Impact of Financial Structure on Firm’s Performance: A Study on Financial and Nonfinancial Sector in Bangladesh

Abstract

This paper aims to find the effect of financial structure on the performance of the firm in recent years in Bangladesh. The study has used descriptive statistics through SPSS as a technique to analyze what is the effect of financial structure on the performance by applying on 40 firms comprising 20 financial companies and 20 nonfinancial companies for the period of 2008-2012. Annual reports of 2008-2012 for the selected companies which are enlisted under Dhaka Stock Exchange (DSE) have been used to conduct this study. In our study, the banks and NBFIs are very high levered firms whereas the non-financial companies are relatively low levered firm. The Return of common equity (ROCE) of financial companies is 27.54% and it is 17.16% for non-financial companies. In terms of financial companies the shareholders enjoy a high degree of profitability due to financial leverage and SPREAD which is the difference between ROCE and Net Borrowing Cost (NBC). On the other hand, the operating leverage of non-financial companies is very high in comparison to financial companies. But they enjoy low degree of profitability.  Any change in financial leverage and SPREAD brings great change in its profitability. Thus the financial leverage of banks and NBFIs has played an important role in profitability measurement. The results of the study conclude that capital structure is strongly associated with firm’s performance on our study sample. In addition, the study finds that there is a significant difference on the impact of the financial leverage (FLEV) between high financially levered firms and low financially levered firms on their performance in financial and non-financial companies.

Keywords: Capital Structure, EPS, FLEV, NBC, OLLEV, ROCE, RONA, SPREAD, TLEV