Capital Structure and Firm Performance: The Case of Central and Eastern European Economies

Gabriela Brendea (), Fanuta Pop and Loredana Mihalca
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Gabriela Brendea: Babes-Bolyai University
Fanuta Pop: Babes-Bolyai University
Loredana Mihalca: Babes-Bolyai University

Journal of Economics / Ekonomicky casopis, 2022, vol. 70, issue 5, 430-449

Abstract: The current study examines the relationship between capital structure and firm performance for a sample of non-financial firms from eight Central and Eastern European countries in the period 2008 – 2017. Based on the agency costs hypothesis, we investigate whether debt ratio as a proxy for capital structure has a positive relationship with firm performance for the countries included in the sample. The results indicate a negative relationship between these variables and, thus, they did not support the agency costs hypothesis. In addition, we test the reverse causality from performance to capital structure based on two opposite hypotheses, that is, the efficiency-risk and the franchise-value hypo-thesis. The results support the franchise-value hypothesis, indicating a negative relationship between debt ratio and firm performance.

Keywords: capital structure; debt ratio; franchise-value hypothesis; efficiency-risk hypothesis; firm performance; agency costs; CEE countries (search for similar items in EconPapers)
JEL-codes: C58 G32 G34 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:sav:journl:v:1:y:2022:i:1:p:430-449

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