Capital Structure and Firm Performance. Evidence from Japan Nikkei 225


Master's Thesis, 2020

59 Pages, Grade: 1,3


Excerpt

Table of Contents

Acknowledgements

Table of Contents

List of Figures

List of Tables

List of Abbreviations

Abstract

1. Introduction

2. Literature Review
2.1 Capital Structure Finance Theories
2.1.1 Trade-Off Theory
2.1.2 Pecking-Order Theory
2.1.3 Agency-Cost Theory
2.2 Effects of the Capital Structure on Firm Performance
2.2.1 Impact of Trade-Off Theory
2.2.2 Impact of Pecking-Order Theory
2.2.3 Impact of Agency-Cost Theory
2.3 Empirical Studies on the Influence of Leverage on Firm Performance
2.3.1 Negative Impact of Leverage on Firm Performance
2.3.2 Positive Impact of Leverage on Firm Performance
2.4 Other Influencing Factors on Capital Structure

3. Research Design
3.1 Research Gap
3.2 Research Objectives
3.3 Research Questions

4. Research Methodology
4.1 Research Philosophy
4.2 Data Collection
4.3 Data Analysis: Regression Models and Practical Implementation

5. Empirical Findings and Analysis
5.1 Descriptive Statistics of Data Set
5.2 Correlation Results Independent Variables
5.3 Regression Results
5.3.1 Regression Results by Leverage Models
5.3.2 Regression Results by Industry

6. Discussion

7. Conclusions

8. References

Appendix A

Acknowledgements

I would first like to thank my supervisor, Dr Xiaowen Gao of the Business School at the University of Greenwich, who allowed this paper to become my individual work, but has also consistently offered her guidance in the right direction when needed. The time that Dr Gao devoted to this study is indeed appreciated. I would also like to thank second marker for time and consideration. Furthermore, I must express a very profound gratitude to my family for being very supportive during my years of study and through the process of research and writing this thesis. Finally, I thank my father for his persistence, encouragement and finance support on this master study.

List of Figures

Figure 1: Research Objectives

List of Tables

Table 1: Number of Companies Categorized by Industry Sector

Table 2: Formula & Variables from Regression Models

Table 3: Sample Regression Model

Table 4: Full Sample Descriptive Statistics

Table 5: Correlation of Independent Variables

Table 6: Regression Model 1 STD

Table 7: Regression Model 2 LTD

Table 8: Regression Model 3 TD

Table 9: Regression Model 4 TDTC

Table 10: Regression Results Model 5 STD + LTD

Table 11: Regression Results of Consumer Staples Industry

Table 12: Regression Results of Industrials Industry

Table 13: Regression Results of Materials Industry

Table 14: Regression Results of Health Care Industry

Table 15: Regression Results of Consumer Discretionary Industry

Table 16: Regression Results of Utilities Industry

Table 17: Regression Results of Communication Services Industry

Table 18: Regression Results of Real Estate Industry

Table 19: Regression Results of Energy Industry

Table 20: Summary Regression-Coefficients by Models

Table 21: Summary Regression-Coefficients by Industries

List of Abbreviations

FATA Fixed Assets to Total Assets

GDP Gross Domestic Product

LTD Long-Term Debt

LTR Long-Term Ratio

N225 Nikkei 225

ROA Return on Assets

ROE Return on Equity

R&D Research & Development

STD Short-Term Debt

STR Short-Term Ratio

TA Total Assets

TD Total Debt

TDTC Debt-to-Capital Ratio

Abstract

Study investigates what kind of impact different leverage ratios have on firm performance measurements Return on Assets, Return on Equity and Tobin’s Q in selected firms listed on Nikkei 225 stock market (excluding Finance & Technology Sector). Furthermore, the influence of sector specific and possible control variables on capital structure (using long- & short-debt ratios) as well as firm performance will be analysed. The sample derive from 165 firms during the time period from 2014 to 2019 and analysed by using various Models multiple regression analysis.

The results are related to those of Myers (1984) and Fama & French (1998) as these studies also have found a negative association between leverage and business performance. Control variables Size and Growth show a clear positive effect on firm performance. In contrast, Tangibility has a negative impact on the model in which all companies are included but has more positive coefficients in the model in which companies are divided into their industries. Additionally, this study suggests that the effect of leverage on firm performance differs among industries. Short- and long-term debt has positive impacts on different firm performance measurements by the Materials, Reals Estate, Energy and Communication Services Sector.

