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Capital structure and firm performance: a panel causality test

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  • Abdullah, Hariem
  • Tursoy, Turgut

Abstract

This study attempts to empirically investigate the reverse causality between firm performance and capital structure for German listed firms in the non-financial sectors over the period 1993-2016. We measure firm performance based on both financial and market indicators while capital structure is measures by leverage ratio of total debt to assets. In addition to two-step GMM estimator, panel causality test of Dumitrescu and Hurlin (2012) is performed to specify the causality direction of causation. The findings provide evidence for the existence of homogeneous causality between capital structure and the two selected proxies of firm performance. Financial performance and financial leverage can positively affect each other. Capital structure could negatively determine market performance whereas stock price has a positive influence on leverage ratio. Our results rather support trade-off theory, probably indicating that non-financial firms in Germany bear more debt to benefit from tax shield.

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  • Abdullah, Hariem & Tursoy, Turgut, 2021. "Capital structure and firm performance: a panel causality test," MPRA Paper 105871, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:105871
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    3. Qadir, Diary, 2022. "Effect of Research and Development on Firm Value: Cross-country Evidence from the Technological Sector," MPRA Paper 114596, University Library of Munich, Germany.
    4. Timothy Olaniyi Aluko & Innocent Bayai, 2023. "This study tests the interaction effect of government financial support for small businesses in the relationship between business revenue and the grant-approved amount in the post-financial support sc," Eurasian Journal of Business and Management, Eurasian Publications, vol. 11(1), pages 46-57.

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    Keywords

    firm performance; capital structure; panel causality; and Germany;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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