Publicly Traded Manufacturing Firms in Bangladesh.: Article 1-The Impact of Capital Structure On The Profitability of

Article 1-The Impact of Capital Structure on the Profitability of
Publicly Traded Manufacturing Firms in Bangladesh.
Applied Economics and Finance Vol. 6,No. 2 March 2019, ISSN 2332-7308
BACKGROUND-
The capital structure choice of a manufacturing firm is the most significant decision taken
by the management of the firm to maximize profits and at the same time minimize costs of
capital leads to the maximization of stockholders wealth. Basically, there are two main
sources of finance. One is internal finance which is equity and another is external finance
which is debt. Most firms use a combination between equity and debt which appearance the
capital structure. This research will help all the financial specialists to realize the impact of
capital formation on the firm's profitability. Moreover, this research will help the company
manager and stakeholder to understand more about the influence of capital structure and the
sensitivity of debt and equity in the firm's activities. It will provide a guideline to the
financial manager to design a better capital structure to reduce the cost of capital, raise firm
profitability and utimately maximize shareholder wealth. At the same time, this study can
lead the investor to know more about the effect of capital structure choice on their return
and form an optimal capital structure.
This research explores the impact of capital structure on the profitability of publicly traded
manufacturing firms in Bangladesh. In this paper, they applied the fixed effect regression to
find out the correlation among independent variables (debt ratio, equity ratio and debt to
equity ratio) and dependent variables (return on asset, return on equity and earnings per
share).
OBJECTIVES-
The main objective of the study is to show the impact of capital structure on profitability of
publicly traded manufacturing firms in Bangladesh. To fulfil the main objective we pursue
the following specific objectives:
• To identify the impact of capital structure on Return on Asset (ROA).
• To identify the impact of capital structure on Return on Equity (ROE).

• To identify the impact of capital structure on Earning per Share (EPS).
METHODOLOGY-
A sample of 50 secondary observations of selected 10 manufacturing companies listed in

Dhaka Stock Exchange has been analysed over the period of 2013 to 2017. To make sure
valid estimates of the measures, an observation is selected on the basis of some criteria:
firms with missing data for any factor in the model during the study period are dropped and
sometimes adjusted; firms having the extremist values for any of capital structure are also
dropped; Firms having the extremist values for any of performance variables are also
dropped. This research reveals that the debt ratio and equity ratio have a significant positive
impact but debt to equity ratio has a significant negative impact on ROA.
DATA ANALYSIS-
The model used for analysis is Econometric Model.
The multiple linear regression model used in this study is as follow: 𝑃𝑖𝑡 = 𝛼 + 𝛽1𝐷𝑅𝑖𝑡 +
𝛽2𝐸𝑅𝑖𝑡 + 𝛽3𝐷𝐸𝑖𝑡 + 𝜀𝑖𝑡
Where, α is constant;
𝛽1 to 𝛽2 = Coefficient of determinants of independent variables;
i (numbers of manufacturing firms) = 1,2,3,....10;
t (time-interval) = 1,2,....5;
ε is error term.
The descriptive statistics show that the mean value of ROA is 0.59642% with a standard
deviation of 0.572085%. In addition, the variable ROA record a rather low inconsistency as
the value range from -0.7% to 2.86%. The mean value of ROE is 0.899142% with a
standard deviation of 1.095714%, the minimum value of ROA is -0.25% and the maximum
is 5.66%. Variable EPS presents relatively high inconsistency since its minimum value
stands at -.91% and maximum at 8.66%. The mean value of EPS is 3.72542% with a
standard deviation of 2.641485%.
Variables Observation Mean Standard
deviation
ROA 50 0.596 0.572
ROE 50 0.899 1.095
EPS 50 3.725 2.641
Source: Results obtained (STATA output) by the authors.
CONCLUSION-
The impact of capital structure on the profitability of the manufacturing firm is analysed
based on descriptive statistics, correlation matrix and fixed effect regression analysis. The
regression result shows the debt ratio has a significant positive impact on ROA supported
by Modigliani and Miller. Equity ratio has a significant positive impact on ROA and ROE.
Finally, the debt to equity ratio has a significant negative impact on ROA, ROE, and EPS.
In conclusion, the firms raise debt finance to reduce the cost of capital and enjoy tax
advantage but debt level over the optimum capital structure has a significant negative
impact on ROA, ROE, and EPS.
Article 2- A Survey on Capital Structure Decision of