Keywords: Capital structure, Firm performance, Japan, Nikkei 225, Leverage ratios, Trade-Off/ Pecking-Order/Agency-Cost Theory, STD, LTD, TD, TDTC

1. Introduction

Recent years have been difficult for many companies because of the increasing globalization and competitive pressure. An important company tool for gaining competitive advantage is investment in new projects as well as taking care of its shareholders by paying dividends. In a case where companies are not profitable to provide enough equity, they may use debt to leverage their actions. However, this could lead to interest payments and reduction of firm performance. According to Jahanzeb et al. (2012), capital structure is a cognitive process of firm value maximization and should be considered by the management.

In a corporate world, the proportion of debt and equity is different in individual companies. Level of leverage depends on several fundamental factors such as current economic situation and firm’s stage of life cycle. Moreover, young companies like start-ups highlight higher equity part because it is difficult to get a cheap debt interest on the market. They may decide to liquid their sharing rights by issuing a new equity. An entity which had already existed for decades would not want to achieve this new equity by giving more rights to its owners (Cole & Sokolyk, 2018). Managers who are able to determine the optimal capital structure are rewarded by minimizing a company's financing costs and thereby maximizing its revenue. However, if the firm’s capital structure influences the performance of the company, it can be assumed that its leverage influences health of the company and probability of default.

Many researchers have analysed the relationship between capital structure and firm performance. Modigliani & Miller (1958) have conducted a theory where in an ideal world the level of leverage does not impact on firm performance and profitability. Other main approaches are: Trade-off theory, Pecking-order theory and Agency-cost theory. On the one hand, Trade-off and Agency-cost theories have a positive relationship with capital structure. On the other hand, Pecking-order theory states that firms adversely indicate performance in causing capital structure because firms prefer to finance their activities with retained earnings first, after which they use debt and finally issue a new equity to meet financial objectives (Berger & Bonaccorsi di Patti, 2006).

Always growing, competitive and progressing globalization shows that there are ever-changing interests of share- and stakeholders and that companies increase their demand of sources and capital as well as other factors that influence capital structure. After all, the existing theories have very different approaches. Based on a factual past, close approach and study should be considered in order to examine any relation between the capital structure and firm performance.

Given the above mentioned evidence the objective of this study focuses on the question - what kind of impact different capital structure ratios have on firms performance in selected firms listed on Nikkei 225 (N225) from 2014 to 2019. Additionally, the influence of sector specific and possible control variables on capital structure (long- & short-term debt ratios) and firm performance is analysed. At the moment, this kind of research on the basis of the N225 index has not yet been made. Japan is an important global economic player which is no longer a developing country and is home to many companies from which all western countries benefit.

The rest of this dissertation is organised as follows - Chapter two discusses theoretical and empirical framework of capital structure and firm performance. Afterwards, research design identifies a research gap, clarifies research objectives and establishes research questions in order to analyse the research gap. Chapter four explains research philosophy. In chapter five, descriptive statistics, correlation results of independent variables as well as empirical results of the statistical study are presented. Chapter 6 focuses on answering research question and sub-question as well as comparing main findings with other empirical studies from the literature review. Finally, last chapter summarises and concludes the paper giving recommendations for future research.

2. Literature Review

Literature review chapter provides information on theoretical and empirical framework of capital structure and firm performance. The first part presents three major financial theories that affect capital structure in firms, followed by the effect of financial theories on capital structure. Third part includes discussions on factors which potentially influence capital structure and should also be included in the analysis.

2.1 Capital Structure Finance Theories

Capital structure in a company is defined as a mix of long-term debt (LTD) and short-term debt (STD) and equity. Overall, it describes how firms fund their financing operations (Tuovila, 2019). According to Turner (2014), entities can maximize their value if they find an optimal combination of debt and equity based on risk and returns. In 1958, Modigliani & Miller published a study which states that level of leverage has no influence on firm value. Even with a 100% debt capital structure, firm performance should not be affected by high debt-equity ratio. On the other hand, Myers (1984) states that optimal capital structure arises from different results if optimal debt ratio is adjusted. High debt also reduces free cash flow. However, 5 years later, they corrected this research and included tax influence on optimal capital structure (Modigliani & Miller, 1963). Furthermore, Brealey & Myers (2018) conclude that the choice of capital structure is fundamentally a marketing problem. Having that in mind, similarity to the existing well known Trade-off theory is further explained in the following chapter.

