Impact of Capital Structure on Profitability and Corporate Value of Ceramic Industry: A Study on Some Selected Listed Companies in Dhaka Stock Exchange
Keywords:
Capital Structure, Ceramic Companies, Corporate Values, Correlation Matrix, Exogenous Variable, Fixed Effect Model, Multicollinearity, Pooled Ordinary Least Square, Profitability, Random Effect Model.Abstract
The purpose of this study is to investigate the effect of capital structure on
profitability and corporate value of listed ceramic companies of Bangladesh.
One of the endogenous variables in this study is profitability measured by
return on asset, return on equity, return on sales, earnings per share, and net
profit margin and another explained variable is corporate value indicated by
Tobin’s Q and market to book value of equity. The exogenous variable is capital
structure proxied by short term and long -term debt to asset ratio, total debt
ratio and debt to equity ratio. This research is a quantitative study that uses
panel data regression model with the help of R software to aid the analysis. This
work involves five ceramic companies enlisted in Dhaka Stock Exchange over
the period of seven years from 2012 to 2018. Three econometric techniques
– pooled ordinary least square, fixed effect and random effect models were
applied. However, the appropriate method for each profitability and corporate
value measure was sorted out through different tests. Finally, panel corrected
standard error technique was applied to test the hypotheses. Multicollinearity
problem restricted the use of short -term debt to asset and total debt ratio
as capital structure estimators. Firm size and liquidity were used as control
variables to avoid omitted variable bias. The research outcome demonstrates
a positive relationship of debt- equity ratio with profitability and corporate
value. On the other hand, long-term debt to asset ratio upholds a negative
correspondence with the explained variables. Capital structure was found to
create no significant impact on net profit margin. This study lays a groundwork
to explore the impact of capital structure on profitability and firm value of solely
the listed ceramic companies of Bangladesh. To the author’s knowledge, no
such study has been conducted so far on the ceramic industry of Bangladesh.
However, such study is highly essential to support financial managers, lenders
and investors to take prudent decisions.
