Capital structure and firm performance in the developed financial market

Abstract

The paper examines the role of debt in affecting the performance/value of a firm (DVF relationship) in the developed financial market. There is no consensus on the DVF relationship in this market. In addition, literature about the DVF relationship in the developed market lacks the interpretation of results by taking into account different business, management and financial theories. The study addresses the gap in the literature by utilizing the panel data of 60 companies for the year 2000 to 2003 from the developed (Australian) financial market. The result of the study suggests that higher debt has a negative relationship with the value of a firm supporting agency theory in this market. The result also supports the second trade off theory and the foundation of developed market as debt in the presence of the dispersed shareholding deteriorates the value of a shareholder. The results relevant to the role of control variables in affecting the value of a firm show that smaller board, liquid market and information efficiency improve the firm's performance in the developed financial market. The results of the study are of value to both academics and policy makers.