Capital structure and corporate performance evidence in vietnam

UNIVERSITY OF ECONOMICS

INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY

THE HAGUE

VIETNAM

THE NETHERLANDS

VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN
DEVELOPMENT ECONOMICS

CAPITAL STRUCTURE AND CORPORATE PERFORMANCE:
EVIDENCE IN VIETNAM

A thesis submitted in partial fulfillment of requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By
PHẠM THỊ THÚY DIỄM

Academic Supervisor
Dr. CAO HÀO THI

HO CHI MINH CITY, NOVEMBER 2013


i

CERTIFICATION
“I certify that the substance of this thesis has not already been submitted for any degree
and has not been currently submitted for any other degree.
I certify that to the best of my knowledge and help received in preparing this thesis and all
sources used have acknowledged in this thesis”.

PHAM THI THUY DIEM
Date: … November 2013


ii

ACKNOWLEGMENTS
Foremost, I would like to thank so much to Vietnam – The Netherlands programme for
Master of Art in Development Economics (MDE programme), I have been studying useful
knowledge. Besides, I thank so much for all lecturers because of their valuable
contributions as well as all my friends because of their helps during period of studying.
I would like to thank deeply to my academic supervisor, Doctor Cao Hao Thi for his
enthusiastic supports, advices and great encouragements during my completion of the
thesis.
Last but not least, I am deeply grateful to my family, especially my mother who supports in
my life as well as lovely thank to my husband Nguyen Phuc Loc and his family.
One time again, I am grateful to all of you. Thank you so much!


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ABSTRACT
This article aims to examine the influence of capital structure on corporate performance

and the reverse causality from corporate performance to capital structure, using data from
150 Vietnamese listed manufacturing firms from 2008 to 2012. Comparing the results of
random effects model (REM) and fixed effects model (FEM), the more appropriate model
will be discussed some empirical results. The study found that the capital structure has
significant and positive relationship with corporate performance in associated with debt to
assets (TDTA) and short-term debt to assets (STDTA). In contrast, corporate performance
is insignificantly influenced by debt to assets (TDTA). The results also state that there is no
existence of optimal capital structure decision. The reverse causality from corporate
performance to capital structure, corporate performance has a significant and positive
influence on capital structure in related with debt to assets (TDTA) and short-term debt to
assets (STDTA) but corporate performance has no meaning with long-term debt to assets
(LTDTA).
Keywords: capital structure, leverage, corporate performance


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TABLE OF CONTENTS
CERTIFICATION ................................................................................................................ i
ACKNOWLEGMENTS ...................................................................................................... ii
ABSTRACT ......................................................................................................................... iii
LIST OF FIGURES ........................................................................................................... vii
LIST OF TABLES ............................................................................................................ viii
ABBREVIATIONS ............................................................................................................. ix
Chapter 1: INTROCDUCTION ......................................................................................... 1
1.1.

Problem statement .................................................................................................... 1

1.2.

Research objective.................................................................................................... 2

1.3.

Research questions ................................................................................................... 2

1.4.

Research scope and data........................................................................................... 3

1.5.

Thesis structure ........................................................................................................ 3

Chapter 2: LITERATURE REVIEW ................................................................................ 5
2.1.

Conceptual issues ..................................................................................................... 5

2.1.1.

Capital structure................................................................................................. 5

2.1.2.

Corporate performance ...................................................................................... 6

2.2.

Theoretical Literature ............................................................................................... 7

2.2.1.

Theories of capital structure and corporate performance .................................. 7

2.2.2.

Theories of reverse causality from corporate performance to capital structure

12
2.3.

Empirical Literature ............................................................................................... 13

2.3.1.

The impacts of capital structure on corporate performance ............................ 13


v

2.3.2.
2.4.

The reverse causality from corporate performance to capital structure .......... 18

Conceptual framework ........................................................................................... 21

Chapter 3: RESEARCH METHODOLOGY ................................................................. 25

3.1.

Research process .................................................................................................... 25

3.2.

Measurement of variables ...................................................................................... 27

3.2.1.

Capital structure variable................................................................................. 27

3.1.2.

Corporate performance variable ...................................................................... 28

3.1.3.

Control variables for firm characteristics ........................................................ 29

3.3.

