Capital Structure, Profitability and Market Structure: Evidence from Textile Industries in Bangladesh.
Topics: Debt, Economics, Balance sheet, Asset, Corporate finance, Finance / Pages: 24 (5784 words) / Published: Jul 5th, 2012

Capital Structure, Profitability and Market Structure: Evidence from Textile Industries in Bangladesh.

Introduction

In corporate finance, the academic contribution of Modigliani and Miller (1958, 1963) about capital structure irrelevance and the tax shield advantage paved the way for the development of alternative theories and a series of empirical research initiatives on capital structure. The alternative theories include the trade-off theory, the pecking order/asymmetric information theory and the agency theory. All these theories have been subjected to extensive empirical testing in the context of developed countries. A few studies report on international comparisons of capital structure determinants and there are some studies that provide evidence on the capital structure determinants from the emerging markets of South-East Asia. The recent focus of corporate finance empirical literature has been to identify some 'stylized ' factors that determine capital structure.

With relatively little evidence available on the interaction between capital structure and product market structure, some researchers have recently started investigating this relationship. Brander and Lewis (1986), Maksimovic (1988), Ravid (1988) and Bolton variously offer a theoretical framework for the linkage between capital structure and market structure.

On a broader front, Harris and Raviv (1991) and Phillips (1995) provide surveys of both the theoretical and empirical research on the relationship between capital structure and market structure. In a recent study, Rathinasamy, Krishnaswamy and Mantripragada (2000) Rathinasamy, Krishnaswamy and Mantripragada (2000) from forty-seven countries. All these studies establish a linear relationship, either positive or negative, between capital structure and market structure. Differing from the linear theory, this paper argues that the relationship between capital structure and market structure is cubic. It also shows that the relation



References:  Annuar, M.N. & Shamsher, M. 1993, 'Capital structure ', Capital Market Review, 1(2): 171-77.  Ariff, M. 1998, Stock Pricing in Malaysia Corporate Financial and Investment Management UPM Press, Selangor, Malaysia.  Barclay, M.J. & Smith, C.W. 1996, 'On financial architecture: leverage, maturity and priority ' Journal of Applied Corporate Finance, 8(4): 4-17  Barclay, M.J  Berger, P.G., Ofek, E. 8c Yermack, D.L. 1997, 'Managerial entrenchment and capital structure decisions ', Journal of Finance, 52(4): 1411-38.  Bolton, P. & Scharfstein, D. 1990, 'A theory of production based agency problems in financial contracting ', American Economic Review, 80(1): 59-581.  Brander, J.A. & Lewis, T.R. 1986, 'Oligopoly and financial structure: the limited liability effect ', American Economic Review, 76(5): 956-70.  Modigliani, F. & Miller, M.H. 1963, 'Corporate income taxes and the cost of capital: a correction ', American Economic Review, 53(3): 433-43.  Pandey, I.M., Chotigeat, T. & Ranjit, M.K. 2000, 'Capital structure choices in an emerging capital market: case of Thailand ', Management and Change, 4(1): 1-14.  Modigliani, F. & Miller, M.H. 1958, 'The cost of capital, corporation finance and the theory of investment ', American Economic Review, 48(3): 261-97.

You May Also Find These Documents Helpful