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A Comparison of Capital Structures Among MNCs and Local Companies in Bangladesh Javed Siddiqui* M. Zillur Rahman** Abstract: Prior studies in capital structure have attempted at establishing relationships between profitability and level of gearing. This study attempts at presenting a comparison of capital structures between MNCs and local blue chip companies enlisted with the DSE. The study concludes that the level of gearing used in MNCs are significantly lower than the level of debt used by their sectoral local counterpart companies, although the MNCs have a higher tangibility ratio. The study also finds that the debt-equity ratio of local companies and MNCs are almost similarly negatively correlated with profitability.
1. Introduction Determination of the optimum capital structure of a firm is always a formidable task. The extent of use of debt in the capital structure is determined by a trade-off between benefits and costs. While the principal attraction of debt is tax benefit, its cost is financial distress and reduced profitability. (Solomon & Pringle, 1977). The study aims at presenting a comparison between the capital structures of listed multinational companies (hereafter, MNCs) and local blue chip companies operating within Bangladesh. It also attempts to determine whether level of gearing varies among industries. The purpose of this paper also includes establishing a correlation between profitability and the level of gearing and comparing such relationship between local firms and MNCs. The creditworthiness of the firms, indicated by the tangibility ratios are also taken into consideration. Information for the study has been collected from annual reports of the sample companies, reports of the Securities and Exchange Commission (SEC) and Dhaka Stock Exchange (DSE). Besides, the web sites of DSE and the sample companies have been visited. The study may have been impaired to some extent by the lack of availability of information regarding capital structures, market prices of shares and book value of the shares. _________________________ * Lecturer, Department of Accounting, Faculty of Business Studies, University of Dhaka. ** Lecturer, Institute of Business Studies, Darul Ihsan University.
A Comparison of Capital Structures Among MNCs and Local Companies in Bangladesh
2. Research methods The empirical work in this study is based on the annual reports of 17 listed companies of the Dhaka Stock Exchange including 6 MNCs. Financial companies (e.g. banks and other financial institutions and insurance companies) are excluded from the sample because of the major difference between such companies' capital structures and those of other companies. In the sector-wise analysis of capital structures, the sectors in which no MNCs are listed have not been included in the study due to the absence of any scope for comparison of MNCs and local companies within the same sector. Among the local companies, only those companies that have been performing on a consistent basis have been selected as a sample to enable comparison with the MNCs. The debt, equity, paid up capital, net profit before tax, net profit after tax, annual turnover, fixed assets and total assets figures used in the study are 4-year averages of the respective elements. In most cases, the market price of the shares was unavailable. 3. Literature survey There are many methods for the firm to raise its required finds. But the most basic and important instruments are stocks or bonds. The firm's mix of different securities is known as its capital structure. The determination of the optimal debt-equity ratio is a major decision for any firm. Modigliani & Miller (1958) illustrated that the financing decision doesn't matter in perfect capital markets. Their famous Proposition I states that the total value of a firm is the same with whatever debt-equity ratio (assuming...