Impact of Capital Structure on Profitability and Corporate Value of Ceramic Industry: A Study on Some Selected Listed Companies in Dhaka Stock Exchange

The purpose of this study is to investigate the effect of capital structure on profitability and corporate value of listed ceramic companies of Bangladesh. One of the endogenous variables in this study is profitability measured by return on asset, return on equity, return on sales, earnings per share, and net profit margin and another explained variable is corporate value indicated by Tobin’s Q and market to book value of equity. The exogenous variable is capital structure proxied by short term and long-term debt to asset ratio, total debt ratio and debt to equity ratio. This research is a quantitative study that uses panel data regression model with the help of R software to aid the analysis. This work involves five ceramic companies enlisted in Dhaka Stock Exchange over the period of seven years from 2012 to 2018. Three econometric techniques – pooled ordinary least square, fixed effect and random effect models were applied. However, the appropriate method for each profitability and corporate value measure was sorted out through different tests. Finally, panel corrected standard error technique was applied to test the hypotheses. Multicollinearity problem restricted the use of short-term debt to asset and total debt ratio as capital structure estimators. Firm size and liquidity were used as control variables to avoid omitted variable bias. The research outcome demonstrates a positive relationship of debt-equity ratio with profitability and corporate value. On the other hand, long-term debt to asset ratio upholds a negative correspondence with the explained variables. Capital structure was found to create no significant impact on net profit margin. This study lays a groundwork to explore the impact of capital structure on profitability and firm value of solely the listed ceramic companies of Bangladesh. To the author’s knowledge, no such study has been conducted so far on the ceramic industry of Bangladesh. However, such study is highly essential to support financial managers, lenders and investors to take prudent decisions.