Effects of Capital Structures on Firms'Performance within different Industries

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This research investigates the relation between capital structure and firm performance using a sample of low-tech and high-tech firms from the U.S and all European union countries from 2010 to 2017. Most related researches have focused on specific countries, industries and indices, providing completely mixed results. Due to the unclear state, studying a sample of low and high-tech firms could be a step forward to having a deeper insight on the relationship between capital structure and firm performance. Using ROA, ROE and Tobin’s Q as measures for firm performance, the results suggest a negative and significant relationship between total debt and all three measures, in both categories of industries. This result supports the pecking order theory which suggest that firms go for internally generated funds instead of relying on external funds. However, long term debt shows a positive relationship with ROA for the low tech, while with ROA and ROE for the high tech. The results therefore suggest that leverage affects both categories of industries in a very similar way, especially with total debt used as a measure for leverage levels. Furthermore, all control variables used in this research are found to have a significant effect on firm performance.
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