Does Capital Structure Matter for Firm Performance? A Study on Listed Companies

Abstract

This study examines the impact of capital structure on a company’s performance in the manufacturing industry in Bangladesh. The data is based on all listed companies in the public and private sectors. The required data was gathered from related financial statements of the concerned industry from 2014 to 2021. We used the Two-Stage Least squares (2SLS) to find out the correlation between independent variables and dependent variables. Here, ROA [Return On Assets), EPS [Earnings Per Share), and NPM (Net Profit Margin) are used to measure firms’performance. The ratios of the long-term debt ratio, total debt ratio and short-term debt ratio are considered the determinants of capital structure. Findings revealed that the short-term debt ratio is positively and significantly related to ROA and EPS, but negatively associated with NPM. In contrast, the Long-Term Debt Ratio (LTDR) has a significant negative impact on EPS. Control variable Firm Size (FS) consistently showed a significant positive infiuence on ROA and EPS, indicating that larger companies outperform smaller ones. More dependence on short-term debt positively affects profitability, while higher dependence on long-term debt can lessen it. This research supports original insights by covering manufacturing sectors which remain uncovered in the research area. The 2SLS regression addresses endogeneity and confirms more consistent outcomes. Moreover, this study offers a robust and context-specific analysis of a developing economy, utilizing firm-level panel data and a range of performance measures. The result will help in retaining an optimal capital structure, which will ultimately direct stockholders to wealth maximization.