THE EFFECT OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE: AN ANALYSIS OF NON-FINANCIAL FIRMS IN THE UK

• Main Author: Maranata Silalahi, Amelia
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/41894
• Institution: Institut Teknologi Bandung

The research examines the influence of capital structure on financial performance of nonfinancial firms in the UK. The research is conducted by using panel data, with samples consisting of 615 observations, referring to 123 unique firms listed on the London Stock Exchange (LSE) during 2014-2018. This samples are divided into six different industry sectors, which are Energy, Communications, Industrial, Technology, Consumer Cyclical, and Consumer non-Cyclical. This research uses four capital structure measures as independent variable. These measures are Shortterm Debt to Total Debt (SDTD), Total Debt to Total Capital (DC), Total Debt to Total Equity (DE), and Total Debt to Total Asset (DA). Three financial performance measures are used as dependent variable, they are Return on Equity (ROE), Return on Asset (ROA), and Tobin’s Q. Firm size, Sales Growth, and Industry are included as control variables. The research is conducted using the Ordinary Least Square (OLS) regression. The result shows that short-term debt is positively correlated ROE, ROA, and Tobin’s Q. However, other capital structure measures, such as Debt to Equity, Debt to Capital, and Debt to Asset, correlates negatively with ROE, ROA, and Tobin’s Q. Long-term debt links with the cost of information asymmetry and also associates with agency cost. This signifies that short-term debt costs smaller compared to long-term debt. Though larger leverage on one side gives benefit through tax shield, it can also affect negatively to financial performance since higher leverage provokes bankruptcy probability and generate even higher cost to debt financing. The result of this research is expected to improve further research and literatures on capital structure.