The Influence Capital Structure Has on Firm Performance - Research Paper Example

THE INFLUENCE CAPITAL STRUCTURE HAS ON FIRM PERFORMANCE, AN ANALYSIS OF SWEDISH LISTED COMPANIES. Name of the student Name of the professor Course Date Key Words: Capital, Performance, Impact, Equity Abstract The study of the companies is argued on the view of how the economic programs are set and the operation of the available funding. The optimal combination of the debt and the equity is necessary for the evaluation and the achievement of the firm finance value. In a corporate financial institution, the performance of the business is obtained by looking at the patterns of the finance behavior. The shareholders opinion and take in making the decisions is necessary for the fulfillment of the enterprise. The managers should work to ensure that the shareholder dividends are divided over time and the behavior of the earning, stock prices and the equity among the shareholders. The study findings shows that the coefficient is negative indicating negative relationship between ROE and debt to equity. Hence we can conclude therefore that the lower the debt to equity the higher the return on equity. Introduction Capital structure has a wider impact on the farm performance, and as identified by the scholars, the performance depends on upon how the funds get in and leaves the firm. The term capital structure is defined by a student as the mix of debt and equity capital sustained by a firm with the different cradles of funds; these are channeled into the enterprise and mainly aim the long-term capital. The framework serves to accommodate the bit shows the balance of the funds thereby giving out the structure as to how the equity and the debt are used for any financial firm. The study of the companies is argued on the view of how the economic programs are set and the operation of the available funding. The optimal combination of the debt and the equity is necessary for the evaluation and the achievement of the firm finance value (Erkens, Hung, & Matos, 2012). Moreover, various definitions have been adopted in the accounting field to define capital structure some of which are a composition of funds raised from different sources broadly categorized as the equity bond debts. It also refers to the structures or all the make ups of capitalization which encompasses all the loans, reserves, shares, and bonds (Hasan et al., 2014). By identifying all these to the company performance, the firm can concentrate on the strengths and work to attain the desired production output thus improving the performance. Statement of the problem The research which looks to analyze and provide the manner in which capital structure has an impact of performance will look to evaluate the performance of firms listed in Sweden. This will thereby provide useful information regarding the manner in which capital structure helps mature and growing economy. This will also provide the management with useful information regarding the manner in which capital structure needs to be maintained so that financial performance can be further improved. Research Objectives The research will look towards identifying and finding results for the following objectives 1. To identifying whether the relationship between capital structure and firm performance is positive or not 2. To identifying the manner in which leverage of firms decreases when the relationship between capital structure and firm performance is negative 3. To identifying whether there is no relationship between firm performance and capital structure Research questions 1. Is there relationship between capital structure and firm performance? 2. How does the leverage of the firm behave when there is negative relationship between capital structure and firm performance 3. What is the different industry impacts relationship between capital structure and firm performance can be identified for listed companies in Sweden? Literature review Capital structure is necessary to the business as the primary purpose serves the company by compromising the optimal mix of debt and equity. In the literature of the Swedish firms, the capital structure is so vital because it reveals how the company balances on the activities and the investigations. The theorists like Miller and Modigliani argues that the value of the firm is independent of the capital structure. For instance in the theoretical application, the business is revealed to at times have a hundred percent debt and still in a position to be affected in any way giving a variation on the value of the company (Ahmad, Abdullah, & Roslan, 2012, pg. 138). According to Hasan et al., (2014), the capital structure affects the company performance as in the consideration of the market dynamics, the extent at which the company balances on the debt and the equity give the leverage for underperformance or success in the business. There should be the universal structure among the firms like the market institutions, farming industries, and the private company's managements. The tax returns are chosen by the companies depending on how the agency weighs the costs and the returns any given period. Given this, the capital structure illustrates how the interest payment of debts from tax and the possible effect on the net income of the agency. The higher the debt in the Swedish capital market the better the performance as illustrated by the researchers. The input of the theory on the capital structure and the agency performance reveals that higher rates of debts may cause risks of bankruptcy by the company. Another key aspect of the firm performance is the adjustment rates in the case of debt ratio to the enterprise profit return. The companies stand the chance to balance the tax ratio and mitigate the business evaluation of the conflicts reducing the cost. As the firm's manager's aim at the positive results, the company may be well improved and advanced in the services that aim at the last business value increase. The management is in a position to note the performance and weigh the challenges in