Hypothesis development ........................................................................................ 34

3.4.

Model specification ................................................................................................ 35

3.4.1.

Capital structure and corporate performance .................................................. 35

3.3.2.

Reverse causality from corporate performance to capital structure ................ 37

3.4.

Estimation strategy ................................................................................................. 38

3.5.

Data collection........................................................................................................ 39

Chapter 4: EMPIRICAL ANALYSIS RESULTS .......................................................... 41
4.1.

Descriptive statistics ............................................................................................... 41

4.2.

Empirical results ..................................................................................................... 44

4.2.1.

Corporate performance and capital structure .................................................. 44

4.2.2.

Reverse causality from corporate performance to capital structure ................ 50

Chapter 5: CONCLUSIONS ............................................................................................ 55
5.1.

Conclusions ............................................................................................................ 55

5.2.

Limitations and suggestion of further research ...................................................... 56


vi

REFERENCE ..................................................................................................................... 58
APPENDIX ......................................................................................................................... 65


vii

LIST OF FIGURES
Figure 2.1: The trade-off of capital structure......................................................................... 9
Figure 2.2: Conceptual framework for the impacts of capital structure on corporate
performance ......................................................................................................................... 22
Figure 2.3: Conceptual framework for the reverse causality from corporate performance to
capital structure .................................................................................................................... 23
Figure 3.1: Research process ............................................................................................... 27
Figure 3.2: Analytical framework for the reverse causality from corporate performance to
capital structure .................................................................................................................... 34

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LIST OF TABLES
Table 2.1: A summary of the empirical results analyzing the relationship between capital
structure and corporate performance ................................................................................... 14
Table 2.2: A summary of the empirical results the reverse causality from corporate
performance to capital structure .......................................................................................... 20
Table 3.1: Control variables used in some previous studies................................................ 32
Table 3.2: Analytical framework for the impact of capital structure on corporate
performance ......................................................................................................................... 33
Table 3.3: Variable description and expected sign for Model 1 .......................................... 36
Table 3.4: Variable description and expected sign for Model 2 .......................................... 37
Table 3.5: Variable description and expected sign for Model 3 .......................................... 38
Table 4.1: Summary statistics of the explanatory variables, 2008-2012 ............................. 42
Table 4.2: Correlation matrix of the explanatory variables, during 2008-2012 .................. 43
Table 4.3: Results of Hausman test ..................................................................................... 44
Table 4.4: Choice between fixed effects model and random effects model ........................ 45
Table 4.5: Corporate performance and capital structure ..................................................... 47
Table 4.6: Corporate performance and optimal capital structure ........................................ 49
Table 4.7: Reverse causality from corporate performance to capital structure ................... 53


ix

ABBREVIATIONS
EFF: Effectiveness
FEM: Fixed effects regression model
Growth: Sales growth
HNX: Hanoi Stock Exchange
HOSE: Ho Chi Minh Stock Exchange

LEV: Leverage
LTDTA: Long-term debt to total assets
M&M: Modigliani and Miller
PROFIT: Profitability
ROA: Return on total assets
ROE: Return on total equity
REM: Random effects regression model
Size: Firm size
STDTA: Short-term debt to total assets
Tang: Tangibility


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Chapter 1: INTRODUCTION
1.1. Problem statement
The connection between the level of equity in financial leverage and corporate
performance has been considered as an important theme in the corporate governance
literature (Williamson, 1988; Short, 1994; Shleifer and Vishny, 1997). The argument goes
back to Modigliani and Miller classic theory in 1958, which indicated that the relationship
between capital structure and corporate’ value is independent under some unreasonable
assumptions in the real world. In contrast, based on these illusive assumptions, a number of
researchers have claimed that the corporate’ performance and behavior might be effected
by the level of debt (Kraus and Litzenberger, 1973; Jensen and Meckling, 1976); however,
their statements may be opposite.
Many empirical studies have been conducted to examine the influence of capital structure
on corporate performance. A number of previous studies have claimed that capital
structure have a statistical and significant negative effect on corporate performance
(Pushner, 1995; Majumdar and Chhibber, 1999; Zeitun and Tian, 2007; Soumadi and
Hayajneh, 2008). Nevertheless, a number of studies found that capital structure is positive

related to corporate performance (Nickell et al., 1997; Margaritis and Psillaki, 2010; Gill et
al., 2011). However, there is some evidence that capital structure and corporate
performance is independent (Krishnan and Moyer, 1997; Laurent Weill, 2007; King and
Santor, 2008).
Many researchers have suggested that the reverse causality from corporate performance to
capital structure have negative correlation (Rajan and Zingales (1995; Noulas and
Genimakis, 2011). In contrast, there is some evidence that the existence of positive
relationship about the reverse causality from corporate performance to capital structure
(Feidakis and Rovolis, 2007; Margaritis and Psillaki, 2010).