2.1.1 Trade-Off Theory

Trade-off theory is developed by Kraus & Litzenberger (1973), who found that companies choose their level of leverage by comparing their benefits and cost of debt. Management analyses and evaluates various costs and benefits between self-weight costs of bankruptcy and tax shield advantages and target level of gearing. According to Graham & Havey (2001), it is almost impossible to achieve an optimal capital structure due to extreme divergence between companies. Therefore, companies with an extensive amount of tangible assets and high taxable income might have high target ratio (Constantinides et al., 2013). Leary & Roberts (2005) support this theory due to the fact that many firms are not active regarding their targeted debt level and some try to purchase their own securities back in order to make a step closer to their target.

Trade-off theory states that companies with higher debt probably have an advantage of tax shield (Modigliani & Miller, 1963). For loan debt, firms have to pay interest payments and this could reduce tax payments and result in a higher net income. Therefore, as stated by Cotei & Farhat (2009), companies tend to choose higher level of debt and take advantage of the tax shield. Comparing two similar firms, we come to a conclusion that entity with huge leverage achieves better firm performance because it generates higher net income. On the other hand, higher debt causes higher bankruptcy risk and agency conflicts. As a result, not only tax advantage and cost of bankruptcy should be used for analysing a proper optimal capital structure, but also agency cost (Brealey et al., 2018). Myers (1984) found that firms try to generate target debt-to-value ratio by paying more or less dividend adjustments. Furthermore, empirical studies from Hovakimian et al. (2001), Fama & French (2001) as well as Gaud et al. (2005) confirm that firm’s capital structure is adapted by a target debt ratio.

Other investigations also proved Trade-off theory wrong. According to Rajan & Zinales (1995); Fama & French (2001), high profitable entities usually borrow less debt. This contradicts the Trade-off theory approach, since profitable companies take on more debt to reduce tax payments in order to get better financial performance. Graham (2002) focuses on benefit and cost of debt only to also discover that profitable firms with low bankruptcy costs avoid using debt. On the other hand, companies with risky and many intangible assets should prefer financing their activities through equity (Brealey et al., 2018; Warner, 1976).

2.1.2 Pecking-Order Theory

Pecking-order theory should be reviewed as an extension of the Agency-cost theory. It is also based on the assumption that there is an asymmetric flow of information between managers and investors. However, Frank & Goyal (2009) found that Pecking-order theory is affected by agency problems with outside investors. If outside investors receive only a fair return, they will not be willing to provide equity funds. In addition to that, a clear target debt ratio does not necessarily need to be achieved, since there are, theoretically, two types of equity - internal and external.

Meyers (1984) argues that managers know more about the fair value of the company than investors. If directors need money for future projects, they will first try to use their internal financing source, not undervalued by the market, such as risky debt or internal funds. In case retained earnings are no longer available, companies should borrow debt only with a default risk and issue new equity as final resort (Pandey, 2015).

The preference of using retained earnings is primarily due to the fact that it does not reflect any adverse signal to the company performance. On the contrary, if managers issue a new equity rather than debt, an investor might interpret this as bad news (Brealey et al., 2018). Obviously, companies are trying to keep stock price at the highest possible level, because in that case, issuing new shares at higher share price will result in more cash inflow. According to Myers & Majluf (1984), a sensible investor treats equity with more risk than debt and reevaluates the company when it decides to issue it. If companies are run by the owner himself, they avoid diluting their voting rights by accepting new shareholders and generating new shares (Quan, 2002; Hamilton & Fox 1998). That is why directors usually choose to finance through a STD as it tends to be safer and usually has a positive effect on the firm performance (Huang & Ritter, 2009).

Pecking-order theory does not deny that tax shield is useless and cost of bankruptcy can be excluded. According to Holmes & Pam (1991), more important is that managers do not issue new equity shares easily. Furthermore, Pecking-order theory contradicts the Trade-off theory by stating that profitable firms borrow less money because they do not need the outside money. Therefore, firms with low profitability cannot save money as retained earnings and burden themselves with debt (Brealey et al., 2018).

2.1.3 Agency-Cost Theory

In the early years, economists assumed that all managers instinctively act for the good of the company. However, Jensen & Meckling (1976) were the first to develop Agency-cost theory, which they define as “a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent” (Jensen & Meckling, 1976). In companies, Agency-cost theory takes its effect if the ownership (principles) and management (agents) are divided. The agency conflict originates from insufficient agents’ workload, forbearance and decisions based on personal preferences (Berger & Bonaccorsi di Patti, 2006). Agency-cost is a lost value which takes its origin from difference between managers’ own interests and their lack of effort in maximizing company value (Brealey et al., 2018).

