The Impact of Capital Structure on Firm Performance-Evidence from Large Companies in Hong Kong Stock Exchange

Abstract

The purpose of this study is to examine the impact of capital structure on a firm’s performance in Hong Kong, which has been an unsolved problem in the field of financial management. Eventually, for both capital structure and performance, a panel data model has been adopted and the empirical model used Return on Assets (ROA) as a proxy for performance, while total debt (TDR) was proxied for capital structure. The research included 202 cross-sections and 1010 observations for the period of 2014 to 2018. However, we have offered a systematic discussion on how different aspects and types of capital structure impacts performance. Also, a case study had been done on Capital Structure and Performance of Hong Kong Firms gave the close linkage between the performance of the firms and the stability of the financial structure, and it is important to understand the vulnerability of the companies. Specifically, these would enable managers to identify determinants and importance of optimal capital structure Nevertheless, further research was carried out by substituting (LTDR) for (TDR). The result showed a small effect in the negative direction. Therefore, the results of the impact of Capital structure on performance proved to be inconclusive. However, taking into consideration that Hong Kong has a different economic system, and the economy has many characteristics that vary from other countries in aspects such as, consumer consumption, spending behavior, and saving habits which serve as influence to firms and individuals. On this basis, concepts such as cultural, political, and institutional differences should be taken into consideration when assessing the impact of capital structure on firm’s performance.