the company to assist in streamlining the objectives to achieve the improvement in the company performance. In a corporate financial institution, the performance of the business is obtained by looking at the patterns of the finance behavior. The shareholders opinion and take in making the decisions is necessary for the fulfillment of the enterprise. The managers should work to ensure that the shareholder dividends are divided over time and the behavior of the earning, stock prices and the equity among the shareholders. The capital structure reveals the most appropriate modes through which the company generates the funds by comparing the internal and external debts and the resources raised by the equity shares or new debts incurred (Erkens, Hung, & Matos, 2012). The firms have to go through various stages in the transition of the cost-benefit analysis and consideration of the value of the market outcome. The capital structure reveals the challenges faced by the companies and more so in the agricultural firms. The firm's financial structure plays a key role in explaining the company performance, and the company identifies the economic structure. In the enterprise performance, the taxation structure is disclosed in the company capital structure and this assist in the evaluation of the routine. Typically the capital structure gives the company the time to consider the firms' age and the degree of diversifications on looking at the capital intensity and the control of the determining factors to market delivery such as the business group, a market orientation of the goods at hand and the time effects. Studies hold that the determinant of the firm capital structure explains all the possible financial strategies by the business to increase profit (Stam, Arzlanian, & Elfring, 2014, pg. 156). The transition times for the business performance illustrates the performance and how well the management can handle the issues of firm planning. The investigations on the banking systems reveal the interaction of any functional firm with any other institutions like the agricultural credit companies and the bank services. Through the evaluation of the capital structure, the Sweden government can provide support to the investment companies and solve the cases of financial rigidities in achieving the balance trade in the economy. The agricultural companies act on the business orientations that produce the targeted companies aiming at getting the expected market production structure thereby reducing the market risks (Erkens, Hung & Matos 2012). Any company evaluates their performance through the visible performance on the return of the assets, earning structure, capital structure, and financial business structure. The earning structure gives the turn asset ratio which will enable the calculations of the benefits and the losses incurred by the agency during any time in the business session. Another important aspect of the learning structure is the net profit margin. The value is drawn from the returns and the debts that the company incurs at any time in the performance (Erkens, Hung, & Matos, 2012). The capital structure reveals the debt to equity ratio and debt ratio that tests the ability of the company to improve or fall in the time range provided. The firm structure identifies the outside factors that affect the agency performance like the financial constraints of the Swedish market and the profit increase at any point of the company operations. By eliminating the factors, the company is in a position to balance and achieve the set objectives in the specializations on the underperformance and the pressing factors eliminations. However, on the factor evaluations, the company has a significant chance of working on the production rate and the exchange strategies in case of a banking firm (Ahmad, Abdullah, & Roslan, 2012, pg. 153). The framework shows how well the equity and debts are used for all the firm operation fencing strategies. The calculations and the figures related to the enterprise performance give the structure to strike a balance and find the optimal combination of debts and equity as the capital structure maximize the value of the firm. In this respect, the capital structure is illustrated and interpreted regarding target capital objectively allocated to strike the balance between the company risks and the possible returns. The firm achieves the relative array of sources of funds in all the coordinated ways which have to relative magnitude and proportion (Hasan et al., 2014). The firm is also in a position to formulate the operational policies that are used in the balance between the capital given out by the owners and the long-term creditors. The decision relating to the assets of affirms very imperative in every business. The management team is in a position of value maximization by ensuring a proper capital structure and ownership interest of the companies. By determining the right business mix of the fund sources, the overall costs of the capital is maintained small and assist the team in cost minimization. All the operational companies aim at new wealth acquisition, and the capital structure increases the ability to achieve it. The investment opportunities are opened up if the company has won the trust of the suppliers of the debts. As the company works on the opening up of new investments, the rate of investment and growth are heightened because the investments are enough to return the sufficient funds to the marketplace. The structure also increases the possibilities for creditworthiness (Stam, Arzlanian, & Elfring, 2014, pg. 167). Sweden as a nation is a cradle of many companies and firms which have been digitally connected to the entire world economy. In shaping the world, these businesses use the capital structure to lay the performance strategies to achieve the global service delivery. The firm lists include the Electrolux Company, Ericson, Skype, and Solvatten among other firms. All these work on the input shown by the capital structure to achieve the better company performance in the business