CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF FOOD INDUSTRY: AN AGRO-BASED EMERGING ECONOMY PERSPECTIVE
Keywords:
Capital Structure, Firm Performance, Food Industry, Emerging Economy .
Abstract
This study aims to investigate the relationship between capital structure and profitability of food industry from an agro-based emerging economy perspective. To attain the objective, we have compiled panel data food and allied companies, representing 64% of total population, listed in Dhaka Stock Exchange and administered ordinary least square (OLS), fixed effect model (FEM), and random effect model (REM) estimate to test the impact of capital structure on the profitability of listed food companies in Bangladesh. The current study usage three proxy variables as the measure of profitability, viz., return on assets (ROA), return on equity (ROE), and earnings per share (EPS). Our panel data estimation using EViews 10 demonstrates that short term leverage has a significant negative impact on ROA (OLS model) and a strong positive impact on ROE (REM estimation) of the listed food and allied firms. However, the study do not produce any significant effects of long term debt on the firm profitability. The findings of the current study help develop the understanding of the corporate managers, investors, policy makers, and academics about the relationship between optimum financing mix and financial performance of food industries and provides valuable insights from an agro-based emerging economy perspective.
JEL Classification Codes: G32, F65, L66, L25, M41.
References
Abdullah, H., & Tursoy, T. (2021). Capital structure and firm performance: Evidence of Germany under IFRS adoption. Review of Managerial Science, 15, 379-398. https://doi.org/10.1007/s11846-019-00344-5
Ahmed, R., & Bhuyan, R. (2020). Capital structure and firm performance in Australian service sector firms: A panel data analysis. Journal of Risk and Financial Management, 13(9), 214. https://doi.org/10.3390/jrfm13090214
Anas, A., Rashid, A. H. M., & Annuar, H. A. (2015). The effect of award on CSR disclosures in annual reports of Malaysian PLCs. Social Responsibility Journal, 11(4), 831-852. https://doi.org/10.1108/SRJ-02-2013-0014
Berger, A. N., & Di Patti, E. B. (2006). Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry. Journal of Banking & Finance, 30(4), 1065-1102. https://doi.org/10.1016/j.jbankfin.2005.05.015
Chaganti, R., & Damanpour, F. (1991). Institutional ownership, capital structure, and firm performance. Strategic Management Journal, 12(7), 479-491. https://doi.org/10.1002/smj.42501 20702
Chathoth, P. K., & Olsen, M. D. (2007). The effect of environment risk, corporate strategy, and capital structure on firm performance: An empirical investigation of restaurant firms. International Journal of Hospitality Management, 26(3), 502-516. https://doi.org/ 10.1016/j.ijhm.2006.03.007
Dawar, V. (2014). Agency theory, capital structure and firm performance: Some Indian evidence. Managerial Finance, 40(12), 1190-1206. https://doi.org/10.1108/MF-10-2013-0275
Dohoo, I. R., Ducrot, C., Fourichon, C., Donald, A., & Hurnik, D. (1997). An overview of techniques for dealing with large numbers of independent variables in epidemiologic studies. Preventive Veterinary Medicine, 29(3), 221-239. https://doi.org/10.1016/S0167-5877(96)01074-4
DSE (2019). Monthly Review December 2019, Dhaka, Bangladesh. Retrieved from https://www. dsebd.org/assets/pdf/Mreview_December_19.pdf
Ebaid, I. E. S. (2009). The impact of capital‐structure choice on firm performance: Empirical evidence from Egypt. The journal of risk Finance, 47, 777-780. https://doi.org/10.1108/15265 940911001385
Gill, A., Biger, N., & Mathur, N. (2011). The effect of capital structure on profitability: Evidence from the United States. International Journal of Management, 28(4), 3-15.
