Corporate capital structure and firm performance: evidence from Bangladesh

Abstract

This study examines whether corporate capital structure reduces agency costs and increases firm economic performance in Bangladesh, an emerging economy. By using two measures of agency cost, expense ratio and asset utilization ratio (or asset-turnover ratio), as well as two measures of performance, return on assets (ROA) and Tobin’s Q, analyses are carried out from an observation of 94 non-financial listed firms at Dhaka Stock Exchange. This study reveals that capital structure in the form of debt and equity neither reduces the agency cost nor improves the firms' economic performance. The implication of this study is that corporate governance mechanisms that work well in some developed economies may not work well in some emerging economies. Many firms, who are in fact very poor in terms of performance, may have employed debt to exercise control, but debt cannot reduce the dysfunctional behaviour of firm. This study contributes to the literature by providing a new avenue of knowledge on corporate capital structure in an emerging economy.