Determinants of Return on Assets in Romania: A Principal Component Analysis

Abstract

This paper examines the impact of capital structure, as well as its determinants on the financial performance of Romanian companies listed on the Bucharest Stock Exchange. The analysis is based on cross sectional regressions and factor analysis, and it refers to a ten-year period (2003-2012). Return on assets (ROA) is the performance proxy, while the capital structure indicator is debt ratio. Regression results indicate that Romanian companies register higher returns when they operate with limited borrowings. Among the capital structure determinants, tangibility and business risk have a negative impact on ROA, but the level of taxation has a positive effect, showing that companies manage their assets more efficiently during times of higher fiscal pressure. Performance is sustained by sales turnover, but not significantly influenced by high levels of liquidity. Periods of unstable economic conditions, reflected by high inflation rates and the current financial crisis, have a strong negative impact on corporate performance. Based on regression results, three factors were considered through the method of iterated principal component factors: the first one incorporates debt and size, as an indicator of consumption, the second one integrates the influence of tangibility and liquidity, marking the investment potential, and the third one is an indicator of assessed risk, integrating the volatility of earnings with the level of taxation. ROA is significantly influenced by these three factors, regardless the regression method used. The consumption factor has a negative impact on performance, while the investment and risk variables positively influence ROA.