Effects of capital structure on the Firms performance Article Review

Introduction: Capital Structure mainly deals with fixing the right proportion of debt and equity in a firm, and this study mainly analyses the effect of capital structure on the firms performance. The relationship between ROE and Capital Structure has been investigated in this study. Objectives: The main objective of this study is: To find out the effects of capital structure on the Firms performance. Finding out the right proportion of debt and equity for a company

Methodology: Secondary Data has been used for this study. The major source of information includes annual reports, Balance Sheet, Profit and loss accounts, etc.

Summary: 100 companies have been taken as a sample. 50 has been allotted a negative debt to assets ratio and the rest 50 positive debt to assets ratio. The critical point for negative debt to assets ratio is nil while the critical point for positive debt to assets ratio is 34.31. For the overall sample, the mean debt ratio for all firms is 47.84% in 1987. The mean leverage decreases monotonically to 34.31% year by year.

Conclusion: This study analyses the relation between corporate performance and the capital structure. We find a strong curvilinear relation between ROE and the debt-to-assets ratio. The theory predicts that the value of firms will first increase, then decrease, as debt ratio increases. Most existing papers on capital structure require firms performance or firms value to bear the linear relation with debt ratio, but the empirical evidence does not support this.