Nepalese Non-Financial Firm.
Journal of Business Management & Social Sciences Research
Vol. 2 ,No.4, 196-205
BACKGROUND-
The theory of capital structure begins with the capital structure irrelevance proposition of
Modigliani and Miller (1958). They explained that in perfect capital markets, the financing
decisions of firms have no effect on their value. M-M confirmed that in the absence of
bankruptcy costs, corporate income taxation, or other market imperfections, firm value is
independent of its financial structure in competitive capital markets. A firm’s capital structure
is the combination of a firm’s equity, debt, and hybrid securities which finances the whole
business operation. A capital may be composed of equity, debt or even hybrid securities.
Therefore, according to M-M, the debt-to-equity ratio has no impact on the total value of a
firm. However, based on this theory, within the literature there are three main theories of
capital structure: the trade-off theory, the pecking order theory, and the agency theory. This
section presents review of major theories on capital structure.
The study aims at examining the views of capital structure in Nepalese non-financial
enterprises. This study is directed towards examining the capital structure policy of Nepalese
non- financial firms. The primary information required for the said purpose has been
collected through the survey of opinions of board of directors, company secretary, executives,
chief fiancé officers and other line managers through administering the well structure multi-
part questionnaire. For the purpose of field survey, 90 questionnaires were distributed among
the respondents located in Kathmandu using non probabilistic sampling. The survey result
shows that preference toward maturity structure of borrowing varied among the Nepalese
non-financial firms, and majority of Nepalese firms do not consider interest rate and practice
of matching between asset and liabilities structure while they go for borrowing.
OBJECTIVES-
Decision of capital structure aims at the following important objectives-

 To get an introduction and brief overview of capital structure.
 Maximise the value of firm.
 Minimise the overall cost of capital.
 Provide a conceptual understanding on M&M proposition 1&2 and its implications on
real life situations.
METHODOLOGY-
1)Research design
The descriptive research design has been adopted to search adequate information in the
context of corporate capital structure, and assess the opinions of respondents of the survey.
Different descriptive statistical measures such as minimum, maximum, percentage, average,
standard deviation and coefficient of variation have been used to analyse.
2) Nature and sources of data
Data required for undertaking the study has been collected from primary sources .In addition
to analyse the secondary information, an attempt has also been made to check and validate
the study findings through opinion survey of major stakeholders of the non- financial firms
covered under the study.
DATA ANALYSIS-
Financing preferences and factors governing capital structure decision-
This part of the questionnaire was designed to understand the respondents view on financing
preferences for new investment and factors governing the financial leverage decision. In first
question respondents were asked to rank the various sources of long-term fund in terms of
their importance for financing new profitable investment by assigning 1. for the most
important source, 2 for second important and so on and 5 for the least important. Number and
percentage of response for each rank together with composite mean has been presented in the
given below table.
Sources Rank1 Rank Rank Rank Rank Total Composite Rank

of long 2 3 4 5 mean
term-
funding
Use of 72 7 3 0 0 82 1.16 1
retained
earnings
Use of 5 65 10 1 1 82 2.12 2
debt
Issue of 0 0 57 15 10 82 3.43 3
preference
stock
Issue of 3 5 10 58 6 82 3.72 4
equity
share
Others 2 5 2 8 65 82 4.57 5
As exhibited in Table the great majority of respondents (87.8 percent) ranked use of retained
earnings as their first choice. The composite ranking mean of use of retained earnings is the
lowest (1.06), and that for others is the highest (4.54). This result implies that use of retained
earnings is the first choice and other sources are the last choice in repotting firms. Issue of
preferred has been ranked third by the respondents with the mean rank of 3.44, and external
equity has been ranked in next order with the mean rank of 3.85. This pattern of preferences
to a greater extent provides an indication towards existence of pecking order financing among
the Nepalese non-financial firms.
CONCLUSION-
The study concludes that current state-of-the- art of corporate capital structure in Nepalese
non-financial enterprises is characterized by lack of formal policy, use of both income
statement and balance sheet based measure of financial leverage, absence of target debt ratio
and lack of policy of maintaining spare debt capacity. The financing practices are
characterized by preference towards internal financing and frequent
change in leadership is the most critical challenge for the corporate capital structure decision
in Nepalese non-financial enterprises.

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Article 1-The Impact of Capital Structure on the Profitability of

Publicly Traded Manufacturing Firms in Bangladesh.

• To identify the impact of capital structure on Return on Asset (ROA).

• To identify the impact of capital structure on Return on Equity (ROE).

A sample of 50 secondary observations of selected 10 manufacturing companies listed in

The model used for analysis is Econometric Model.

𝛽1 to 𝛽2 = Coefficient of determinants of independent variables;

i (numbers of manufacturing firms) = 1,2,3,....10;

Article 2- A Survey on Capital Structure Decision of

Decision of capital structure aims at the following important objectives-

2) Nature and sources of data

Financing preferences and factors governing capital structure decision-

Sources Rank1 Rank Rank Rank Rank Total Composite Rank

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