Capital structure and firm performance: a panel causality test

Hariem Abdullah and Turgut Türsoy

MPRA Paper from University Library of Munich, Germany

Abstract: This study attempts to empirically investigate the reverse causality between firm performance and capital structure for German listed firms in the non-financial sectors over the period 1993-2016. We measure firm performance based on both financial and market indicators while capital structure is measures by leverage ratio of total debt to assets. In addition to two-step GMM estimator, panel causality test of Dumitrescu and Hurlin (2012) is performed to specify the causality direction of causation. The findings provide evidence for the existence of homogeneous causality between capital structure and the two selected proxies of firm performance. Financial performance and financial leverage can positively affect each other. Capital structure could negatively determine market performance whereas stock price has a positive influence on leverage ratio. Our results rather support trade-off theory, probably indicating that non-financial firms in Germany bear more debt to benefit from tax shield.

Keywords: firm performance; capital structure; panel causality; and Germany (search for similar items in EconPapers)
JEL-codes: G3 (search for similar items in EconPapers)
Date: 2021-02-02
New Economics Papers: this item is included in nep-cwa, nep-fdg and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:105871

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