Capital Structure and Firm Performance in the Financial Sector
Asian Journal of Finance & Accounting ISSN 1946-052X 2012, Vol. 4, No. 1
Capital Structure and Firm Performance in the Financial Sector: Evidence from Australia
Vedran Skopljak School of Economics and Finance, La Trobe University Kingsbury Drive, Bundoora, Vic 3086, Australia Tel: 61-3-9479-1111 E-mail: vedran.skopljak@latrobe.edu.au
Robin H. Luo (Corresponding author) Department of Finance, Wuhan University Luojia Hill, Wuhan 430072, China Tel: 86-27-6875-2740 E-mail: robin.h.luo@gmail.com
Received: January 29, 2012 doi:10.5296/ajfa.v4i1.1319
Accepted: March 1, 2012
Published: June 1, 2012
URL: http://dx.doi.org/10.5296/ajfa.v4i1.1319
Abstract How does capital structure affect firm performance of Authorised Deposit-taking Institutions (ADIs) using explicitly Australian data? This paper investigates the relationship between capital structure and firm performance of Australian ADIs. Our findings show a significant and robust quadratic relationship between capital structure and firm performance of Australian ADIs. At relatively low levels of leverage an increase in debt leads to increased profit efficiency hence superior bank performance, at relatively high levels of leverage increased debt leads to decreased profit efficiency as well as bank performance. This can most likely be attributed to financial distress outweighing any gains made from managerial performance improving. Keywords: Profit efficiency; Capital structure; Agency cost theory, Financial sector
278
www.macrothink.org/ajfa
Asian Journal of Finance & Accounting ISSN 1946-052X 2012, Vol. 4, No. 1
1. Introduction Capital structure and its effect on firm performance has long been a topic of discussion, with no shortage of papers on the issue (e.g. Modigliani and Miller, 1958; Myers, 1977; Jensen and Meckling, 1976; Harris and Raviv, 1991 and Margiratis and Pslilaki, 2007). However, these papers are very general in their conclusions and their reach to the financial sector
Capital Structure and Firm Performance in the Financial Sector: Evidence from Australia
Vedran Skopljak School of Economics and Finance, La Trobe University Kingsbury Drive, Bundoora, Vic 3086, Australia Tel: 61-3-9479-1111 E-mail: vedran.skopljak@latrobe.edu.au
Robin H. Luo (Corresponding author) Department of Finance, Wuhan University Luojia Hill, Wuhan 430072, China Tel: 86-27-6875-2740 E-mail: robin.h.luo@gmail.com
Received: January 29, 2012 doi:10.5296/ajfa.v4i1.1319
Accepted: March 1, 2012
Published: June 1, 2012
URL: http://dx.doi.org/10.5296/ajfa.v4i1.1319
Abstract How does capital structure affect firm performance of Authorised Deposit-taking Institutions (ADIs) using explicitly Australian data? This paper investigates the relationship between capital structure and firm performance of Australian ADIs. Our findings show a significant and robust quadratic relationship between capital structure and firm performance of Australian ADIs. At relatively low levels of leverage an increase in debt leads to increased profit efficiency hence superior bank performance, at relatively high levels of leverage increased debt leads to decreased profit efficiency as well as bank performance. This can most likely be attributed to financial distress outweighing any gains made from managerial performance improving. Keywords: Profit efficiency; Capital structure; Agency cost theory, Financial sector
278
www.macrothink.org/ajfa
Asian Journal of Finance & Accounting ISSN 1946-052X 2012, Vol. 4, No. 1
1. Introduction Capital structure and its effect on firm performance has long been a topic of discussion, with no shortage of papers on the issue (e.g. Modigliani and Miller, 1958; Myers, 1977; Jensen and Meckling, 1976; Harris and Raviv, 1991 and Margiratis and Pslilaki, 2007). However, these papers are very general in their conclusions and their reach to the financial sector