Optimum Capital Structure

An Empirical Evidence From Emerging Economics

Thesis (M.A.) , 2009 , 53 Pages , Grade: M.B.A

Business economics - Economic Policy

Capital structure is one of the most converse and vital issues both in finance literature and practical research. This research deals with the theoretical and empirical aspects of capital structure decision. It is observed that the determination of debt ratio is subtle and sophisticated to determine, and its estimation is still a matter of debate, and yet there is no entirely satisfactory theoretical model for forecasting the optimal debt ratio in the firm's capital structure. There is little consensus on how firms choose their capital structure and how the firm-specific factors influence the shape of the capital structure. This research develops a link between theory and practice of capital structure.

This study has supported a set of sample firms to show the impact of six factors determinants on the financial leverage and how they comply with the findings derived by different previous theories regarding these factors. Least Square method has been used to assess the influence of defined explanatory variables on the capital structure by using the dataset of Bangladeshi manufacturing firms for the period 2000 to 2004. Out of Six examined explanatory variables-agency-equity, agency debt, Bankruptcy, profitability are statistically significant determinants of financial leverage. Otherwise, growth rate and operating leverage are found to be insignificant. Agency-equity, agency debt, bankruptcy operating leverage, profitability, growth rate, all these are showing a negative relation with the dependent variable.

Also, this paper suggests that the institutional context and macroeconomic events play an essential role in the capital structure decisions of Bangladeshi companies. It would seem appropriate that further research should focus on the role played by the institutional framework, such as the impact of taxation, the practice of good corporate governance, legal and regulatory structure.

Table of Contents

• Executive Summary
• CHAPTER 1: INTRODUCTION
• 1.1 Scope and Objective of the Study
• 1.2 Categorization of the Report
• 1.3 Methodology
• 1.4 Limitation of the Study
• CHAPTER 2: FINANCIAL ENVIRONMENT OF BANGLADESHI FIRMS
• 2.1 Financial market
• 2.2 Institutional framework and environment of Bangladeshi firms
• 2. 3. Corporate Governance Practice in Banks and Financial Institutions
• 2.4 Problem, Prospects and Challenges of Bangladesh Capital Market
• CHAPTER 3: RESEARCH DESIGN
• 3.1 Defining variables explaining firm 's capital structure
• 3.1.a. Dependent Variable
• 3.1.b. Agency Variables
• 3.2 Methodology
• 3.2.1 Source of Information
• 3.2.2 Sampling and Population
• 3.2.3 Statement of Hypotheses
• 3.2.4 Pattern of the Model
• 3.2.5 Significant Proxy Variable
• CHAPTER 4: EMPIRICAL ANALYSIS
• CHAPTER 5: SUMMARY AND CONCLUSION
• References
• Data Appendices

Objectives and Key Themes

This research explores the theoretical and empirical aspects of capital structure decisions in emerging economies, specifically focusing on Bangladesh. The study aims to identify the key determinants of financial leverage in Bangladeshi manufacturing companies and assess their impact on the firm's capital structure. It also seeks to bridge the gap between existing capital structure theories and the practical implications of these theories within the context of Bangladesh.

• Capital structure decisions in emerging economies
• Determinants of financial leverage in Bangladeshi manufacturing companies
• Impact of agency costs on capital structure
• Role of institutional context and macroeconomic events in capital structure decisions
• Empirical validation of capital structure theories

Chapter Summaries

• CHAPTER 1: INTRODUCTION: This chapter introduces the topic of capital structure and its importance in determining firm value. It discusses the gap in existing research regarding capital structure in the context of Bangladesh and highlights the objectives of the study. The limitations of the study are also outlined.
• CHAPTER 2: FINANCIAL ENVIRONMENT OF BANGLADESHI FIRMS: This chapter delves into the financial landscape of Bangladeshi firms, focusing on the financial market, institutional framework, corporate governance practices in banks and financial institutions, and the challenges faced by the Bangladesh capital market.
• CHAPTER 3: RESEARCH DESIGN: This chapter outlines the research methodology, including the definition of variables, data collection methods, sampling procedures, and hypothesis testing. The chapter also presents a model for analyzing the relationship between key variables and financial leverage.

Keywords

The study revolves around core concepts such as capital structure, financial leverage, agency costs, firm value, emerging economies, Bangladeshi manufacturing firms, and institutional context. It uses empirical analysis to investigate the impact of various factors on capital structure decisions and evaluates the applicability of existing capital structure theories in the Bangladeshi context.

• College: University of Dhaka
• Course: Master of Finance
• Grade: M.B.A
• Author: Lutfa Ferdous (Author)
• Publication Year: 2009
• Pages: 53
• Catalog Number: V464938
• ISBN (eBook): 9783668945708
• ISBN (Book): 9783668945715
• Language: English
• Tags: optimum, capital, structure, empirical, evidence, from, emerging, economics