According to Stulz (1990), the borrowing debt in Agency-cost theory has two side effects. On the one hand, it may seem as if high leverage companies try to reduce overinvestment problems. On the other hand, borrowing debt downgrades underinvestment because the firm has to repay instalment payments for the leverage. Furthermore, Meyers (1977) states that the borrowing debt in agency-cost theory is dubious. Leverage companies will probably not accept valuable investment opportunities because the repayment of debt to creditors is higher than present value of the investment. This leads to suboptimal investment and reduces company's market value.

Jensen & Meckling (1976) argued that there are two major conflicts regarding capital structure in Agency-cost theory. If a manager borrows debt, some problems with an outside participant are possible because the manager might be acting in accordance with his personal benefit. In order to respond to the transparency of sharing profit and prevent such behaviour, stricter contracts, higher monitoring as well as incentive mechanisms for managers are required. What is more, shareholders tend to like taking higher risks to achieve higher earnings while companies usually try to avoid risk.

Shareholders’ reward is presented in profit flow while losses are commonly shared proportionately with creditors. Such behaviour is expected from debtors as the cost of borrowing by the company might be higher. As a result, more shareholders increase surveillance costs and are willing to take the risk. It can be concluded that debt might be a better choice to lower company costs while improving performance.

2.2 Effects of the Capital Structure on Firm Performance

Capital structure financial theories from chapter 2.1 show an impact on the firm performance. In the first three chapters in section 2.2, capital structure choice from each financial theory and the resulting impact on financial performance will be discussed. After that, a review of empirical studies on the influence debt leverage has on business performance will be presented.

2.2.1 Impact of Trade-Off Theory

According to the Trade-off theory, firms should use debt until they achieve an appropriate capital structure mix. This is determined by the trade-off between benefits and costs of leverage. Firms reduce their financial costs by taking advantage of the tax shield. At the same time, companies risk more with high level of leverage but also increase costs of bankruptcy and agency conflict. Therefore, the Trade-off theory presupposes a positive relationship between the firm performance and level of debt, until optimal debt ratio is achieved. This is to happen under the presumption that the firm performance can be maximized up to a certain debt point (Titman & Wessels, 1988).

Many researchers have argued the same evidence of positive relationship between the level of leverage and financial performance (Berger & Bonaccorsi di Patti, 2006; Al-Taani, 2013; Champion, 1999). In particular, a strong relationship was found by Nguyen & Nguyen (2014), where a debt ratio less than 59.27% affects the firm performance positively, while LTD’s have negative influence on company’s value. In addition, Chou et al. (2013) confirm a coherent outcome of their study with the Trade-off theory. They have tried to find the optimal capital structure and cover sentimental hint of tax benefits based on income statements of 37 Taiwanese firms.

At the same time, studies based on empirical evidence have contrary findings; even a low level of debt can cause a negative assumption. According to Myers (1984); Fama & French (1998), debt is negatively related to debt. If debt ratio increases, firm performance decreases. It is then easier for larger firms to borrow debt to finance by equity. However, they do not deny that tax shield is invalid and useless for larger entities.

2.2.2 Impact of Pecking-Order Theory

According to Myers (1984), the preference of capital structure in Pecking-order theory is clearly based on internal financing. For companies, it is always better to use retained earnings, before borrowing debt. Last option should be issuing a new equity because it dilutes voting and holders’ shares. The connection with financial performance is presented so that companies can rebalance their capital structure by issuing new shares. This happens when bankruptcy costs are too high because the company is too indebted (Graham, 2002).

If a profitable company would like to achieve a low debt ratio, it would not only issue debt but also reduce its outstanding equity component, while an unprofitable firm would always exhibit higher leverage ratio because its earnings reserves would not be that high (Fama & French, 2001). The problem from the asymmetric information in Pecking-order theory prevents firms from issuing new shares. Additionally, this question prevents firms from paying back the debt amount (Rajan & Zingales, 1995). Other empirical studies from Vasiliou et al. (2009), Jaafar et al. (2017) as well as Sen & Oruc (2008) confirm negative correlation between profitability of a firm and huge amount of debt from Pecking-order theory.

