Corporate capital structure effects on corporate performance pursuing a strategy of innovation in manufacturing companies

Fahad Ahmed; Mujib Ur Rahman; Hafiz Mudassir Rehman; Muhammad Imran; Anna Dunay; Md Billal Hossain

doi:10.1016/j.heliyon.2024.e24677

Corporate capital structure effects on corporate performance pursuing a strategy of innovation in manufacturing companies

Heliyon. 2024 Jan 25;10(3):e24677. doi: 10.1016/j.heliyon.2024.e24677. eCollection 2024 Feb 15.

Authors

Fahad Ahmed¹, Mujib Ur Rahman², Hafiz Mudassir Rehman³, Muhammad Imran⁴, Anna Dunay⁵, Md Billal Hossain⁶

Affiliations

¹ School of Information Technology, Washington University of Science and Technology, VA 22182, USA.
² Faculty of Business & Economics, Abdul Wali Khan University Mardan, 23200, Khyber Pakhtunkhwa, Pakistan.
³ Department of Global Business & Enterprise, Ulster University Business School, Ulster University, BT487JL, UK.
⁴ Faculty of Administrative & Management Sciences, Khwaja Fareed University of Engineering and Information Technology (KFUEIT), Rahim Yar Khan, Punjab, Pakistan.
⁵ Doctoral School of Management and Business Administration, John von Neumann University, 1117 Budapest, Hungary.
⁶ Business Management and Marketing Department, School of Business and Economics, Westminster International University in Tashkent (WIUT), Tashkent 100047, Uzbekistan.

Abstract

Within the sphere of finance, the concept of capital structure has long been a subject of intense debate, serving as a quantitative depiction of the balance between debt, preference shares, and common stock within a company. This structure serves a crucial role in optimizing the utilization of a company's existing resources while simultaneously elevating the revenue streams for stakeholders. This particular study delves into the intricate relationship between corporate performance and capital structure, focusing on 78 publicly listed firms within the Dhaka Stock Exchange (DSE). Bangladesh holds the 29th position globally in terms of purchasing power, lending significant weight to this investigation. To comprehensively analyze this correlation, panel data encompassing the span from 2017 to 2021 was collected for these 78 sample companies operating within the DSE. Several key determinants of capital structure were considered in this analysis, namely the debt-to-equity ratio, short-term leverage ratio, long-term leverage ratio, and total debt ratio. Meanwhile, the performance of these firms was gauged using key metrics such as Return on Assets (ROA), Return on Equity (ROE), and Earnings Per Share (EPS). To ensure a robust analysis, factors such as inflation, liquidity, growth rate, tax rate, and firm size were meticulously controlled for. The findings unveiled a compelling narrative: all forms of debt ratios-be it short-term, long-term, or the total debt ratio-exhibited a substantial negative impact on ROA at a significant level of 1 %. Conversely, specific debt ratios, like the short-term total debt and the total debt-to-total asset ratio, displayed a notable positive correlation with ROE at a 1 % significance level. Intriguingly, the long-term total debt ratio yielded a negative and insignificant effect on ROE. Moreover, within the spectrum of predictors influencing a firm's performance, the liquidity ratio emerged as a non-significant factor-a notable discovery that highlights the nuanced nature of the interplay between capital structure and performance within these companies.

Keywords: Corporate capital structure; Debt finance; Economic growth; Money and interest rates.