Establishing a Dynamic Capital Structure Model for Company Sustainability Performance Using Data Mining Techniques

Mu-Jung Huang, Kuo-Chih Cheng, Ching-Ju Huang, Kun-Meng Lin, Huo-Ming Wang, Cheng-Kuo Chuang and Ming-Cheng Wu
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Mu-Jung Huang: Department of Accounting, National Changhua University of Education, Changhua 500, Taiwan
Kuo-Chih Cheng: Department of Accounting, National Changhua University of Education, Changhua 500, Taiwan
Ching-Ju Huang: Department of Accounting, National Changhua University of Education, Changhua 500, Taiwan
Kun-Meng Lin: Department of Finance, National Changhua University of Education, Changhua 500, Taiwan
Huo-Ming Wang: Department of Finance, National Changhua University of Education, Changhua 500, Taiwan
Cheng-Kuo Chuang: Department of Finance, National Changhua University of Education, Changhua 500, Taiwan
Ming-Cheng Wu: Department of Finance, National Changhua University of Education, Changhua 500, Taiwan

Sustainability, 2021, vol. 13, issue 11, 1-15

Abstract: In order to reconsider the changes of adjustment speed caused by the recapitalization cost, this research adopted dynamic capital structure theory with adjustment speed as one of the independent variables to analyze the relationship between capital structure and company performance. Instead of applying the commonly used regression models, this research used the decision tree C4.5 algorithm and association rules of priori algorithm. Taking the predictive models created by the decision tree as the main result and supporting it with association rules which help to explain the relationships between capital structure and company performance, this research shows how capital structure influences company performance. As the result presents, a company tends to have better performance when its debt ratio is low, and Tobin’s Q and ROA will turn worse as the ratio gets higher. However, maybe because of the financial leverage, ROE will not decrease when the ratio is high but will increase instead. In addition, this research found out that adjustment speed is negatively related to company performance, meaning that even though a company is more flexible in adjusting itself, it might still perform badly since it is deviating from its optimum leverage. This research found that not only capital structure, but other variables such as price-earnings ratio, research and development expense ratio, and dividend payout ratio also determine a company’s performance.

Keywords: capital structure; company performance; data mining; decision tree; association rules (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
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