Impact of Capital Structure Decision on Firm Performance and Stock Return Pre during and Post Crisis: An Evidence from Developed and Developing Country

Sultan Mehmood, Muhammad Shaoor Ul Hassan Naqvi, Muhammad Irfan


The aim of this investigation is to determine how the financial crisis in 2008 influenced Capital Structure (CS) and firm performance relationship in developed (United State of America) and developing (Pakistan) countries, further how the company’s CS affects stock return and EPS. The study sample consists of 130 firms listed on Pakistan Stock Exchange and 26 leading USA non-financial firms listed on New York Stock exchange (NYSE). To find answers to the questions of this investigation this research employed generalized method of moments (GMM) regression analysis. We split our sample period into two phases i.e. pre-crises (2004-2008) and post-crises (2009-2013). The sample of this study comprise of top US nonfinancial firms listed on the NYSE and Pakistani firms listed on a Pakistan stock exchange. The results indicate that CS has significant association with firm performance and earnings per share. However, the CS relationship with stock return is not significant in Pakistan after the crises. Specifically, an increase of one unit in debts to equity ratio lead to an increase of 0.42 in ROA before crises and the result is highly significant at level 1%, however after crises the increase is 0.026 but insignificant. In addition, the relation of ROA with earning per share and stock return is also highly significant and positively post crises. On the other side, the relationship of EPS and stock return is positive but not significant after crises. Moreover, SR and EPS are related negatively with each other however the result is insignificant before crises, while after crises the result is positive and significant. For US firms, an increase of one unit in debts to equity ratio is linked with a rise of 0.019 in ROA before crises, and .0087 after crises. The results show significant level of 5% in both period of time in USA. If firms increase one percentage point of their leverage, their EPS and SR will increase 0.23 and 0.22 respectively before crisis. Whereas, after crisis EPS and SR increase is .008 and .009 with positive significant level 10% and 5% respectively. Furthermore, the relationship between CS and EPS as well as SR is also positive and significant pre-crises however post crises in case of SR the result is insignificant. The increase in EPS and SR is 0.42 and 0.41 before crises, and after crises the increase is 0.04 and 0.001 respectively. After crises EPS is significant at the 5% level; however SR have insignificant relation after crises in Pakistan. Moreover, EPS is positively and insignificantly related with ROA and SR before crises, but the results after crises is highly significant and positive. A one unit change in SR will increase the value of ROA by 0.096 before crises. Whereas, after crisis the value of ROA rises by 0.113. Results more over shows that EPS value increases by 10% if SR changes by one percent before crisis period. Whereas, after crises the increase is 8%.

Keywords: Capital Structure, Financial Crisis, Firm’s Performance, Debt to Equity Ratio

DOI: 10.7176/RJFA/12-2-06

Publication date: January 31st 2021

Full Text: PDF
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