MANUFACTURING FIRMS’ CAPITAL STRUCTURE IN BANGLADESH: COMPARISON BETWEEN LISTED MNCS AND LOCAL COMPANIES
Keywords:
Capital, Structure, Debt, Leverage, Equity.
Abstract
The capital structure of a firm has immense significance as it has implications on corporate value and financial performance. The basic aim of the research was to analyze and compare the capital structure of Dhaka Stock Exchange (DSE)-listed multi-national companies (MNCs) and local companies of Bangladesh over 24 years (1996-2019). Stratified sampling techniques were applied to the selection of firms. Six financial leverage ratios were used to analyze and compare capital structures. There were significant differences in capital structure between local companies and MNCs as the null hypothesis was rejected. It was also found that the mean equity-financing proportion of domestic companies and MNCs were 65% and 92.5% respectively. The proportion of long term debt in total capital employed was very low for both types of companies. MNCs can raise the proportion of both short and long-term debt to take the advantage of financial leverage. Domestic companies can redeem some short term loan and replace some short term debt with long term debt. This research would be useful for corporate financial managers, creditors, and investors to take appropriate financing as well as investment decisions which would affect shareholders' wealth and value of the firm in the long run to a significant extent.
JEL Classification Codes: G30, G32, G39
References
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Alom, K. (2013). Capital structure choice of Bangladeshi firms: An empirical investigation. Asian Journal of Finance & Accounting, 5(1), 320–333.
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Hossain, M. I., & Hossain, M. A. (2015). Determinants of capital structure and testing of theories: A study on the listed manufacturing companies in Bangladesh. International Journal of Economics and Finance, 7(4), 176-190. http://dx.doi.org/10.5539/ijef.v7n4p176
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Islam, M. E., Rahman, L., & Khan, A. N. M S. N. (2011). Influence of profitability and risk on capital structure: An analysis on the cement industry of Bangladesh. Journal of Banking & Financial Services, 5(2), 231–244.
Islam, R. (2016). Determinants of capital structure choices for listed manufacturing companies in Bangladesh. Research Journal of Finance and Accounting 7(7).
Janardhanan, A. K., & Uma, V. R. (2020). The role of internal control and firm-specific characteristics on firm value: Evidence from Indian financial services sector. Indian Journal of Finance and Banking, 4(1), 117-133.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76, 323-339.
Kusuma, G. D. V. (2018). A study on evaluation of capital structure. Indian Journal of Finance and Banking, 2(2), 42-46.
Lima, M. (2011). An insight into the capital structure determinants of the pharmaceutical companies in Bangladesh.Journal of Finance and Banking, 9(1), 67–84.
M’ng, J. C. P., Rahman, M., & Sannacy, S. (2017). The determinants of capital structure: Evidence from public listed companies in Malaysia, Singapore and Thailand.Cogent Economics & Finance, 5, 1-34. https://doi.org/10.1080/23322039.2017.1418609
Mawanza, W., & Mugumisi, N. (2013). Capital structure and corporate performance: A case for tourism and hospitality sector of Zimbabwe. Global Journal of Commerce and Management Practice, 2(6), 85-90. Retrieved from https://www.longdom.org/articles
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 36(1), 116-19.
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48(2), 61-275.
Ramadan, I. Z. (2015). Leverage and the Jordanian firms’ value: Empirical evidence. International Journal of Economics and Finance, 7(4), 75-81. http://dx.doi.org/10.5539/ijef.v7n4p75
Rouf, A. (2015). Capital structure and firm performance of listed non-financial companies in Bangladesh.The International Journal of Applied Economics and Finance, 9(1), 25-32.
Sadiq, A. I., Kachollom, P. W., Dasuki, S. I., &Yusuf, M. (2017). Effect of capital structure on the performance of deposit money banks. International Journal of Accounting & Finance Review, 1(1), 12-23.
Siddik, M. N. A., Kabiraj, S., & Joghee, S. (2017). Impacts of capital structure on the performance of banks in a developing economy: Evidence from Bangladesh. International Journal of Financial Studies,5(13), 1-18. http://dx.doi.org/10.3390/ijfs5020013
Tsuji, C. (2013). Corporate solvency and capital structure: The case of the electric appliances industry firms of the Tokyo stock exchange. International Journal of Economics and Finance, 5(6), 46-54. http://dx.doi.org/10.5539/ijef.v5n6p46
Umar, M., Tanveer, Z., Aslam, S., & Sajid, M. (2012). Impact of capital structure on firms’ financial performance: Evidence from Pakistan. Research Journal of Finance and Accounting, 3(9), 1-12. Retrieved from http://www.iiste.org
Waliullah, G. M., & Islam, M. (2018). Capital structure and MNC profitability: Empirical evidence from Bangladesh. Proceedings of Academicsera 21st International Conference, Kuala Lumpur, Malaysia, June 1-2.