2

In Vietnam, several studies have presented the link between firm’s capital structure and its
performance. Son and Hoang (2008) states that there is a significant and positive impact of
firm leverage on firm corporate performance but this study only used market performance
measure. In causality link, Anh (2010) the corporate performance has negative relationship
with capital structure. However, there is lack of empirical evidence to examine the
influence of capital structure on corporate performance as well as the reverse causality
from corporate performance to capital structure.
Based on important points mentioned earlier, “Capital Structure and Corporate
Performance: Evidence in Vietnam” has been considered as a research of interest which is
believed to bring significant theoretical and practical benefits.

1.2. Research objective
The study aims to analyze the relationship between firm’s capital structure and its
performance. Particularly, this study investigates:
-

The influence of firm’s capital structure on its performance.

-

Finding out the optimal capital structure

-

The reverse causality from corporate performance to capital structure

-

Finding out the firm characteristics factors which also influence on corporate
performance as well as capital structure.

1.3. Research questions
This research questions in this study mainly focused on investigating the relationship
between firm’s capital structure and its performance. For this reason, the study aimed to
answer these following questions:
-

Does capital structure have significant in related with corporate performance?


3

-

If there is some evidence that capital structure is significant in related with
corporate performance, how the optimal capital structure is maximum the corporate
performance?

-

How do the impact of firm characteristics factors on corporate performance?

-

How does the reverse causality from corporate performance to capital structure?

-

How do the impact of firm characteristics factors on capital structure?

1.4. Research scope and data
The study focused on investigating the relationship of firm’s capital structure and its
performance in 150 Vietnam manufacturing firms from 2008 to 2012. These firms are
collected randomly in Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange
(HOSE). Selected sample are required to publicly disclosure their audited financial
statements at least from 2008 to 2012 and downloaded directly from their websites. As a
result, the type of used data is a balanced panel including necessary variables.
To find out the relationship of capital structure and corporate performance, this study based
on M&M theory, trade off theory for the effect of firm’s capital structure on its
performance; agency cost theory for finding out the existence of capital structure;
efficiency-risk hypothesis and franchise-value hypothesis for testing reverse causality from
corporate performance to capital structure. This study employed panel least square method
to run the models including random effects model (REM) and fixed effects model (FEM).
1.5. Thesis structure
The structure of the study consist five chapters and the herein chapter is the introduction
section. The next chapter is to review the literature of the relationship between firm’s
capital structure and its performance both theory and empirical evidences. Third

chapter illustrates the research methodology including measurement of variables,
hypothesis development, model specification, estimate strategy and description of
data is used in this research. The next is the chapter about empirical analysis


4

results which are focused and discussed the findings. The final one provides the
conclusions, limitations as well as research future directions.


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Chapter 2: LITERATURE REVIEW

The major objective of chapter two is review relevant theoretical literature as well as
empirical literature associating with the relationship between firm’s capital structure and
its performance. This study aims to analyze this relationship though two channels
including the influence of capital structure on corporate performance and the reverse
causality from performance to firm’s capital structure. First of all, conceptual issues of
capital structure and corporate performance are also illustrated to provide a view of this
study. The final part is conceptual framework which supports for next chapters.
2.1. Conceptual issues
2.1.1. Capital structure
The concept of capital structure or leverage is a combination debt with equity capital which
the firm uses to finance its operations (Jensen and Meckling, 1976; Myers, 1977). Capital
structure is also mentioned as financial structure. Total capital of the firm is divided by two
major components including debt and equity. Debt is associated with debt holders who is
individuals, banks or debt instruments of financial intermediaries such as bonds, bill,
etc…Equity is referred as firm ownerships through stock. A other aspect of capital

