The impact of capital structure on firm performance: What is the role of firm specific factors?

Abstract

This study focuses on the impact of firm specific factors into the relationship between capital structure and firm performance. Since previous studies found mixed and contradicting results of the effect of leverage on firm performance, the goal of this research is to improve our understanding of this relationship. This research extends previous studies by focusing on the impact of the firm specific factors size, growth, volatility of earnings and tangibility on the relationship between capital structure and firm performance. The data sample consists of 1,175 listed firms from the United States for the period 2011 till 2018. Since this research makes use of panel data, the fixed effects model is used to analyze the dataset. Firm performance is measured by the return on assets, return on equity and Tobin’s Q. This study finds evidence of a negative relation between leverage and firm performance. The volatility of earnings of a firm shows to have a negative effect on the relation between leverage and firm performance. Furthermore, the size of a firm shows a tendency towards a positive effect while growth shows a tendency towards a negative effect on the relationship between leverage and firm performance.

Keywords: Firm performance, capital structure, leverage, firm specific factors, size, tangibility, volatility of earnings, growth