Hasan, M. B., Ahsan, A. M., Rahaman, M. A., & Alam, M. N. (2014). Influence of capital structure on firm performance: Evidence from Bangladesh. International Journal of Business and Management, 9(5), 184-194. http://dx.doi.org/10.5539/ijbm.v9n5p184
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the econometric society. 46(6), 1251-1271. https://doi.org/1913827
Hossain, M. I. (2021). Effects of e-banking adoption on the financial performance of state-owned commercial banks in Bangladesh. Information Resources Management Journal, 34(4), 1-20. http://dx.doi.org/10.4018/IRMJ.20211001.oa1
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/ 10.1016/0304-405X(76)90026-X
Kashem, A. (2021). Food exports may grow 10 folds only if certification is there, The Business Standard. Retrieved from https://www.tbsnews.net/economy/trade/food-exports-may-grow-10-folds-only-if-certification-there-181864
Kennedy, P. (1985). A Guide to Econometrics 2nd edn. Oxford: Blackwell.
Kraus, A. & Litzenberger, R. H. (1973). A state-preference model of optimal financial leverage. The Journal of Finance, 28(4), 911-922. https://doi.org/2978343
Li, K., Niskanen, J., & Niskanen, M. (2019). Capital structure and firm performance in European SMEs: Does credit risk make a difference?. Managerial Finance, 45(5), 582-601. https://doi.org/10.1108/MF-01-2017-0018
Lin, F. J. (2008). Solving multicollinearity in the process of fitting regression model using the nested estimate procedure. Quality & Quantity, 42(3), 417-426. https://doi.org/10.1007/s11135-006-9055-1
Mahmood, M. (2019). Agro-food processing industry in Bangladesh: An overview, The Financial Express. Retrieved from https://www.thefinancialexpress.com.bd/views/agro-food-processing-industry-in-bangladesh-an-overview-1572707863
Mardones, J. G., & Cuneo, G. R. (2020). Capital structure and performance in Latin American companies. Economic Research-EkonomskaIstraživanja, 33(1), 2171-2188. https://doi.org/10. 1080/1331677X.2019.1697720
Margaritis, D. & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal of Banking & Finance, 34(3), 621-632. https://doi.org/10.1016/j. jbankfin.2009.08.023
Marquardt, D. W. (1980). Comment: You should standardize the predictor variables in your regression models. Journal of the American Statistical Association, 75(369), 87-91. https://doi.org/10.1080/01621459.1980.10477430
Miller, M. H. (1977). Debt and taxes. The Journal of Finance, 32(2), 261-275. https://doi.org/2326758
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261-297. https://www.jstor. orgstable/1809766
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53(3), 433-443. https://www.jstor.org/stable/ 1809167
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221. https://doi.org/10.1016/0304-405X(84)90023-0
Ngatno, Apriatni, E. P., & Youlianto, A. (2021). Moderating effects of corporate governance mechanism on the relation between capital structure and firm performance. Cogent Business & Management, 8(1). https://doi.org/10.1080/23311975.2020.1866822
Nguyen, T., & Nguyen, H. (2020). Capital structure and firm performance of non-financial listed companies: Cross-sector empirical evidences from Vietnam. Accounting, 6(2), 137-150. https://doi.org/10.5267/j.ac.2019.11.002
Rouf, D., & Abdur, M. (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.