structure is optimal capital structure. Jensen and Meckling (1976) suggested that the
optimal leverage which could be obtained though trading off benefits of debt against
agency costs of debt. In brief, agency theory indicates that enterprises in mature industries
in which have few growth opportunities such as airlines and steel industries leading to
highly leverage. In contrast, enterprises have large cash inflows which experience slow as
well as negative growth such as mining industry have more debt in its capital structure.
Propositions of agency cost theory suggest that enterprises face on a tradeoff between
influences of benefits of financing debt and the opposing financial distress costs implies
that there is existence of an optimal capital structure. On the other hand, based on the
influences of costs of financial distress, agency costs and taxes, trade-off theory indicates


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that management aims at maintaining a target debt to equity ratio (Jensen and Meckling
1976; Stulz 1990; Harris and Raviv, 1990). That is, an optimal capital structure is caused
by a tradeoff of benefits and borrowing costs. In raising finance, an alternative approach
suggests that managers prefer internal funds following a pecking order. Debt, hybrid
securities are followed, and then, a new issue of ordinary shares as a last resort. Following
The Pecking Order approach, this theory suggests that there is no a target debt-equity
ratio’s existence (Donaldson, 1961; Myers, 1984). In other words, a firm’s actual debt to
equity ratio changes over time and external finance is depended on its need.
Capital structure is measured by various approaches which can be separated as the
measures of accounting, measures of market-value, measures of quasi-market. Because
debt may be difficult to estimate thought market-value and quasi-market measures so that
accounting measures are accepted as leverage proxies. According to Rajan and Zingales
(1995), they states that the choice of capital structure should depend on the objectives of
research. For example, a more reasonable definition of capital structure is supplied by
long-term debt to assets and short term to assets. However, these measures are
disappointed to integrate the fact that some firm’s assets are created by particular non-debt

liabilities such as the gross total of trade credit increase may reduce the leverage following
this measure. In addition, the level of accounts receivable and accounts payable may
jointly be impacted on by industry considerations; since, it seems reasonable to employ a
leverage measure unaffected by trade credit.
2.1.2. Corporate performance
According to Achabal et al (1984), the concept of corporate performance is associated with
productivity, efficiency and effectiveness because all these concepts involve optimal
utilization resources. Efficiency and productivity are concerned with the relationship
between factors of production and outputs per time unit. The procedures of optimization
such as stochastic frontier analysis and data envelopment analysis are employed to
consider efficiency and productivity. Because of the scope of this research, those analysis


7

types are topics which are not focused on in this research and they belong to their own
right. The concept of effectiveness is more relevant which demonstrates the extent to in
which a corporation is able to satisfy its maximization objects related to sales, profits,
returns, wealth, or other measures.
The measures of effectiveness are either financial dimension or operational dimension.
Some examples of criterions are used to measure the financial effectiveness such as Profit
maximization, return on equity maximization, and maximizing shareholder wealth. Growth
in sales, growth in assets and changing in tangibility fixed assets are illustrated for
operational effectiveness measures. Koth and Nair (1995) have claimed that each nation
has a particular culture so that it may be influenced by different in usefulness of a
effectiveness measure. For instant, the financial effectiveness measures are generally
employed in U.S firms while Japanese firms concentrate on operational measures.
However, some countries consider both these two approach to measure corporate
performance such as Canada, Italy, Jordan, etc…
2.2. Theoretical Literature

2.2.1. Theories of capital structure and corporate performance
As mentioned above, the capital structure or financial leverage is generally defined as the
combination of equity and debt in which the firm use to finance its operation. According to
Brealey and Myers (2003), they suggested that the option of leverage is an essential
problem in marketing. The relationship between leverage and firm value is one of crucial
issues that have been considered. However, many researchers provide conflicting results
about the connection between capital structure and corporate performance. The
predominant debate, Modigliani and Miller (1958) have claimed that the level of debt has
neutral influence on firm value under some key assumptions which might be unreasonable
in the real world. From this classis financial structure theory, a few studies works have
demonstrated that in favor of the independence of structure of capital in terms of


