Capital Structure and Firm’s Financial Performance: Evidence from Listed Cement Companies of Dhaka Stock Exchange of Bangladesh

Abstract

Bangladesh cement industry is the 40th largest market in the world. Despite the recent global economic upheavals, the Bangladesh economy continues its steady march with growth in excess of 6% over the past few years. Development of cement industry in Bangladesh dates back to the early-fifties but its growth in real sense started only about a decade. The country has been experiencing an upsurge in cement consumption for the last five years. This paper examines the effect of capital structure on firm’s performance. This paper uses four performance ratios namely ROE, ROA, EPS and Net profit margin as the dependent variables and SDTA, LDTA, TDTA, LTDCE, TDTQ (five capital structure ratios), size, growth of the company, tangibility of assets, cash flows and liquidity as independent variables. This paper uses panel data procedure for a sample of 5 companies out of 7 listed cement companies of Dhaka Stock Exchange (DSE) over the period 1999 to 2011. The panel data regression Fixed Effects Model (FEM) analysis demonstrated that short-term debt and cash flows have significant positive effect on performance variables. But long-term debts, tangibility of assets and liquidity have significant negative effect on the financial performance variables except on ROE. This paper shows that Bangladeshi cement companies represent low accounting performance over the years. So this study recommends that managers of manufacturing companies should exercise caution while choosing the long-term debt to use in their capital structure as it affects their performance negatively.