Firm Profitability and Capital Structure: An Empirical Study on the Listed It Companies of Bangladesh

Abstract

Background of the StudyCapital Structure is imperative in ensuring sound financial management and profitability of a company. Since one of the key responsibilities of financial managers is to maximize shareholders' wealth, finding the right mix of financial instruments to fund the operation of the business is quintessential to enhance its growth and profitability [1]. Weston and Brigham [2] defined capital structure as the permanent financing of the firm represented by long-term debt, preferred stock and net worth. The capital structure of the company is a mix of various financial securities, i.e. issuing of large amount of debt (leverage), arranging lease financing, using warrants, convertible bonds, swaps, equity or a combination of other securities to best fit its financial needs. The objective is to collaborate a mix of instruments with the lowest cost that will maximizes overall market value of the company. Planning a capital structure involves the consideration of shareholders' interests; the risk associated with each funding choice; and the significant effect if would have in appropriating funds for immediate and future projects [3].Traditionally, financial advisers and experts have constantly argued on how a company's leverage affects the firm value, with numerous findings on both sides of the spectrum [4] [5]. Most research [6][7][3][4] focused on all listed companies irrespective of industry and showed the significance of leverage, current ratio, cash ratio, tax rate and size on the performance of firms. However, no one optimal capital structure could be determined, as profitability and capital structure tend to vary for firms: operating in different industry; of variable size; and, operating in diverse economies [7].