8

economics. These theoretical are discussed including M&M theory, information
asymmetries and signaling, agency cost, trade-off theory, packing order theory.
2.2.1.1. Modigliani and Miller’s theory
Modigliani and Miller (1958) suggest that firm value is not dependent on financial
leverage or “capital structure irrelevance” in perfect market under restrictive constraints.
These core assumptions include no transaction costs or bankruptcy cost, no taxes,
homogenous expectations. The existing transaction costs and tax-deductible cause to the
term “optimal capital structure” that a firm is able to maximize its value by minimizing
capital cost. Modigliani and Miller (1963) and Miller (1977) supplement the idea of “taxdeductible expense” in originally M&M model. Tax-deductible expense is reply that a firm
can pay lower taxes by interest payment or the notion “tax-shield”. Therefore, they suggest
that the level of debt in financial structure should be used as much as possible to finance its
operation to maximize its value. Besides corporation taxation, many researchers were
concerned with the personal taxes in relationship with firm value. Base on the tax
legislation system of United States of America, three tax rates are recognized to find out
the firm’ value by Miller (1977) including dividend tax rate, corporate tax rate, tax rate on

interest inflows. Moreover, according to Miller (1977) has claimed that the level of each
tax rate effect on the valuation of firm compared with the other two.
2.2.1.2. Trade-off theory
This theory is a step of balancing the costs and benefits through the process of selecting
how much debt and finance to use equitably which is presented by Figure 2.1. The theory
of trade-off permits the price of bankruptcy to subsist. It declares that it advantageously
finances with debt (namely, the tax profit) and that financing with debt produce a cost
(bankruptcy costs and the financial distress costs of debt). When there is an increase on the
marginal cost, the firm seems to optimize its total value by concentrating on the trade-off
when selecting how much impossibly unpaid amount and equity to be used for financing.


9

In theory this probably clarifies varieties in the ratios of D/E among manufacturing fields.
On the opposite, it is impossible to use this theory for explaining differences within the
same industry.
Figure 2.1: The trade-off of capital structure
Value of firm (V)
VL=VU + TCB = Value of firm
under MM with corporate taxes and
debt

Present value of
tax shield on debt

Present value of
financial distress
costs

Maximum
firm value

V = Actual value of firm

VU = Value of firm with
no debt

Debt (B)
B*

Optimal amount of debt

Source: Ross et al. (2005)

2.2.1.3. Agency cost theory
The seminal work by the theory of Jensen and Meckling (1976), it supposed the conflicts
of benefits among managers, debt holders and shareholders. In fact, there are two types of
interest conflicts including shareholders versus managers and shareholders versus debtholders. The results of these two types are opposite on the relationship between corporate
performance and financial structure. First, shareholders and managers conflict with interest
leading to agency costs. Moral hazard is a core problem in behavior of managers which the


10

cause of waste firm resource. In other words, agency costs in this relationship leads to
minimize their effort instead of maximize firm value because of their own objectives. For
this reason, firm’ managers are pressured by raising debt financing to perform as “free cash
flow” is reduced the disposal of firm’ managers (Jensen, 1986; Grossman and Hart, 1982).
In fact, when the firm utilizes debt in financing, the obligations of interest payment will be

one consequence of raising the probability of firm’s bankruptcy whether firm can not
afford these obligations. Hence, leverage impacts positive on corporate performance.
Second, shareholders and debt-holders conflict with interest also leading to agency costs.
In fact, because of shareholders own benefits at the debt-holders expense, they do not
inevitably maximize firm value. As moral hazard issues, Jensen and Meckling (1976) is
mentioned that riskier projects are chose by shareholders prefer more than debtholders. If
debt value is below returns of an investment, gains change to shareholders, is defined as
“asset substitution”. In contrast, both debt-holders and shareholders share together the
losses of investment fails that shareholders are not obligated to repay the borrowed capital.
Since agency costs are existence, underinvestment often is accept. Thus, the financial
structure is negative correlated with corporate performance.
2.2.1.4. The information asymmetries and signaling theory
Based on information asymmetries and signaling which is established by Akerlof (1970),
the information asymmetries and signaling approach has been proven that corporate
performance has positive relationship with the level of debt in leverage. Because the
information asymmetries exist between debt holders and management, the cost of capital is
different among sources of finance in firm’s operation. A number of studies are generally
believed (Leland and Pyle, 1977; Ross, 1977; Myers and Majluf, 1977) that managers or
shareholders (firm insiders) have more some private information than firm outsiders about
nature of the firm. It has then been illustrated that adverse selection problems can be
occurred by information asymmetries between outsiders and insiders of firm. Stiglitz and
Weiss (1981) suggest that outsiders or lenders are not able to valuate their loans exactly


