| Title : | Capital structure and firm performance: a comparative study of joint venture banks, private banks and public banks | | Material Type: | printed text | | Authors: | Karna Bahadur Lama, Author | | Publication Date: | 2016 | | Pagination: | 121p. | | Size: | GRP/Thesis | | Accompanying material: | 8/B | | Languages : | English | | Descriptors: | Capital structure
| | Class number: | 332.041 | | Abstract: | One of the most important decisions from the financial managers in order to maintain the firm’s competitiveness is a decision regarding the capital structure. The capital structure of banking institutions has become an increasingly prominent issue in the world of finance, particularly in the wake of the 2008 banking collapse and financial restructuring efforts. Relationship between capital structure and firm performance is widely discussed and tested in the literature review. In spite of the numerous studies of this subject, the effect of capital structure on firm performance stills the most perplexing issues in corporate finance literature (Brounen and Eichholtz, 2001). Companies especially banks should have appropriate capital structure which is very important in the management of the firm. This is because the higher the debts in the capital structure of a firm, the greater the return on investment (Nwachukwu and Kingsley, 2016). Hence, capital structure is imperative for a firm’s survival and growth, as it plays a primary role in its financial performance in order to achieve its long-term goals and objectives.
According to Diamond and Rajan (2000), the capital structure of banks is largely determined by the asset side of the statement of financial position. Titman and Wessels (1988) contended that firms with high profit levels, all things being equal, would maintain relatively lower debt levels since they can realize such funds from internal sources. Kester (1986) found a significantly negative relation between profitability and debt/asset ratio. Rajan and Zingales (1995) also confirmed a significantly negative correlation between profitability and leverage. Taub (1975) found significantly positive association between debt and profitability. Likewise, Abor (2005) found a significantly positive relationship between total debt and profitability. Similarly, Myers (2001) found that there is a positive relationship between capital-asset ratio and earnings of the bank. Salim and Yadav (2012) found that the short term debt ratio and long term debt ratio have negative impact on performance measured by ROE. In the context of Nepal, Baral (2004) found that the firm size and growth rate are positively related to leverage whereas the earning rate is negatively related to leverage. Gajurel (2005) found that Nepalese managers prefer internal financing first followed by bank loan financing. Likewise, Pradhan &Pokharel (2016) concluded that size and credit risk are the major factors affecting the financial performance of commercial banks.
The major objective of this study is to assess the relationship between capital structure and firm performance of the Nepalese commercial banks. The study is based on secondary data of 17 commercial banks with 136 observations for the period of 2007/8 to 2014/15. The main source of data include various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank Supervision Report published by Nepal Rastra Bank and Annual Reports of selected commercial banks. The pooled cross sectional data analysis has been undertaken in the study. The research design adopted in this study is descriptive and causal comparative research design as it deals with the relationship between capital structure and firm performance of Nepalese commercial banks.
The result shows that average return on equity is highest for NBB (36.56 percent) and lowest for NBL (-45.41percent). The average Tobin’s Q is highest for NABIL (0.954 times) and lowest for NBL (0.067 times). The average earning per share is highest for EBL (Rs. 89.96 per share) and lowest for MBL (Rs. 8.98 per share). The average short term debt ratio is highest for RBB (48.61 percent) and lowest for MBL (21.17 percent). The average long term debt ratio is highest for NBL (80.90 percent) and lowest for ADBL (58.25 percent). The average debt to equity ratio is highest for SBI (14.06 times) and lowest for NBL (-44.83 times). The average firm size is highest for RBB (Rs. 96.08 Billion) and lowest for NCCB (Rs. 18.06 Billion). The average assets tangibility is highest for MBL (3.25 percent) and lowest for SCB (0.23 percent). The average assets growth rate is highest for GBIME (49.50 percent) and lowest for NBL (9.34 percent).
