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Capital Structure and Firm Performance: The Case of Central and Eastern European Economies

Author

Listed:
  • Gabriela Brendea

    (Babes-Bolyai University)

  • Fanuta Pop

    (Babes-Bolyai University)

  • Loredana Mihalca

    (Babes-Bolyai University)

Abstract

The current study examines the relationship between capital structure and firm performance for a sample of non-financial firms from eight Central and Eastern European countries in the period 2008 – 2017. Based on the agency costs hypothesis, we investigate whether debt ratio as a proxy for capital structure has a positive relationship with firm performance for the countries included in the sample. The results indicate a negative relationship between these variables and, thus, they did not support the agency costs hypothesis. In addition, we test the reverse causality from performance to capital structure based on two opposite hypotheses, that is, the efficiency-risk and the franchise-value hypo-thesis. The results support the franchise-value hypothesis, indicating a negative relationship between debt ratio and firm performance.

Suggested Citation

  • Gabriela Brendea & Fanuta Pop & Loredana Mihalca, 2022. "Capital Structure and Firm Performance: The Case of Central and Eastern European Economies," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 70(5), pages 430-449, May.
    • Handle: RePEc:sav:journl:v:1:y:2022:i:1:p:430-449
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    capital structure; debt ratio; franchise-value hypothesis; efficiency-risk hypothesis; firm performance; agency costs; CEE countries;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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