The Impact of Capital Structure on Firms Operating Performance

This study seeks to investigate the impact of capital structure on firm performance by analyzing the relationship between operating performance of Malaysian firms, measured by return on asset (ROA) and return on equity (ROE) with short-term debt(STD), long-term debt (LTD) and total debt (TD). ). Four variables found by most literature to have an influence on firm operating performance, namely, size, asset grow, sales grow and efficiency, are used as control variables. This study covers four major sectors in Malaysian equity market which are the consumers,industrials, trading or services and properties sectors. 240 firms were identified as the sample firms and their financial data from the year 2002 through 2007 are used as observations for this study, resulting in a total number of observations of 1440. A series of regression analysis were executed for each model, where either one of the capital structure proxies is included in each analysis. Lag values for the proxies were also used to replace the non lag values in order to ensure that any extended effect of capital structure on firm performance is also examined. The study finds that only long term debt has significant relationship with ROA but not with ROE. The analysis with lagged values shows that non of lagged values for total debt, short term debt and long term debt has significant relationship with performance. The study therefore concludes that capital structure does not affect operating performance of Malaysian firms