Said, R., Omar, N. & Abdullah, W. N. (2013). Empirical investigations on boards, business characteristics, human capital and environmental reporting. Social Responsibility Journal, 9(4), 534-553. https://doi.org/10.1108/SRJ-02-2012-0019
Salim, M. N., & Susilowati, R. (2019). The Effect of Internal Factors on Capital Structure and Its Impact on Firm Value: Empirical Evidence From The Food and Beverages Industry Listed on Indonesia Stock Exchange 2013-2017. International Journal of Engineering Technologies and Management Research, 6(7), 173-191. https://doi.org/10.5281/zenodo .3359550
Sheikh, N. A., & Wang, Z. (2012). Effects of corporate governance on capital structure: empirical evidence from Pakistan. Corporate Governance: International Journal of Business in Society, 12(5), 629-641. https://doi.org/10.1108/14720701211275569
Tripathy, S., & Shaik, A. (2020). Leverage and firm performance: Empirical evidence from Indian food processing industry. Management Science Letters, 10(6), 1233-1240. https://doi.org/10.5267/j.msl.2019.11.035
Vo, X. V., & Ellis, C. (2017). An empirical investigation of capital structure and firm value in Vietnam. Finance Research Letters, 22, 90-94. https://doi.org/10.1016/j.frl.2016.10.014
Ahmed, R., & Bhuyan, R. (2020). Capital structure and firm performance in Australian service sector firms: A panel data analysis. Journal of Risk and Financial Management, 13(9), 214. https://doi.org/10.3390/jrfm13090214
Anas, A., Rashid, A. H. M., & Annuar, H. A. (2015). The effect of award on CSR disclosures in annual reports of Malaysian PLCs. Social Responsibility Journal, 11(4), 831-852. https://doi.org/10.1108/SRJ-02-2013-0014
Berger, A. N., & Di Patti, E. B. (2006). Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry. Journal of Banking & Finance, 30(4), 1065-1102. https://doi.org/10.1016/j.jbankfin.2005.05.015
Chaganti, R., & Damanpour, F. (1991). Institutional ownership, capital structure, and firm performance. Strategic Management Journal, 12(7), 479-491. https://doi.org/10.1002/smj.42501 20702
Chathoth, P. K., & Olsen, M. D. (2007). The effect of environment risk, corporate strategy, and capital structure on firm performance: An empirical investigation of restaurant firms. International Journal of Hospitality Management, 26(3), 502-516. https://doi.org/ 10.1016/j.ijhm.2006.03.007
Dawar, V. (2014). Agency theory, capital structure and firm performance: Some Indian evidence. Managerial Finance, 40(12), 1190-1206. https://doi.org/10.1108/MF-10-2013-0275
Dohoo, I. R., Ducrot, C., Fourichon, C., Donald, A., & Hurnik, D. (1997). An overview of techniques for dealing with large numbers of independent variables in epidemiologic studies. Preventive Veterinary Medicine, 29(3), 221-239. https://doi.org/10.1016/S0167-5877(96)01074-4
DSE (2019). Monthly Review December 2019, Dhaka, Bangladesh. Retrieved from https://www. dsebd.org/assets/pdf/Mreview_December_19.pdf
Ebaid, I. E. S. (2009). The impact of capital‐structure choice on firm performance: Empirical evidence from Egypt. The journal of risk Finance, 47, 777-780. https://doi.org/10.1108/15265 940911001385
Gill, A., Biger, N., & Mathur, N. (2011). The effect of capital structure on profitability: Evidence from the United States. International Journal of Management, 28(4), 3-15.
Hasan, M. B., Ahsan, A. M., Rahaman, M. A., & Alam, M. N. (2014). Influence of capital structure on firm performance: Evidence from Bangladesh. International Journal of Business and Management, 9(5), 184-194. http://dx.doi.org/10.5539/ijbm.v9n5p184
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the econometric society. 46(6), 1251-1271. https://doi.org/1913827
Hossain, M. I. (2021). Effects of e-banking adoption on the financial performance of state-owned commercial banks in Bangladesh. Information Resources Management Journal, 34(4), 1-20. http://dx.doi.org/10.4018/IRMJ.20211001.oa1
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/ 10.1016/0304-405X(76)90026-X
Kashem, A. (2021). Food exports may grow 10 folds only if certification is there, The Business Standard. Retrieved from https://www.tbsnews.net/economy/trade/food-exports-may-grow-10-folds-only-if-certification-there-181864
Kennedy, P. (1985). A Guide to Econometrics 2nd edn. Oxford: Blackwell.
