CAPITAL STRUCTURE DETERMINANTS IN A DEVELOPING ECONOMY: EVIDENCE FROM BANGLADESH
Abstract
Capital structure decisions are crucial for firms to enhance performance and maximize shareholder wealth. This study investigates the determinants of capital structure in Bangladeshi firms listed on the Chittagong Stock Exchange (CSE) from 2018 to 2022. The research utilises regression analyses to evaluate the relationships between financial leverage and key explanatory variables. By analysing various factors, including firm size, profitability, non-debt tax shields, growth opportunities, liquidity, and tangibility of assets, this research aims to identify the optimal mix of debt and equity financing. Using quantitative analysis, the study finds that several factors significantly influence capital structure decisions. Both fixed and random effects regression models are employed to analyse the data, revealing that profitability, non-debt tax shields, growth opportunities, and liquidity negatively impact financial leverage, while firm size and asset tangibility have positive associations. The Hausman test suggests that the fixed effects model is preferable, given its χ2-value of 93.52 with a p-value of 0.0000. The study concludes that the optimal capital structure is influenced by multiple factors, with no single theory universally applicable. The findings suggest that firms should carefully consider these factors when making capital structure decisions. Excessive debt can lead to financial distress, while appropriate debt levels can enhance performance. Understanding these determinants is essential for firms to optimize their financial strategies and achieve long-term success. This study contributes to the existing literature by providing insights into capital structure decisions in a developing economy like Bangladesh. It highlights the importance of considering specific factors and industry dynamics when making financing choices.
JEL: G32; F21; C49
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DOI: http://dx.doi.org/10.46827/ejefr.v8i5.1808
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