THE EFFECT OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE
4 ANALYSIS AND RESULTS
Table 1
The results of descriptive statistics indicate that mean of total debt to assets for Turkish manufacturing companies listed on Borsa Stock Exchange Istanbul during 2004-2013 is 50.48%.
It shows that about 50.48% percent of total assets of Turkish manufacturing companies are financed by debt. Further the table shows that mean of ROA, ROE, Size, Tangibility, Intangibility, Risk and Sales Growth are 5.36%, 6.12%, 37.53%, 39.97%, 6.34% and 13.95%
respectively.
Result
Random effect regression method was used to find the relationship of capital structure with performance of the firm. The regression equations were run to study the relationship between each of the capital structure measures and the firm's financial performance called ROA and ROE.
Further, in the regression equation, the control variables were added to check their effects on firm’s financial performance.
Table 2 - Capital Structure and Firm Performance measured by ROA
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Table 2 shows long term debt and total debt have a negative significant effect on the financial performance of the firm measured by ROA. On the other hand the two out five control variables, size of the firm and risk affect performance of the firm measured by ROA is positive and significant, there is significant negative relationship between tangibility and ROA while sales growth and intangibility have insignificant relationship with the performance of the firm measured by ROA. This negative relationship is in consistent with finding of (Bokpin et al., 2010); El‐Sayed Ebaid (2009); Khan (2012)Sheikh and Wang, 2011
Table 3 - Capital Structure and Firm Performance measured by ROE
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Table 3 shows long term debt and total debt have no significant effect on the financial performance of the firm measured by ROE. This result is consistent with Zeitun and Tian (2007) and Ebaid (2009). On the other hand only intangibility out five control variables that has negative significant effect on performance of the firm when measured by ROE, while the remaining four control variable have no any significant effect on the financial performance of the firm measured by ROE.
5 CONCLUSION
The aim of this study is to investigate the impact of capital structure on financial performance of firms in Turkey. The paper examines the impact of capital structure on financial performance of 180 manufacturing companies listed on Borsa Stock Exchange Istanbul Turkey over the period 2004 to 2013. Panel cross- sectional time series techniques are used for data analysis. Return on Assets (ROA) and Return on Equity (ROE) are the two dependent variables of the model, Total Debt to Total Assets (TDTA) and Long term Debt to Total Assets (LDTA) introduced as the explanatory variables while size, sale growth, tangibility, intangibility and risk were included in the model as control variables.
The first result obtain confirm that long term debt and total debt have a negative significant effect on the financial performance of the firm measured by ROA. This negative relationship is consistent with finding of Bokpin et al. (2010); El‐Sayed Ebaid (2009); Khan (2012); Sheikh and Wang, (2011), Rajan and Zingales (1995) and Zeitun and Tian (2007). The first finding shows that Turkish manufacturing sector have adopted capital structure on the pecking order hypothesis. As a result of undersized debt market and less efficient equity market, the main
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source of finance for Turkish manufacturing companies is short term debt. Banks are the main source of finance in Turkey and as a result of volatility in earning, information asymmetry finances are protected with stringent covenants which can force the companies to borrow less while Long term finances is costly. On the other the find does not support both Agency theory and static trade off theory when measuring long term debt and total debt with ROA in Turkish manufacturing companies.
While the second confirm that long term debt and total debt have no significantly effect on the financial performance of the firm measured by ROE. This result is consistent with Zeitun and Tian (2007) and Ebaid (2009). This implies that this finding does not support Pecking order theory, Agency theory or static trade off theory when measuring long term debt and total debt with ROE in Turkish manufacturing companies. There is need for further study that should consist of all companies list on Borsa Stock Exchange both financial and non-financial manufacturing and non-manufacturing industries. Introduction of additional national variable such as ownership concentration macroeconomic factors would be important to consider in further studies.
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doi:doi:10.1108/14720700710727122 Contact information
Ali Ibrahim Dasuki PhD Student
Faculty of Economics and Management Fatih University Istanbul, Turkey
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