2.2.3 Impact of Agency-Cost Theory

Considering the impact of Agency-cost theory on capital structure, it can be concluded that high firm performance is positively correlated with high debt. In theory, borrowing debt reduces agency costs and increases company value by forcing or encouraging managers to act more in shareholders’ interests. According to Kochhar (1996), the impact is economically and statistically significant. In fact, agency costs can also be incurred if the level of debt is high and the company also has a small amount of equity. Therefore, high debt ratio affects the Agency-cost theory and influences firm performance (Berger & Bonaccorsi di Patti, 2006).

However, Kalash (2019) tested 52 listed firms in Turkey considering leverage impact on corporate performance, depending on high or low agency cost. He found that leverage had a negative impact on corporate profitability. It was also stated that impact was higher for companies with higher agency costs (companies with growth opportunities and less property, plant and equipment) and lower for companies with agency costs for free cash flows.

2.3 Empirical Studies on the Influence of Leverage on Firm Performance

In the following two sections, empirical study results will be presented and divided into positive and negative influence of debt on corporate performance. Only a few studies show weak positive or negative relation with firm performance (Ebaid, 2009; Saeedi & Mahmoodi, 2011).

2.3.1 Negative Impact of Leverage on Firm Performance

Looking on empirical evidence, Mesquita & Lara (2003) found that negative relationship is related to LTD on corporate performance of 70 firms over 7 years in Brazil, in terms of the ratio of response rates to debt. In consistence with other studies, most lucrative companies are those with lowest debt. According to Brigham & Houston (2001), it is possible for short-term financing to receive much lower interest rates because it presents less risk than extensive long-term borrowing. A decreasing effect of using debt in the capital structure was also investigated by Gleason et al. (2000), where a dependent variable ROA was found to have a negative regression outcome under debt. Results of the study from Aziz & Abbas (2019) indicated that debt financing has a negative but significant impact on firm performance in firms in Pakistan. Their findings suggest that entities should rely more on their internal source of finance because it is a cheap and reliable source of finance in the country of Pakistan. Referring to Abor (2005), a negative relationship between the LTD ratio and corporate performance was found.

2.3.2 Positive Impact of Leverage on Firm Performance

Mesquita & Lara (2003) in their study on firms in Brazil dispute a positive relationship between firm performance and STD in contrast to the statement that long-term borrowing has negative impact on corporate performance. Furthermore, the results of Abor (2005) reveal a significantly positive relation between the ratio of STD to Total Assets (TA) and firm performance. Even in the context of a relationship between TD and response rate, findings have shown a significantly positive relationship between the ratio of TD to TA and corporate performance. Positive relationship was also indicated by Holz (2002) between LTD and business performance.

Other studies have also found significant positive coefficients for four measures of profitability in a regression of these measures against debt ratio (Taub, 1975; Baker, 1973; Rehman et al., 2016). Using a panel data regression model on 257 South African firms, Fosu (2013) found that leverage has a positive impact on the companies’ profitability. Petersen & Rajan (1994) who worked with simultaneous equations model, identified the same association but for industries sectors. Taking into account low and high growth companies, Margaritis & Psillaki (2010) determined a positive relationship between debt and business performance. Zeitun & Tian (2007) take in their regression analysis accounting (ROA/ROE) as well as market-based (Tobin’s Q) measurements, in order to find its effect on corporate performance in Jordan. They, however, determined that STD positively influences firm profitability.

2.4 Other Influencing Factors on Capital Structure

In addition to presented theories, internal and external factors also influence capital structure of firms (O'Brien, 2003); only the hypothesis of Modigliani & Miller (1985) does not consider other elements. In theory, potential internal factors are cash flows, growth, innovation, marketing and asset structure and external factors - size, investors and taxation. The independent part of the regression equation in dissertation focuses on measurable variables such as Size, Growth and Tangibility which influence the capital structure of each company.

According to Lindblom et al. (2011), Size of the firm is important because, usually, smaller companies are granted external financing less often than larger companies. In case they are offered capital it often comes at significantly higher costs. Smaller companies usually only provide limited, incomplete, or incomparable information to the public. This prevents lenders or financiers from fully evaluating, investing or finance smaller entities (Degryse et al., 2012; Gaud et al., 2005). As a result, larger firms should have a positive relation to leverage. Furthermore, some types of companies have an equity gap that occurs when they do not have sufficient funds and cannot retain sustainable growth from their shareholders' internal cash flow or equity (Margaritis & Psillaki, 2010). Another advantage of larger firms is benefit of economies of scale as well as influence of major market share (Jermias, 2008).

