative relation between capital structure and (ROA, EPS). Altogether, our study provides evidence that indicates firm performance is positively or even negatively related to capital structure.