Relationship between Capital Structure and Profitability: Evidence from Four Asian Tigers

Abstract

Purpose: Capital structure is one of the hot topics in corporate finance. To meet the needs of stakeholders, firms need to build a capital structure that is desirable for shareholders by decrease financial risk and expand their profitability. Thus, the aim of this study is to investigate the relationship between capital structure and profitability.

Methods: In examining the relationship between capital structure and profitability, we apply correlation and regression analysis on dataset from 2003 to 2016 for the firms in the Four Asian Tiger economies. The data are collected from the Compustat Global Vantage database and include 46,301 observations.

Findings: This study finds a significantly negative relationship between leverage and profitability, a significantly positive relationship between growth and leverage in Taiwan, Korea and Hong Kong and a significantly positive relationship between size and leverage in each country.

Significance of the study: This study empirically examines the impacts of capital structure on the profitability in the case of firms of Four Asian Tiger economies, which appears to be main contribution to the literature of corporate finance.

Keywords: Capital Structure, Financial Leverage, Profitability, Four Asian Tigers