William, M. (2005). Corporate Finance Theory. USA: Addison-Wesley Education publishers
Aggarwal, R. (1990). Capital structure differences among large Asian companies. ASEAN Economic Bulletin, 7(1), 39-53. Retrieved from https://www.jstor.org/stable/25770284
Ahmad, Z. N., Abdullah, M. H., & Roslan, S. (2012). Capital structure effect on firms performance: Focusing on consumers and industrials sectors on Malaysian firms.International Review of Business Research Papers, 8(5), 137-55. Retrieved from http://www.sciedu.ca/ijba
Akani, H. W., & Ifechi, K. N. J. (2017). Effects of capital structure and board structure on corporate performance of selected firms in Nigeria. Indian Journal of Finance and Banking, 1(2), 1-16.
Akbarpour, M., & Aghabeygzadeh, S. (2011). Reviewing relationship between financial structure and firms performance in firms traded on the Tehran stock exchange. International Journal of Business Administration, 2(4), 175-80. https://doi.org/10.5430/ijba.v2n4p175
Akhtar, S. (2005). The determinants of capital structure for Australian multinational and domestic corporations. The Australian Graduate School of Management, 30, 321-341.
Alom, K. (2013). Capital structure choice of Bangladeshi firms: An empirical investigation. Asian Journal of Finance & Accounting, 5(1), 320–333.
Amin, & Jamil (2015). Capital structure and firm performance: Evidence from cement sector of Dhaka stock exchange limited. Journal of Finance and Banking, 13(1&2).
Barakat, A. (2014). The impact of financial structure, financial leverage and profitability on industrial companies’ shares value (applied study on a sample of Saudi industrial companies). Research Journal of Finance and Accounting, 5(1), 55– 66. Retrieved from http://www.iiste.org
Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital structure in developing countries. Journal of Finance, 56, 87-130.
Borman, T. (2019). A Review on capital structure differences in Bangladeshi firms and its impact on their financial performance. ABC Research Alert,7(3). https://doi.org/10.18034/abcra.v7i3.262
Brealey, R. A., & Myres, S. C. (1996). Principles of Corporate Finance (5thed.). New York: McGraw Hill Companies, pp. 484-486.
Chowdhury, A., & Chowdhury, S. (2010). Impact of capital structure on firm’s value: Evidence from Bangladesh. Business and Economic Horizons, 3(3), 111–122. http://dx.doi.org/10.15208/beh.2010.32
Collins, O. S., Filibus, I. E., & Clement, A. A. (2012). Corporate capital structure and corporate market value: Empirical evidence from Nigeria. International Journal of Economics and Finance, 4(12), 193-201. http://dx.doi.org/10.5539/ ijef.v4n12p193
Cuong, N.T., & Canh, N. T. (2012). The effect of capital structure on firm value for Vietnam’s seafood processing enterprises. International Research Journal of Finance and Economics, 89, 221-233.
Esch, R. V. (2011). The differences in capital structure between the G-7 countries and the E-7 countries (Master’s Thesis). Faculty of Economics and Business, Department of Finance.
Fama, E. F., & French, K. R. (1998). Taxes, financing decisions, and firm value. The Journal of Finance, 53 (3), 819–843. Retrieved from http://www.sciedu.ca/ijba
Fosu, S. (2013). Capital structure, product market competition and firm performance: Evidence from South Africa. The Quarterly Review of Economics and Finance, 53, 140-51. Retrieved from http://www.elsevier.com/locate/qref
Gill, A., & Obradovich, J. D. (2012). The impact of corporate governance and financial leverage on the value of American firms. International Research Journal of Finance and Economics, 91, 46-56. Retrieved from http://www.internationalresearchjournal offinanceandeconomics.com
Haque, S. (2017, December 19). Bringing multinationals to the stock market. The Daily Star. Retrieved from https://www.thedailystar.net /opinion/economics
Hossain, I. (2016). Effects of capital structure and managerial ownership on profitability: Experience from Bangladesh. International Journal of Business and Management, 11(9)
Hossain, M. I., & Hossain, M. A. (2015). Determinants of capital structure and testing of theories: A study on the listed manufacturing companies in Bangladesh. International Journal of Economics and Finance, 7(4), 176-190. http://dx.doi.org/10.5539/ijef.v7n4p176
Iheduru, N. G., & Chukwuma, I. R. (2019). Effect of environmental and social cost on performance of manufacturing companies in Nigeria. International Journal of Accounting & Finance Review, 4(2), 5-12.