The descriptive statistics for joint venture bank shows that the average return on equity, Tobin’s Q, earnings per share, short term debt ratio, long term debt ratio, debt to equity ratio, firm size, assets tangibility and assets growth rate are 26.71 percent, 0.55 times, Rs. 62.74 per share, 32.88 percent, 74.44 percent, 10.96 times, 48.11 percent, 1.15 percent and 18.71 percent respectively. Similarly, the descriptive statistics for the private banks reveals that the average return on equity, Tobin’s Q, earnings per share, short term debt ratio, long term debt ratio, debt to equity ratio, firm size, assets tangibility and assets growth rate are 15.77 percent, 0.38 times, Rs. 20.56 per share, 23.35 percent, 72.61 percent, 10.06 times, 30.39 percent, 1.72 percent and 30.27 percent respectively. Similarly, the descriptive statistics for the private banks reveals that the average return on equity, Tobin’s Q, earnings per share, short term debt ratio, long term debt ratio, debt to equity ratio, firm size, assets tangibility and assets growth rate are -5.21 percent, 0.14 times, Rs. 58.10 per share, 41.32 percent, 72.65 percent, -10.83 times, 74.97 percent, 1.09 percent and 11.94 percent respectively.
The study of joint venture banks shows that short term debt ratio is positively correlated to return on equity whereas long term debt ratio and assets tangibility are negatively related to return on equity and Tobin’s Q respectively. Similarly, the study of the private banks reveals that short term debt ratio and debt to equity ratio are positively related to earnings per share whereas the assets tangibility is negatively related to earnings per share. Likewise, the study of public banks reveals that short term debt ratio is positively related to return on equity whereas it is positively related to earnings per share. Likewise, firm size is also positively related to Tobin’s Q for public banks.
The regression analysis reveals that the short term debt ratio has positive impact on bank performance for joint venture banks. This indicates that higher the short term debt ratio, higher would be the bank performance. Similarly, the short term debt ratio has positive impact on return on equity and earnings per share for private banks. The long term debt ratio has negative impact on return on equity which shows higher the long term debt ratio, higher would be the return on equity. Likewise, the total debt to equity ratio has positive impact on earnings per share for joint venture and private banks which indicates that an increase in total debt to equity ratio leads to increase in earnings per share. This result also shows that debt to equity ratio has positive impact on return on equity while it has negative impact on earnings per share for public banks. The bank size has positive impact on Tobin’s Q for public banks which indicates that higher the bank size, lower would be the Tobin’s Q. Likewise, the assets tangibility has negative impact on Tobin’s Q for joint venture banks which shows an increase in assets tangibility leads to decrease in Tobin’s Q.
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Capital structure and firm performance: a comparative study of joint venture banks, private banks and public banks [printed text] / Karna Bahadur Lama, Author . - 2016 . - 121p. ; GRP/Thesis + 8/B. Languages : English | Descriptors: | Capital structure
| | Class number: | 332.041 | | Abstract: | One of the most important decisions from the financial managers in order to maintain the firm’s competitiveness is a decision regarding the capital structure. The capital structure of banking institutions has become an increasingly prominent issue in the world of finance, particularly in the wake of the 2008 banking collapse and financial restructuring efforts. Relationship between capital structure and firm performance is widely discussed and tested in the literature review. In spite of the numerous studies of this subject, the effect of capital structure on firm performance stills the most perplexing issues in corporate finance literature (Brounen and Eichholtz, 2001). Companies especially banks should have appropriate capital structure which is very important in the management of the firm. This is because the higher the debts in the capital structure of a firm, the greater the return on investment (Nwachukwu and Kingsley, 2016). Hence, capital structure is imperative for a firm’s survival and growth, as it plays a primary role in its financial performance in order to achieve its long-term goals and objectives.
According to Diamond and Rajan (2000), the capital structure of banks is largely determined by the asset side of the statement of financial position. Titman and Wessels (1988) contended that firms with high profit levels, all things being equal, would maintain relatively lower debt levels since they can realize such funds from internal sources. Kester (1986) found a significantly negative relation between profitability and debt/asset ratio. Rajan and Zingales (1995) also confirmed a significantly negative correlation between profitability and leverage. Taub (1975) found significantly positive association between debt and profitability. Likewise, Abor (2005) found a significantly positive relationship between total debt and profitability. Similarly, Myers (2001) found that there is a positive relationship between capital-asset ratio and earnings of the bank. Salim and Yadav (2012) found that the short term debt ratio and long term debt ratio have negative impact on performance measured by ROE. In the context of Nepal, Baral (2004) found that the firm size and growth rate are positively related to leverage whereas the earning rate is negatively related to leverage. Gajurel (2005) found that Nepalese managers prefer internal financing first followed by bank loan financing. Likewise, Pradhan &Pokharel (2016) concluded that size and credit risk are the major factors affecting the financial performance of commercial banks.
