Corporate capital structure and firm performance: evidence from a developing country

Abstract

This study examines if the corporate capital structure in the form of debt and equity may act as a disciplinary role in a developing country’s context. In doing so this study examines if the debt may reduce the agency cost and enhance the firm performance under various performance measures. The agency costs are measured as the ‘expense ratio’ and ‘asset utilization ratio’; firm performances are measured under both the accounting and market based performance measures. The study identifies that additional debt can not reduce the agency cost; but influence the firm performance under market based performance measures. The significant positive relationship between the tax payment and firm performance under the accounting based performance measure implies that tax savings influence the firm’s profitability. This study implies the ‘one size does not fit all’ or one set of capital structure arrangement may not be suitable for every country.