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The effect of debt financing on profitability of Nepalese Commercial banks / Nitesh Khadka
Title : The effect of debt financing on profitability of Nepalese Commercial banks Material Type: printed text Authors: Nitesh Khadka, Author Publication Date: 2016 Pagination: 52p. Size: GRP/Thesis Accompanying material: 7/B Languages : English Descriptors: Corporations-Finance
Debt financing (Corporations)Class number: 658.152 Abstract: Financial decisions are taken in different paradigms of investment, financing, asset management and dividend policy. Investment decision is mainly concerned with three areas. Either the manager has to take decision about opening a new venture, or decision may be specific to expansion of current business venture and it may be to replace current assets or machinery. Once the investment decision is made, another most important decision is how to finance the investment. The mix of debt and equity has been defined as financial leverage in the literature (Grinblatt, Timtman, and Fernandez, 2003; Pandey, 2008).It is also defined as the idea of categorizing capital structure in terms of the combination of the short-term and long-term funds available to the business (Van Horne, 2002).
The major purpose of this study is to analyze the effect of debt financing on profitability of Nepalese commercial banks. The specific objectives are (a) to investigate structure and pattern of financial leverage of Nepalese commercial banks, (b) to assess the impact of financial leverage on commercial bank performances, (c) to analyze the impact of financial leverage on firm performance when control variable like firm size is present and (d) to determine relationship between firm performance and control variable (firm size).
The study has employed descriptive and causal comparative research designs to deal with the fundamental issues associated with the effect of debt financing on profitability of Nepalese commercial banks. The descriptive research design has been adopted for fact-finding and searching adequate information about factors affecting financial performance of the banks. Thestudy relies on secondary data and the secondary data for the study is collected from various sources such as various issues of Bank and Financial Statistics and Supervision Report published by Nepal Rastra Bank, economic survey, annual reports of commercial banks, published and unpublished research thesis, books and journals. Descriptive statistics, correlation and regression tools are used in SPSS package in order to drive the meaningful relationship among the dependent and independent variables. Besides, an effort has also been made to describe the nature of 22 enterprises consisting of 148 observations during fiscal year 2008/09 through 2014/15 by using descriptive statistics with respect to firm specific variables such as performance (ROA, ROE and NIM), capital structure (debt to assets ratio, short term debt to assets ratio, long term debt to assets ratio, debt to equity ratio and interest coverage ratio) and bank specific variable (firm size).
The results shows that return on assets, return on equity and net interest margin is negatively correlated to debt to total assets, long term debt to total assets and debt to equity ratio.The beta coefficients are negative for total debt ratio, long term debt ratio and debt to equity ratio. It implies that total debt has positive impact on return on assets. Similarly increase in long term debt results in lower return on assets. Likewise, higher the debt to equity ratio lower would be return on assets. However, the beta coefficients are significant only for the total debt to assets ratio and long term debt to assets ratio.Moreover, the beta coefficients are positive for short term debt to assets, interest coverage ratio and size.The result reveals that beta coefficients for total debt to total assets ratio, long term debt to total assets ratio and debt to total equity ratio are negative. It indicates total debt and long term debt have negative impact on return on equity of the banks. Similarly, increase in debt to equity ratio leads to increase in return on equity. Beta coefficient is significant for total debt to assets ratio and debt to equity ratio.
The major conclusion of the study is that among the debt variables of Nepalese commercial banks, long term debt to total assets, total debt to total assets, debt to equity ratio and interest coverage ratio are the major variables with significant impact on Nepalese banks’ profitability. Moreover, the control variable i.e. size has also a significant impact on the profit of the Nepalese commercial banks.The study also concludes that long term debt to total assets, total debt to total assets and debt to equity ratio have negative significant impact on the profitability of the banks. In contrast, the interest coverage ratio and size also contribute a significant positive impact on profitability of Nepalese commercial banks. Furthermore, short term to total assets has a positive impact on the bank profitability but the result is not significant.
