Assignment week 12

docx

School

University of the Cumberlands *

*We aren’t endorsed by this school

Course

734

Subject

Finance

Date

Nov 24, 2024

Type

docx

Pages

Uploaded by PrivateMask15464

Assignment 12 Ahmed Abdelhamed University of the Cumberlands Corp Fin: Fiscal Mngmnt GloCul (BADM-734-M40) - Full Term Dr. Adu Bonna November 14 th , 2023

Does Capital Structure Impact Firm Performance: An Empirical Study of Three U.S. Sectors Abstract This research study investigates the relationship between capital structure and firm performance in three sectors in the United States: Industrial, Healthcare, and Energy. The study aims to determine whether capital structure negatively or positively impacts firm performance and to what extent. The research question being examined is whether there is a significant relationship between capital structure and firm performance. The study utilizes a quantitative research method, collecting data from secondary sources such as annual reports and Yahoo Finance over a ten-year period (2004-2013). The sample consists of 30 randomly selected firms from each sector, resulting in a total of 300 observations per sector. Four dependent variables (market value per share, return on assets, operating return, and profit margin) and one independent variable (long-term liabilities to total assets ratio) are used to measure firm performance and capital structure, respectively. The findings of the study reveal that the relationship between capital structure and firm performance varies depending on the sector and the specific performance measure used. In the Industrial Sector, capital structure has a negative relationship with return on assets and operating return, but a positive relationship with profit margin. In the Healthcare Sector, capital structure has a negative relationship with return on assets and operating return, but no relationship with profit margin or stock price. In the Energy Sector, capital structure has a negative relationship with return on assets, operating return, and profit margin. There is no relationship between capital structure and stock price in any sector.(Cole et al., n.d.)

The study supports Modigliani and Miller's theory that capital structure and stock price are independent of each other. The results suggest that firms in the Industrial and Healthcare Sectors should consider alternative financing options if they do not want to reduce their performance ratios, while firms in the Energy Sector should seek alternative financing to avoid negative impacts on performance. The study contributes to the limited research on the relationship between capital structure and firm performance in U.S. companies within specific sectors. Overall, this study provides valuable insights into the relationship between capital structure and firm performance in different sectors, highlighting the importance of considering sector-specific factors and performance measures when analyzing this relationship. Problem Statement The problem statement of this article is to determine the relationship between capital structure and firm performance in the Industrial, Healthcare, and Energy sectors of U.S. firms. The study aims to investigate whether capital structure negatively or positively impacts firm performance and to what extent. The research question being examined is whether there is a significant relationship between capital structure and firm performance. The study seeks to provide insights for firms in these sectors on how to select financing options that will maximize performance and minimize risk.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Significance & Purpose of the study The significance of the study is to determine the relationship between capital structure and firm performance in the Industrial, Healthcare, and Energy sectors of U.S. firms. The study aims to provide insights for firms in these sectors on how to select the financing options that will maximize performance and minimize risk. By analyzing the relationship between capital structure and firm performance, the study contributes to the existing literature in corporate finance and fills the gap in research on U.S. companies within specific sectors. The study examines the relationship between capital structure and firm performance in the Industrial, Healthcare, and Energy sectors in the United States. The study finds that the relationship between capital structure and firm performance varies depending on the sector and the variable used to measure firm performance. In the Industrial Sector, capital structure has a negative relationship with return on assets and operating return, but a positive relationship with profit margin. There is no relationship between capital structure and stock price. In the Healthcare Sector, capital structure has a negative relationship with return on assets and operating return, but no relationship with profit margin or stock price. In the Energy Sector, capital structure has a negative relationship with return on assets, operating return, and profit margin. There is no relationship between capital structure and stock price. The study supports Modigliani and Miller's theory that capital structure and stock price are independent of each other. The findings suggest that firms in the Industrial and Healthcare Sectors should consider alternative financing options if they do not want to reduce their performance ratios, while firms in the Energy Sector should seek alternative financing to avoid negative impacts on performance. The study highlights the importance of considering different measures of firm performance and

capital structure when analyzing their relationship. The study contributes to the limited research on the relationship between capital structure and firm performance in U.S. companies within specific sectors. The purpose of the study is to investigate whether capital structure negatively or positively impacts firm performance and to what extent. The research question being examined is whether there is a significant relationship between capital structure and firm performance. By utilizing quantitative methods and analyzing data from annual reports and secondary sources, the study aims to provide empirical evidence on the relationship between capital structure and firm performance. The findings of the study can help firms make informed decisions regarding their financing choices and optimize their performance ratios. Research Method The authors use a quantitative study method to address the problem. They collect data from secondary sources, such as annual reports and Yahoo Finance, and analyze the relationship between capital structure and firm performance using regression analysis. They treat the performance variables as dependent variables and the capital structure variable as an independent variable. The study aims to determine the extent of the relationships between capital structure and firm performance and whether these relationships are statistically significant.