Kraus, A. & Litzenberger, R. H. (1973). A state-preference model of optimal financial leverage. The Journal of Finance, 28(4), 911-922. https://doi.org/2978343
Li, K., Niskanen, J., & Niskanen, M. (2019). Capital structure and firm performance in European SMEs: Does credit risk make a difference?. Managerial Finance, 45(5), 582-601. https://doi.org/10.1108/MF-01-2017-0018
Lin, F. J. (2008). Solving multicollinearity in the process of fitting regression model using the nested estimate procedure. Quality & Quantity, 42(3), 417-426. https://doi.org/10.1007/s11135-006-9055-1
Mahmood, M. (2019). Agro-food processing industry in Bangladesh: An overview, The Financial Express. Retrieved from https://www.thefinancialexpress.com.bd/views/agro-food-processing-industry-in-bangladesh-an-overview-1572707863
Mardones, J. G., & Cuneo, G. R. (2020). Capital structure and performance in Latin American companies. Economic Research-EkonomskaIstraživanja, 33(1), 2171-2188. https://doi.org/10. 1080/1331677X.2019.1697720
Margaritis, D. & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal of Banking & Finance, 34(3), 621-632. https://doi.org/10.1016/j. jbankfin.2009.08.023
Marquardt, D. W. (1980). Comment: You should standardize the predictor variables in your regression models. Journal of the American Statistical Association, 75(369), 87-91. https://doi.org/10.1080/01621459.1980.10477430
Miller, M. H. (1977). Debt and taxes. The Journal of Finance, 32(2), 261-275. https://doi.org/2326758
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261-297. https://www.jstor. orgstable/1809766
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53(3), 433-443. https://www.jstor.org/stable/ 1809167
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221. https://doi.org/10.1016/0304-405X(84)90023-0
Ngatno, Apriatni, E. P., & Youlianto, A. (2021). Moderating effects of corporate governance mechanism on the relation between capital structure and firm performance. Cogent Business & Management, 8(1). https://doi.org/10.1080/23311975.2020.1866822
Nguyen, T., & Nguyen, H. (2020). Capital structure and firm performance of non-financial listed companies: Cross-sector empirical evidences from Vietnam. Accounting, 6(2), 137-150. https://doi.org/10.5267/j.ac.2019.11.002
Rouf, D., & Abdur, M. (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.
Said, R., Omar, N. & Abdullah, W. N. (2013). Empirical investigations on boards, business characteristics, human capital and environmental reporting. Social Responsibility Journal, 9(4), 534-553. https://doi.org/10.1108/SRJ-02-2012-0019
Salim, M. N., & Susilowati, R. (2019). The Effect of Internal Factors on Capital Structure and Its Impact on Firm Value: Empirical Evidence From The Food and Beverages Industry Listed on Indonesia Stock Exchange 2013-2017. International Journal of Engineering Technologies and Management Research, 6(7), 173-191. https://doi.org/10.5281/zenodo .3359550
Sheikh, N. A., & Wang, Z. (2012). Effects of corporate governance on capital structure: empirical evidence from Pakistan. Corporate Governance: International Journal of Business in Society, 12(5), 629-641. https://doi.org/10.1108/14720701211275569
Tripathy, S., & Shaik, A. (2020). Leverage and firm performance: Empirical evidence from Indian food processing industry. Management Science Letters, 10(6), 1233-1240. https://doi.org/10.5267/j.msl.2019.11.035
Vo, X. V., & Ellis, C. (2017). An empirical investigation of capital structure and firm value in Vietnam. Finance Research Letters, 22, 90-94. https://doi.org/10.1016/j.frl.2016.10.014
Published
2022-03-14
How to Cite
Hossain, M. I., Azam, M. S., Uddin, M. R., & Shovon, M. K. H. (2022). CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF FOOD INDUSTRY: AN AGRO-BASED EMERGING ECONOMY PERSPECTIVE. International Journal of Accounting & Finance Review, 10(1), 53-60. https://doi.org/10.46281/ijafr.v10i1.1654
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2022 Md. Imran Hossain, Md. Shah Azam, Md. Reyad Uddin, Md. Kamrul Hasan Shovon
This work is licensed under a Creative Commons Attribution 4.0 International License.
