TITLE

A mediating role of debt level on the relationship between determinants of capital structure and firm's financial performance

AUTHOR(S)
Ramadan, Abdulhadi H.; Chen, Jean J.; Al-Khadash, Husam Aldeen; Atmeh, Muhannad
PUB. DATE
January 2012
SOURCE
International Research Journal of Applied Finance;Jan2012, Vol. 3 Issue 1, p65
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
Purpose: This research attempts to investigate whether the link between the determinants of capital structure and a firm's performance exists in the UK context, and whether debt level plays a mediating role in such a relationship if it exists. In addition, we run F test according to Schroeder, Sjoquist, and Stephan (1986) which investigates the significance of the difference between two R-squares in two different models. Methodology: this study uses panel data models (OLS, fixed effect and random effect) for fifteen years period from 1992 to 2006. The sample consists of 425 non-financial firms represent the FTSE All-Share Index published by the Financial Times and London Stock Exchange. Findings: First, results show that debt level has a significant mediating role for the relationship between determinants of capital structure and the financial performance, this role is weak but still significant in all regressions. Second, there is a direct and significant relationship between assets structure, growth opportunities, non-debt tax shields firm's risk and liquidity on one hand, and firm's financial performance on the other hand. Third, results reveal negative and significant relationship between debt level and firm's financial performance. Fourth, this research confirms the previous studies that assets structure, growth opportunities, firm's profitability, firm's size, firm's liquidity and industry type are important determinants of capital structure. Moreover, all above relationships have been controlled for firm's size and industry type. Originality/ value: Several important contributions of this study that advance the knowledge in the area of capital structure and performance. First, this is the first comprehensive study examining the relationship between determinants of capital structure, debt level, and a firm's financial performance for the UK capital market from the perspective of capital structure theories. Second, this is the first study to test and prove the mediating role of debt level in the relationship between determinants of capital structure and a firm's financial performance. Third, choosing a performance measure that represents the shareholders' value represents a real challenge; this study picks four performance measures which represent the point of view of shareholders. Fourth, this is the first study to prove that there is a relationship between assets structure, liquidity and non-debt tax shields on one hand, and firm's financial performance on the other.
ACCESSION #
78349240

 

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