Critical analysis Strengths of the study are as follows, The study focuses on U.S. companies within the Industrial, Healthcare, and Energy sectors, providing sector-specific insights into the relationship between capital structure and firm performance. The study utilizes a quantitative research method, collecting data from secondary sources over a ten-year period, which enhances the reliability and validity of the findings. The study considers multiple measures of firm performance, including market value per share, return on assets, operating return, and profit margin, providing a comprehensive analysis of the relationship between capital structure and different performance indicators. The study contributes to the existing literature by examining the relationship between capital structure and firm performance in U.S. companies, which has been relatively understudied in this specific area of corporate finance. On the other hand, the Limitations of the study are The study relies on secondary data sources, such as annual reports and Yahoo Finance, which may have limitations in terms of accuracy and completeness. The study only considers a sample of 30 firms in each sector, which may not fully represent the entire population of firms in those sectors. The findings may not be generalizable to all firms in the Industrial, Healthcare, and Energy sectors. The study focuses on a specific time (2004-2013), and the findings may not be applicable to different time periods or economic conditions. The study does not consider other factors that may influence firm performance, such as industry-specific factors, management quality, or macroeconomic conditions. These factors could potentially confound the relationship between capital structure and firm performance. The study does not explore the causality between capital structure and firm performance, as it only

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

examines the relationship between the two variables. Further research is needed to establish causality and understand the mechanisms through which capital structure affects firm performance. Conclusion The conclusion of the study is that the relationship between capital structure and firm performance varies depending on the sector and the variable used to measure firm performance. In the Industrial Sector, capital structure has a negative relationship with return on assets and operating return, but a positive relationship with profit margin. In the Healthcare Sector, capital structure has a negative relationship with return on assets and operating return, but no relationship with profit margin or stock price. In the Energy Sector, capital structure has a negative relationship with return on assets, operating return, and profit margin. There is no relationship between capital structure and stock price in any sector. The findings of the study generally support the conclusion. The results show that capital structure has a significant impact on certain performance measures in each sector. However, it is important to note that the relationship between capital structure and firm performance can vary depending on the specific variable used to measure performance. Therefore, the conclusion suggests that firms in different sectors should consider alternative financing options based on the specific performance ratios they want to optimize. The study also supports Modigliani and Miller's theory that capital structure and stock price are independent of each other.

Future work A potential proposal for future research on the topic could be to investigate the impact of capital structure on firm performance in different countries or regions. The existing literature primarily focuses on U.S. firms or specific countries, such as Pakistan or Nigeria. Conducting a comparative analysis across different countries or regions would provide valuable insights into how cultural, legal, and economic factors influence the relationship between capital structure and firm performance. The research could involve selecting a sample of firms from various countries or regions and analyzing their capital structure and performance using similar variables and methodologies. By comparing the results across different countries or regions, researchers can identify any variations in the relationship between capital structure and firm performance. This would help in understanding the role of country-specific factors, such as financial regulations, tax systems, and market conditions, in shaping the relationship. Additionally, future research could explore the impact of different industry characteristics on the relationship between capital structure and firm performance. The current study focuses on the Industrial, Healthcare, and Energy sectors in the United States. However, other sectors, such as technology, consumer goods, or financial services, may have unique dynamics that influence the relationship between capital structure and firm performance. Investigating these industry- specific factors would provide a more comprehensive understanding of the topic. Furthermore, it would be beneficial to examine the long-term effects of capital structure decisions on firm performance. The current study analyzes the relationship between capital

structure and firm performance over a ten-year period. However, understanding how capital structure decisions impact firm performance in the long run, beyond the scope of the study period, would provide valuable insights for firms and policymakers. Overall, future research should aim to expand the geographical scope, consider industry- specific factors, and investigate the long-term effects of capital structure on firm performance to further enhance our understanding of this important corporate finance topic. References Cole, C., Yan, Y., & Hemley, D. (n.d.). Does Capital Structure Impact Firm Performance: An Empirical Study of Three U.S. Sectors .

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version