The relationship between capital structure and the financial performance of the firm

Corporate finance literature suggests that the capital structure decision hasplayed a pivotal role over the years in driving the establishment and growth offirms. There is also a body of evidence that financial markets take a keeninterest in firm performance, especially for those listed on the stock exchange.There is no empirical evidence that there is a causal relationship betweencapital structure and the firms performance despite the importance of the twoconcepts in corporate finance. This study uses the debt/equity ratio as a proxy for capital structure and a selected few financial ratios to represent attributes of firm performance (e.g.profitability and shareholder value) in investigating the relationship between thetwo in the South African context. The results based on stock exchange data as input are inconclusive but they lay a foundation for potential future research. Interesting insights are drawn from using some limitations identified in the literature to try and explain why theresults are the way that they are. Copyright © 2006 University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria Please cite as follows: Gangeni, C 2006, The relationship between capital structure and the financial performance of the firm, MBA dissertation, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd-03302010-133740/ > G10/231/ag