Islam, M. E., Rahman, L., & Khan, A. N. M S. N. (2011). Influence of profitability and risk on capital structure: An analysis on the cement industry of Bangladesh. Journal of Banking & Financial Services, 5(2), 231–244.
Islam, R. (2016). Determinants of capital structure choices for listed manufacturing companies in Bangladesh. Research Journal of Finance and Accounting 7(7).
Janardhanan, A. K., & Uma, V. R. (2020). The role of internal control and firm-specific characteristics on firm value: Evidence from Indian financial services sector. Indian Journal of Finance and Banking, 4(1), 117-133.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76, 323-339.
Kusuma, G. D. V. (2018). A study on evaluation of capital structure. Indian Journal of Finance and Banking, 2(2), 42-46.
Lima, M. (2011). An insight into the capital structure determinants of the pharmaceutical companies in Bangladesh.Journal of Finance and Banking, 9(1), 67–84.
M’ng, J. C. P., Rahman, M., & Sannacy, S. (2017). The determinants of capital structure: Evidence from public listed companies in Malaysia, Singapore and Thailand.Cogent Economics & Finance, 5, 1-34. https://doi.org/10.1080/23322039.2017.1418609
Mawanza, W., & Mugumisi, N. (2013). Capital structure and corporate performance: A case for tourism and hospitality sector of Zimbabwe. Global Journal of Commerce and Management Practice, 2(6), 85-90. Retrieved from https://www.longdom.org/articles
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 36(1), 116-19.
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48(2), 61-275.
Ramadan, I. Z. (2015). Leverage and the Jordanian firms’ value: Empirical evidence. International Journal of Economics and Finance, 7(4), 75-81. http://dx.doi.org/10.5539/ijef.v7n4p75
Rouf, A. (2015). Capital structure and firm performance of listed non-financial companies in Bangladesh.The International Journal of Applied Economics and Finance, 9(1), 25-32.
Sadiq, A. I., Kachollom, P. W., Dasuki, S. I., &Yusuf, M. (2017). Effect of capital structure on the performance of deposit money banks. International Journal of Accounting & Finance Review, 1(1), 12-23.
Siddik, M. N. A., Kabiraj, S., & Joghee, S. (2017). Impacts of capital structure on the performance of banks in a developing economy: Evidence from Bangladesh. International Journal of Financial Studies,5(13), 1-18. http://dx.doi.org/10.3390/ijfs5020013
Tsuji, C. (2013). Corporate solvency and capital structure: The case of the electric appliances industry firms of the Tokyo stock exchange. International Journal of Economics and Finance, 5(6), 46-54. http://dx.doi.org/10.5539/ijef.v5n6p46
Umar, M., Tanveer, Z., Aslam, S., & Sajid, M. (2012). Impact of capital structure on firms’ financial performance: Evidence from Pakistan. Research Journal of Finance and Accounting, 3(9), 1-12. Retrieved from http://www.iiste.org
Waliullah, G. M., & Islam, M. (2018). Capital structure and MNC profitability: Empirical evidence from Bangladesh. Proceedings of Academicsera 21st International Conference, Kuala Lumpur, Malaysia, June 1-2.
William, M. (2005). Corporate Finance Theory. USA: Addison-Wesley Education publishers
Published
2021-01-06
How to Cite
Rahman, S. M. K., & Tania, T. C. (2021). MANUFACTURING FIRMS’ CAPITAL STRUCTURE IN BANGLADESH: COMPARISON BETWEEN LISTED MNCS AND LOCAL COMPANIES. International Journal of Accounting & Finance Review, 6(1), 1-18. https://doi.org/10.46281/ijafr.v6i1.935
Section
Regular Research Article/ Short Communication Article
Copyright (c) 2021 Syed Mohammad Khaled Rahman, Tasmina Chowdhury Tania
This work is licensed under a Creative Commons Attribution 4.0 International License.
