Abstract:
Purpose – The main objective of this study is to find out the impact of capital
structure on firms financial performance and the empirical findings based on two
different markets to compare the result of developed country market (Dow Jones 30
Index USA) and developing country market (KSE 100 Index).
Design/methodology/approach – Multiple statistical tools are used to examine the
empirical finding of this study based on sample data. Descriptive statistics, correlation
matrix and multiple regression models are used for finding the relationship between
capital structure and firms financial performance. Three dependent variables are used
to measure the financial performance: Return on assets (ROA), return on equity
(ROE), and earnings per share (EPS). Determinant of capital structure includes short
term debt to total assets (STDTA), long term debt to total assets (LTDTA) and total
debt to total assets (TTDTA). Two control variables are used in this study: Growth of
assets and Size of assets. The sample data collected from two markets for the time
period of five years from 2009 to 2013. The type of data is panel data and Husman
tests are used to get suggestions which test would be good to handle the panel data.
Fixed and random effect models are used to find the relationship between capital
structure and firms financial performance.
Results – In developed market higher percentage of debt are used and in developing
country the average utilization of debt is lower than developed country percentage.
This study concluded that the in both markets the return on assets and return on equity
has statistically positive and significant relationship with capital structure and
earnings per share have positive but insignificant relationship with capital structure.
Originality/value – This is the first study that conducted on two different markets
and concludes the result on comparative basis that what is the impact of capital
structure on firm’s financial performance in developed country like USA and in
developing country like Pakistan.
