The Impact of capital structure on firm performance: A study of manufacturing companies on HOSE

Abstract

Since Modigliani and Miller (1958) have released their paper about the issue

of capital structure, this topic has raised interest for many researchers. Basically, capital structure is the way a firm use different source of funds to finance its activities. The purpose of this study is to examine the relationship between capital structure and firm performance of manufacturing firms listed on Hochiminh Stock Exchange (HOSE), the observed period is three years, from 2009 to 2011. The data is collected from financial reports of 71 firms for this study. The descriptive and panel regressions methods are used to interpret the results. The study selects return on assets (ROA) and return on equity (ROE) as the measures of firm performance; short-term debt to total assets, long-term debt to total assets, total debt to total assets and total debt to total equity as proxy of capital structure. The study found that the observed manufacturing firms they do not heavily depend on debt to finance their operations. However, the short-term debt accounted for a large proportion of total debt comparing to long-term debt. The results of the study indicate that there is a negative but highly statistically significant correlation between total debt to total assets ratio and return on assets. This implies that return on assets decreases as debt ratio increases. There is also a negative but highly statistically significant correlation between short-term debt to total assets ratio and return on equity. This means that return on equity decreases when short-term debt ratio increases. Another finding is that total debt to equity has strong positive impact on return on equity ratio.