11

because the results of borrower’s quality based on imperfect pricing. As a result, the
“high-quality” borrowers often ought incentive to demonstrate their quality. However, their
private information is provided, it should be a credible signaling which “low-quality”
borrowers can not have. Therefore, debt as a signaling which can be adopted to finance

rather than equity in choice of financing to express worthless information to the lenders. In
addition, according to Ross (1977), he states that a “good-quality” firm prefers to debt
rather than equity compared with “low-quality” one because the probability of default is
positive relative to the level of debt of financing. In brief, information asymmetries theory
leads to profitable firm acquire more debt.
2.2.1.5. Pecking order theory
Historically, the pecking order theory about capital structure decisions of a firm was first
proposed by some studies (Donaldson, 1961; Myers and Majluf, 1984). Based on the
principle and the law of least effort, it shows that sources of financing (from internal
financing to equity) are prioritized by companies; equity is preferred to increase as a
financing mean of last strategy. Thus, inner funds are firstly utilized and debt is issued as
that fund turns empty. The issue of equity occurs as any more debt is not reasonably
issued. Pecking Order theory aims to capture the homologous information costs.
Additionally, this theory keeps businesses bind to an order of sources for financing and
favor inner financing as it appears, and equity is less favored in contrast to debt if there is a
requirement of external financing (equity would explain issuing shares with the meaning of
“bringing external ownership” to the company). Therefore, debt form chosen by a firm is
able to act like a sign of its requirement for finance from the outside. Myers generalized
this idea debating that equity is less chosen solution to increase capital because when new
equity proposed by managers (supposed to recognize more about the precise situation of
the company than investors who consider managing staffs think that there is an overvaluation in the firm which can be taken advantage by them. For this reason, a lower value
will be put to the new equity issuance by investors.


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2.2.2. Theories of reverse causality from corporate performance to capital structure
According to discussed theories above, the choice of firm’s capital structure may impact on
its performance. However, firm performance also may influence on its capital structure
decisions. Based on M&M assumptions in perfect-markets, the efficiency-risk hypothesis

and franchise-value hypothesis give some reasons to demonstrate why the optimal capital
structure ratio may move up or move down under the changing of firm efficiency, all else
equal.
Under the efficiency-risk hypothesis, because more efficient firms have ability to reduce
financial distress and bankruptcy cost than other firms; hence, these firms have higher debt
ratios. In sense, higher efficiency creates higher expected return with a given leverage
ratios. Moreover, the firm may be protected to against future crises by higher efficiency.
These results based on joint hypotheses state that (i) profit efficiency has positive
correlation with expected return, and (ii) equity capital is substituted to manage risks by
higher expected returns. Berger and Mester (1997) points out returns on assets (ROA) and
returns on equity (ROE) have significantly positively relative to measured profit efficiency.
In addition, a number of studies (e.g., DeYoung, 1997) give evidences to demonstrate that
the higher profit efficiency supports the firm has stability over time; thus, the future returns
is expected high in relationship with high current efficiency. On the other hand, the firm
can avoid portfolio risks because its high expected returns and low debt ratio may decrease
the financial distress cost and bankruptcy cost. As a result, high leverage ratios can be hold
by firms which have high expected returns with high profit efficiency.
In contrast, under the franchise-value hypothesis, this hypothesis states that more
efficiency firms trend to increase equity capital with all else equal, thus lower leverage
ratios is chose to protect firm’s franchise value or its future income. This statement can be
explained by some evidences of studies (e.g., Demsetz, 1973; Keeley ,1990; Titman and
Wessels, 1988). These authors indicate that firms in which expect to maintain future high


13

efficiency rate will choose lower leverage ratios with the aim of protection of economic
rents or the terms of franchise value created by obtained efficiencies from liquidation
threats. Moreover, because of substitution effect of equity for debt, the relationship
between debt ratios and efficiency may also be influenced by income effect.

