Capital structure and a firm´s profitability: is there any relationship?

Abstract

Capital structure defined by the proportion of debt and equity financing has always been an important component in managerial finance due to its relative importance in measuring a company's risk. Arguably, it is among the most controversial topics in corporate finance and has gain recent recognition of its importance when considering the emergence of different sources of financing across industry. The purpose of this study was to explore the relationship between capital structure and a firm's profitability in other to determine whether a significant connection exists between how a firm finances its operations and its financial performance. A comprehensive Lilliefors’s, Kolmogorov Smirnov and Chi square tests analysis were utilised for a sample of 23 peer reviewed journal articles across various industries. The findings revealed that capital structure cannot be used to explain variations in profitability and profitability is independent of capital structure. This paper contributes to the ongoing debate on optimal capital structure by strengthening methodological rigor and some of the existing theories on how capital structure can be used to maximise profitability. It may be very helpful for further studies to first establish the direction of impact and the size effect of the independent variables.

Keywords: {'name': 'Capital structure, profitability, meta-analysis, Lilliefors test, Kolmogorov Smirnov test, Chi square test'}

Authors & affiliations

Samuel Tabot Enow
Affiliation not supplied

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