It is necessary to consider Growth of a company when evaluating capital structure because developing companies need access to external financing from banks/venture capital firms (Alqatawni, 2013). According to Abor (2005), firms with huge growth opportunity will be more profitable. Therefore, a positive relationship is expected between the Growth and firm value. In contrast, Lin & Chang (2011) deny that growth has a positive impact on entities value.

Tangibility is also an essential factor because normally a large number of assets increases guarantee for a lender; therefore, positive leverage represents a good indicator for Tangibility (Rajan & Zingales, 1995). Since R&D per se does not consist of property, plant and equipment that provides collateral, it is argued that it is difficult for these firms to obtain external funding for debt financing to fund R&D projects (Rajan & Zingales, 1995). According to Degryse et al. (2012), a huge amount of intangible assets might be an indicator of future growth opportunities, more than in companies with less intangible assets.

3. Research Design

Chapter research design clarifies the research objectives, which resulting from an identified research gap. Afterwards, research questions are established in order to analyse the research gap.

3.1 Research Gap

Over the past few decades, a considerable number of studies have been regarding the impact of capital structure on firm performance, even though this literature review is mostly based on theories, which could not be fully substantiated with empirical studies. Most existing practical studies also focus more on the western industrialized states (Europe/United Kingdom/United States) (Ebaid, 2009). However, it is also important to take a look at newly industrialized economies in Asia, as their productivity gains have made them more likely to leverage in recent years.

Unfortunately, there are not many studies about the capital structure and firm performance in Japan. Japan is no longer identified as an upcoming market, but in fact as a fully developed one. Furthermore, according to International Monetary Fund (2020), Japan is the third largest economy of the world, measured by the nominal Gross domestic product. However, over the last years, level of public debt has substantially raised, resulting in Japan becoming one of the highest developed countries of any developed nation (over 200% of Japan’s GDP) (Sanati, 2016).

On the other hand, high level of public debt does not necessarily mean that companies also have a large leverage part. Daisuke (2015) mentioned how Japan’s credit market is considered a bank-based financial system. It is, therefore, easier for companies to get bank loans in Japan than in other developed countries. This is why in this dissertation aims to fill the research gap by analysing the impact of capital structure on firm performance based on the N225 from 2014 to 2019. Accordingly, 225 public companies in Japan from various industries are included, making it one of the most important stock indices in the world (Chen, 2020).

3.2 Research Objectives

Literature review discusses different capital structure theories and their particular influence on firm performance. There are currently not many studies conducted on the effect leverage has on firm performance in Japan. In this dissertation, effort will be taken to identify the two research questions on the N225 in detail. First, a positive or negative effect of the relationship between the capital structure and firm performance is discussed. Second, the study evaluates whether there is an effect of STD and LTD in different industries.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Research Objectives

The regression results could be expected to show a positive, negative or no correlation between capital structure and firm performance. If a positive correlation is determined, companies could enhance their firm performance with STD/LTD. In another case, negative correlation implies that STD/LTD reduces firm performance. Unlike positive and negative correlation, no correlation/relationship would mean that short-/long term leverage has no impact on company performance.

3.3 Research Questions

The following hypotheses have been established:

- Which impact has the short-/long term and total debt had on the firm performance of the Nikkei 225 index during the period 2014-2019?
- What effect did the short-/long-term debt have on firm performance in different sectors?

4. Research Methodology

The first section research philosophy focuses on epistemology and ontology as ways of research and conducting knowledge. Second part of this chapter includes information about collecting secondary data necessary for running regressions and provides information about the criteria of sample selection. Afterwards, every regression model is presented and required variables from the regression models are explained comprehensively. Furthermore, practical implementation is outlined in Excel sheet.

4.1 Research Philosophy

Main goal of research objectives and research questions is to identify the impact of capital structure on firm performance. Many theories of literature review can be proved by empirical studies. Therefore, a quantitative study, based on numerical data, seems to be more appropriate than a qualitative study. According to Saunders et al. (2016), it could be useful for quantitative strategy to apply an explanatory study, which analyses the relationship between variables and evaluates it in a statistical test. Additionally, the explanatory research design gives a new insight into different ideas.