The major objective of this study is to assess the relationship between capital structure and firm performance of the Nepalese commercial banks. The study is based on secondary data of 17 commercial banks with 136 observations for the period of 2007/8 to 2014/15. The main source of data include various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank Supervision Report published by Nepal Rastra Bank and Annual Reports of selected commercial banks. The pooled cross sectional data analysis has been undertaken in the study. The research design adopted in this study is descriptive and causal comparative research design as it deals with the relationship between capital structure and firm performance of Nepalese commercial banks.
The result shows that average return on equity is highest for NBB (36.56 percent) and lowest for NBL (-45.41percent). The average Tobin’s Q is highest for NABIL (0.954 times) and lowest for NBL (0.067 times). The average earning per share is highest for EBL (Rs. 89.96 per share) and lowest for MBL (Rs. 8.98 per share). The average short term debt ratio is highest for RBB (48.61 percent) and lowest for MBL (21.17 percent). The average long term debt ratio is highest for NBL (80.90 percent) and lowest for ADBL (58.25 percent). The average debt to equity ratio is highest for SBI (14.06 times) and lowest for NBL (-44.83 times). The average firm size is highest for RBB (Rs. 96.08 Billion) and lowest for NCCB (Rs. 18.06 Billion). The average assets tangibility is highest for MBL (3.25 percent) and lowest for SCB (0.23 percent). The average assets growth rate is highest for GBIME (49.50 percent) and lowest for NBL (9.34 percent).
The descriptive statistics for joint venture bank shows that the average return on equity, Tobin’s Q, earnings per share, short term debt ratio, long term debt ratio, debt to equity ratio, firm size, assets tangibility and assets growth rate are 26.71 percent, 0.55 times, Rs. 62.74 per share, 32.88 percent, 74.44 percent, 10.96 times, 48.11 percent, 1.15 percent and 18.71 percent respectively. Similarly, the descriptive statistics for the private banks reveals that the average return on equity, Tobin’s Q, earnings per share, short term debt ratio, long term debt ratio, debt to equity ratio, firm size, assets tangibility and assets growth rate are 15.77 percent, 0.38 times, Rs. 20.56 per share, 23.35 percent, 72.61 percent, 10.06 times, 30.39 percent, 1.72 percent and 30.27 percent respectively. Similarly, the descriptive statistics for the private banks reveals that the average return on equity, Tobin’s Q, earnings per share, short term debt ratio, long term debt ratio, debt to equity ratio, firm size, assets tangibility and assets growth rate are -5.21 percent, 0.14 times, Rs. 58.10 per share, 41.32 percent, 72.65 percent, -10.83 times, 74.97 percent, 1.09 percent and 11.94 percent respectively.
The study of joint venture banks shows that short term debt ratio is positively correlated to return on equity whereas long term debt ratio and assets tangibility are negatively related to return on equity and Tobin’s Q respectively. Similarly, the study of the private banks reveals that short term debt ratio and debt to equity ratio are positively related to earnings per share whereas the assets tangibility is negatively related to earnings per share. Likewise, the study of public banks reveals that short term debt ratio is positively related to return on equity whereas it is positively related to earnings per share. Likewise, firm size is also positively related to Tobin’s Q for public banks.
The regression analysis reveals that the short term debt ratio has positive impact on bank performance for joint venture banks. This indicates that higher the short term debt ratio, higher would be the bank performance. Similarly, the short term debt ratio has positive impact on return on equity and earnings per share for private banks. The long term debt ratio has negative impact on return on equity which shows higher the long term debt ratio, higher would be the return on equity. Likewise, the total debt to equity ratio has positive impact on earnings per share for joint venture and private banks which indicates that an increase in total debt to equity ratio leads to increase in earnings per share. This result also shows that debt to equity ratio has positive impact on return on equity while it has negative impact on earnings per share for public banks. The bank size has positive impact on Tobin’s Q for public banks which indicates that higher the bank size, lower would be the Tobin’s Q. Likewise, the assets tangibility has negative impact on Tobin’s Q for joint venture banks which shows an increase in assets tangibility leads to decrease in Tobin’s Q.
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