economy. Research methodology Research methodology mainly focuses on the research process which is a tool and procedures which is to be used in the research study. It helps in describing the research design approach, the sampling techniques, data source, instrumentation and research reliability and validity to be used and the model of analysis (La Porta et al., 2000) Research design This research design will specifically be an explanatory study. It will emphasizing on the problem in order to explain the relationship between variables under the study. Sampling design The sample size in this study composed of 40 listed companies in Sweden stock exchange. To help in evaluating the topic, researchers will use different methods of statistical package for social science for analyzing the data. Correlations and multiple regression was used to carry out the analysis. Reliability and validity of the data Cronbach’s alpha was used to establish the reliability of the data. The standard value of alpha of 0.7 will be used to compare our results with. The secondary data of the study was collected from the audited annual reports and financial accounts hence these data was considered reliable for the purpose of this study (La Porta et al., 2000). Cross checking of data was done further to ensure that there is no mistake in the data accuracy. All these efforts were made in order to generate validity data for the present study. Hence researcher satisfied content validity. Data analysis model The following dividend payout ratios and indicators of firm performance ratio were considered in developing the model. Results and Discussion Variables description The description of the performance of firm is normally based on the measure of return on equity and that of assets Fig. 1.0: ROE Figure 1 shows the return on equity matric and the aggregate of all studied companies and the median sample over the year 2005 to 2016. From the year 2008 median is 14.5 and reduces as the year goes until it reaches zero in year 2013. Median number increases as the aggregate decreases at a given interval. The values for the median are generally lower than for that of the aggregate number with only in 2013 where the median value for ROE was higher with around 5 over the entire period. The aggregate number in this case is around 2 points higher in 2008. This explains the financial crisis in 2008/2007 that hit the whole Europe and Swedish were not spared of the financial crisis. Figure 2: Return on Asset for the Swedish companies 2005-2016 The figure gives the indication of median and the total number of the return on the assets in most listed companies for the period 2005 to 2016. In this case, there is a steady increase in median on the return on assets. This behaviour of the curves of ROA contradict behaviour of ROE which was showing a steady decline in the process. The description of the structure of the company capital is normally based on the amount of debt to equity ratio. The above figure shows the aggregate and the median values of the debt to equity for the Swedish markets between the years 2005 to 2016. From the findings, it can be seen that there is significant difference between the aggregate and the median firms with the aggregate number being over 28. Regression output Table 1.0: Model summary Model R R Square Adjusted R Square Std. Error of the Estimate Change Statistics R Square Change F Change df1 1 .368a .135 .087 6.851 .135 2.816 2 From the results in the table, 13.5% of the Debt to equity ratio has been explained by the two variables and the model is fit for the analysis. ANOVAa Model Sum of Squares df Mean Square F Sig. 1 Regression 264.382 2 132.191 2.816 .073b Residual 1689.862 36 46.941 Total 1954.244 38 a. Dependent Variable: DE b. Predictors: (Constant), ROE, ROA Coefficientsa Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) 16.443 1.977 8.316 .000 ROA .060 .196 .049 .308 .760 ROE -.213 .090 -.377 -2.354 .024 Coefficients Model 95.0% Confidence Interval for B Correlations Colinearity Statistics Lower Bound Upper Bound Zero-order Partial Part Tolerance 1 (Constant) 12.433 20.454 ROA -.337 .458 -.046 .051 .048 .936 ROE -.396 -.029 -.365 -.365 -.365 .936 From the results, we are only able to explain the variation ROE against D/E since there p-value in this case is statistically significance. The coefficient is negative indicating negative relationship between ROE and debt to equity. We can conclude therefore that the lower the debt to equity the higher the return on equity. Conclusion From the findings, it shows that the Swedish companies were to large extend were not spared the financial crisis. The literature here forms a basis for further research to establish the extend of this effect. Again, this research found that there is negative relationship between debts to equity with the Return on equity. References Ahmad, Z., Abdullah, N.M.H. and Roslan, S., 2012. Capital structure effect on firm’s performance: Focusing on consumers and industrials sectors on Malaysian firms. International review of business research papers, 8(5), pp.137-155. Erkens, D.H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide.Journal of Corporate Finance, 18(2), pp.389-411. Erkens, D.H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), pp.389-411. Hasan, M.B., Ahsan, A.M., Rahaman, M.A. and Alam, M.N., 2014. Influence of capital structure on firm performance: Evidence from Bangladesh.International Journal of Business and Management, 9(5), p.184. Hasan, M.B., Ahsan, A.M., Rahaman, M.A. and Alam, M.N., 2014. Influence of capital structure on firm performance: Evidence from Bangladesh. International Journal of Business and Management, 9(5), p.184. La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R., 2000. Investor protection and corporate governance. Journal of financial economics, 58(1), pp.3-27. Stam, W., Arzlanian, S. and Elfring, T., 2014. Social capital of entrepreneurs and small firm performance: A meta-analysis of contextual and methodological moderators. Journal of Business Venturing, 29(1), pp.152-173. Read More