In summary, these two hypotheses generate opposite predictions considering the likely the
choice of capital structure is effected by firm efficiency. Although this research cannot
determine the income effects versus separate substitution, empirical analysis can only
separate which effect dominates is more significant than the other in the different of the
choices of capital structure.
2.3. Empirical Literature
2.3.1. The impacts of capital structure on corporate performance
The influence of capital structure on corporate performance has been considered by a
number of previous empirical studies. However, the major difference among them seems
to have conflicting results. It can be seen from Table 2.1 that effect of capital structure on
corporate performance may be negative, positive or no relationship.
Many studies have claimed that capital structure have a statistical and significant negative
effect on corporate performance. Pushner (1995) analyzes the link between firm’s capital
structure and its performance in combination with the affect by equity ownership in firms
in Japan. In this study, corporate performance is estimated by total factor productivity
though a production frontier which corporate performance is equivalent to OLS residual
estimate. The author shows that a negative link exists between capital structure and
corporate performance. Majumdar and Chhibber (1999) examine the relationship between
firm’s capital structure and its performance for Indian corporations. Analysis of the


14

Table 2.1: A summary of the empirical results analyzing the relationship between capital structure and corporate
performance
Author(s)

Period and Sample

Methodology

Performance Measure/s

Capital structure
Measure/s

Results

Majumdar and Chhibber
(1999)

- 1988-1994
- 1000 Indians firms

Weighted least squares
estimation

Return on net worth

Total debt/Total equity

( )

Pushner (1995)

- 1976-1989
- 1247 Japanese
manufacturing companies

Production frontier and

OLS estimate

Total factor productivity

(Total liabilities – excess of
accounts payable over accounts
receivable)/Total assets

( )

Nickell et al (1997)

- 1982-1994
- 580 UK manufacturing
firms

Dynamic Panel Data
with robust one-step
parameters

Productivity growth (CobbDouglas production function)

Financial pressure (Dominant
shareholders)

(+)

Margaritis and Psillaki
(2010)

- 2002-2005
- 2005 France firms for the
three industries

Deterministic nonparametric frontier
methods (DEA)

1/(1+ distance function
value)

Debt/Total assets

(+)

Laurent Weill (2007)

- 1998-2000
- 11836 manufacturing
firms for 7 countries in
European (Belgium, France,
Germany, Italy, Norway,
Portugal, Spain)

- Stochastic Frontier
Approach
- Maximum likelihood
procedure

Total cost/price of labor

Total liability/total assets

No
relationship

Soumadi and Hayajneh
(2008)

- 2001-2006
- 76 firms

Ordinary least squares
(OLS)

Return on equity and Tobin’s
Q

Book value of total
liabilities/book value of total
assets

( )

King and Santor (2008)

- 1998-2005
- 615 Canadian firms

Random-effects
specification

Return on assets,
Tobin’s q

Debt/total assets

No
relationship

Source: Author’s summary


15

Table 2.1: A summary of the empirical results analyzing the relationship between capital structure and corporate
performance (continues)
Author(s)

Period and Sample

Methodology

Performance Measure/s

Gill et al. (2011)

- 2005-2007
- 272 American firms

OLS Regression

Return on equity

Gleason et al. (2000)

- 1994
- 1998 Community retailers
in 14 European countries

OLS Regression

Krishnan and Moyer
(1997)

- 1988-1992
- 81 companies form Hong
Kong, Singapore, Malaysia
and Korea

OLS Regression

Zeitun and Tian (2007)

- 1989-2003
- 167 Jordanian companies

Random-effects
specification

Return on assets,

Pretax income/sales,
Sales/the number of
employee
Return on equity,
Return on invested capital,
Pre-tax operating profit
margin,
Market return on the stock
(Market value of equity +
Book value of debt)/Book
value of assets,
Market value of equity/Book
value of equity,
Price per share,
(Market value of equity +
Book value of liability)/Book
value of equity,
Return on equity,
Return on assets,
(EBIT + Depreciation)/Total
assets

Source: Author’s summary

Capital structure
Measure/s
Total debt/total assets,
Short-term debt/total assets,
Long-term debt/total assets
Total debt/total assets

Results
(+)

( )

Total debt/total equity

No
relationship

Total debt/total assets,
Total debt/total equity,
Long-term debt/total assets,
Short-term debt/total assets,
Total debt/total capital

( )