The Impact of Capital-Structure Choice on Firm Performance Empirical Evidences from South Asian Microfinance Institutions

Abstract

This research paper investigated the impact of capital structure choice on firm performances in South Asian Microfinance Institutions. This paper was mainly influenced from the studies of Prahalathan & Ranjani, (2011) & Ebaid, (2009). Sample consists of 136 microfinance institutions for the period of 2006-2010 in the South Asian region creating 680 of observations. Multiple regression analysis and the Pearson correlation analysis have used to identify the most significant predictor variables and to identify the relationship among capital structure and performances respectively. Two dependent variables (Return on Assets and Return on Equity) measure the performance of firms and Debt/Equity is used as the independent variable of the study. Moreover, one control variable used which is also another significant variable in firm performances. Therefore, this study controls the differences in firm's operating environment by including the size variable in the model. Findings of the study correspond with the prediction of trade-off theory suggesting a positive relationship towards firm performance from size and gearing of the firm. Besides, a high negative relationship was incorporated among performance of the institution and the Debt/Equity of the firm measured by return on equity as a performance indicator. Finally, all predictor variables implied causality for all models and most notably, the gearing level of the firm did not implied causality for return on equity as a performance indicator.