The effect of debt financing on profitability of Nepalese Commercial banks [printed text] / Nitesh Khadka, Author . - 2016 . - 52p. ; GRP/Thesis + 7/B.
Languages : English
Descriptors: Corporations-Finance
Debt financing (Corporations)Class number: 658.152 Abstract: Financial decisions are taken in different paradigms of investment, financing, asset management and dividend policy. Investment decision is mainly concerned with three areas. Either the manager has to take decision about opening a new venture, or decision may be specific to expansion of current business venture and it may be to replace current assets or machinery. Once the investment decision is made, another most important decision is how to finance the investment. The mix of debt and equity has been defined as financial leverage in the literature (Grinblatt, Timtman, and Fernandez, 2003; Pandey, 2008).It is also defined as the idea of categorizing capital structure in terms of the combination of the short-term and long-term funds available to the business (Van Horne, 2002).
The major purpose of this study is to analyze the effect of debt financing on profitability of Nepalese commercial banks. The specific objectives are (a) to investigate structure and pattern of financial leverage of Nepalese commercial banks, (b) to assess the impact of financial leverage on commercial bank performances, (c) to analyze the impact of financial leverage on firm performance when control variable like firm size is present and (d) to determine relationship between firm performance and control variable (firm size).
The study has employed descriptive and causal comparative research designs to deal with the fundamental issues associated with the effect of debt financing on profitability of Nepalese commercial banks. The descriptive research design has been adopted for fact-finding and searching adequate information about factors affecting financial performance of the banks. Thestudy relies on secondary data and the secondary data for the study is collected from various sources such as various issues of Bank and Financial Statistics and Supervision Report published by Nepal Rastra Bank, economic survey, annual reports of commercial banks, published and unpublished research thesis, books and journals. Descriptive statistics, correlation and regression tools are used in SPSS package in order to drive the meaningful relationship among the dependent and independent variables. Besides, an effort has also been made to describe the nature of 22 enterprises consisting of 148 observations during fiscal year 2008/09 through 2014/15 by using descriptive statistics with respect to firm specific variables such as performance (ROA, ROE and NIM), capital structure (debt to assets ratio, short term debt to assets ratio, long term debt to assets ratio, debt to equity ratio and interest coverage ratio) and bank specific variable (firm size).
The results shows that return on assets, return on equity and net interest margin is negatively correlated to debt to total assets, long term debt to total assets and debt to equity ratio.The beta coefficients are negative for total debt ratio, long term debt ratio and debt to equity ratio. It implies that total debt has positive impact on return on assets. Similarly increase in long term debt results in lower return on assets. Likewise, higher the debt to equity ratio lower would be return on assets. However, the beta coefficients are significant only for the total debt to assets ratio and long term debt to assets ratio.Moreover, the beta coefficients are positive for short term debt to assets, interest coverage ratio and size.The result reveals that beta coefficients for total debt to total assets ratio, long term debt to total assets ratio and debt to total equity ratio are negative. It indicates total debt and long term debt have negative impact on return on equity of the banks. Similarly, increase in debt to equity ratio leads to increase in return on equity. Beta coefficient is significant for total debt to assets ratio and debt to equity ratio.
The major conclusion of the study is that among the debt variables of Nepalese commercial banks, long term debt to total assets, total debt to total assets, debt to equity ratio and interest coverage ratio are the major variables with significant impact on Nepalese banks’ profitability. Moreover, the control variable i.e. size has also a significant impact on the profit of the Nepalese commercial banks.The study also concludes that long term debt to total assets, total debt to total assets and debt to equity ratio have negative significant impact on the profitability of the banks. In contrast, the interest coverage ratio and size also contribute a significant positive impact on profitability of Nepalese commercial banks. Furthermore, short term to total assets has a positive impact on the bank profitability but the result is not significant.
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