Research philosophy includes ontology and epistemology paradigms which take into account the way of doing research and conducting knowledge (Van Inwagen, 2014; Gerson, 2009). Ontology includes two approaches - objectivism (dependent relationship between social reality/phenomena/social actors) and constructivism (social actors are decisive for social reality & phenomena) (Brymann & Bell, 2015). This dissertation’s focus will be on objectivism, because variables capital structure and firm performance are not influenced by social actors.

On the other hand, the epistemology theory is explained by four different stances: positivism, realism, interpretivism and subjectivism (Brymann & Bell, 2015). Here, the positivism approach will be considered. This study’s concept takes into account the existing theories and hypothesis test based on the empirical results of N225 in Japan from 2014 to 2019. Additionally, it uses secondary numerical data and is not, as already mentioned in the ontology point of view, influenced by social actors.

4.2 Data Collection

In the first stage of data collection, it is crucial to determine dependent and independent variables before running regression models and receiving empirical results. The dependent variable in the regression is based on corporate performance, while independent variable is determined by debt ratio measurements and control variables. All regression models are calculated with each of the dependent variables in order to establish whether independent and control variables enhance the same result by different corporate performance ratios.

Measurement of the financial performance is divided into accounting (ROA/ROE) and market-based (Tobin’s Q) ratios. For measuring capital structure, debt ratios such as Long- and Short-term ratio (STR/LTR), Total Debt ratio (TDR) as well as Debt-to-Capital ratio (TDTC) are considered. Control variables (Size/Growth/Tangibility) of a company also influence capital structure and will be taken into account for data collection and analysis.

Items of ratios and control variables are taken from the balance sheet and income statement of N225 companies (Cited: 01.04.2019). The observed time period is from 2014 to 2019 and data has been collected annually at the reporting date. This time period seems to be free from financial crises and represents a good sample of the latest and relevant situation in Japan (Syed et al., 2009). For this, the University of Greenwich provides its students a financial analysis platform called Eikon, which includes information about the market data, fundamental data as well as analytics and firm reports. It is considered essential for a research study, based on secondary data to ensure that data source is valid and reliable. Eikon is used by many professionals and is considered to be a high quality source (Refinitiv, 2020).

There are currently 225 firms in the N225 index from 11 different industries. One of the research questions evaluates whether STD/LTD is sensitive to firm performance in a certain industry sector. However, sectors Financials and Technology will not be taken into account in this paper. The Financial sector addresses mostly banks, which are not comparable with their leverage proportion while Technology sector includes companies that are inherently higher in leverage (Coleman & Robb, 2012). Furthermore, companies added to or removed from the observed time period (2014-2019) will also not be considered. Some companies with incomplete financial statements are also not included, for the obvious reason. In total, there are 165 companies in the initial sample. Table 1 presents nine industries and the respective number of companies of each sector.

Table 1: Number of Companies Categorized by Industry Sector

Abbildung in dieser Leseprobe nicht enthalten

It would only seem appropriate to use statistical methods in Excel for relevant data, however, correlation and regression analysis will be used to explain, identify and quantify the relationship between firm performance measurements, capital structure ratios and control variables. Regression coefficient b shows the contribution of each independent variable to prediction and indicates a degree of influence. Higher value of b, therefore, shows that the independent variable has more influence, while the regression coefficient (positive or negative) shows the type of relationship and direction of the variables (Anderson et al., 2017). For some ratio calculations, Excel is an ideal tool, especially for presenting descriptive statistics. Statistic calculations help summarise data (Mean/Median/Min- & Maximum/Range/Standard deviation, Skewness/Kurtosis), or illustrate, for example, the influence level of leverage and corporate performance.

4.3 Data Analysis: Regression Models and Practical Implementation

In the first stage, required balance sheet and income statement positions of the regressions models were downloaded from Eikon. Table 2 shows all ratios and variables with associated formulas.

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Details

Title
Capital Structure and Firm Performance. Evidence from Japan Nikkei 225
College
University of Greenwich
Grade
1,3
Author
Year
2020
Pages
59
Catalog Number
V1031166
ISBN (eBook)
9783346462404
ISBN (Book)
9783346462411
Language
English
Tags
capital, structure, firm, performance, evidence, japan, nikkei 225
Quote paper
Tobias Burkhart (Author), 2020, Capital Structure and Firm Performance. Evidence from Japan Nikkei 225, Munich, GRIN Verlag, https://www.grin.com/document/1031166

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