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Purpose This paper explores the connection between capital structure and financial performance within European listed firms. The primary objective is to demonstrate an inverse U-shaped relationship between these two variables and pinpoint an optimal debt-equity mix.Design/methodology/approach In this study, we adopt a dynamic modeling approach to investigate the relationship between a firm’s capital structure and financial performance. Drawing on well-established theories and prior empirical studies, our model examines 3,121 dividend-paying firms from 41 European countries over 14 years, from 2008 to 2021. To enhance the reliability of our findings, we employ two distinct estimation techniques: the fixed effect model (FE) and the system generalized method of moments (System-GMM).Findings This study reveals an inverse U-shaped relationship between the firm’s financial performance, measured by the return on equity (ROE) and its capital structure (total liability to total assets ratio). Furthermore, an optimal capital structure of about 29% is determined for all firms in the sample, and about 21%, 28% and 41% industry-specific capital structure for manufacturing, real estate and wholesale trade, respectively.Originality/value This paper contributes to existing knowledge by empirically determining an optimal capital structure for listed firms across various industries in Europe, which very few studies have attempted to do in the past. An optimal capital structure is an invaluable benchmark for managers and other stakeholders, informing their decision-making.

One of the key decisions faced by financial managers in relation to company operations is funding decisions. The funding decision is seen from the capital structure, good capital structure is the optimal capital structure. The optimal capital structure is a condition in which a firm can use a combination of debt and equity ideally and balancing the value of the firm and the cost of its capital structure. The cost of capital arose is a direct consequence of the decision taken when the manager uses the debt in which there will be the capital cost of interest expense required by creditor. However, if the manager decides to use internal funds, an opportunity cost of funds will be incurred. This research that was used is quantitative data with financial data from the site Indonesian Stock Exchange. The companies that was used is Non-Bank Financial Institutions which published financial statements of the period 2014 – 2016. This research aims to know the effect of profitability and asset structure to capital structure on Non-Bank Financial Institutions Listed on Indonesian Stock Exchange. Analysis method that was used in this thesis is panel data regression with statistical software Views 7 Version. The sample was 30 companies by purpose sampling technique. The independent variables that used are profitability and asset structure, and the variable dependent is capital structure. The results show that profitability partially has insignificant negative effect on capital structure with value of -0.469. Asset structure partially has insignificant positive effect on capital structure with value of 0.945. Profitability and asset structure during 2014 – 2016 simultaneously has significant effect on capital structure on Non-Bank Financial Institutions with value of 0.018. The companies are expected to pay attention to profitability, as it increases profitability equally by increasing internal funding. The used of long term debt align with their firm size because debt will also have its effect to all operational aspect so that asset structure will become optimal.

Examination of optimal capital structure in financial markets with imperfections suggests that when deviations from optimal capital structure occur, adjustment costs may prevent firms from moving towards target capital structure. However, previous studies on the capital structure of non-financial firms in Nigeria did not consider these imperfections and adjustment costs. It is against this background that this study investigates the dynamic adjustment to target capital structure by non-financial firms listed on the Nigerian Stock Exchange. By utilizing a framework that provides for the determination of adjustment costs, the results reveal the existence of dynamic adjustment to optimal capital structure suggesting attempts made by the sampled firms to maximize shareholders wealth. A comparison of the adjustment costs with those of firms in more developed economies shows that Nigerian firms have higher costs of adjustment indicating that the level of development of the market is important in lowering transaction costs. In addition, tangibility of assets, non-debt tax shield, growth opportunity, firm size, profitability and inflation significantly influence Nigerian firms’ optimal capital structure.

Capital structure decision is one of the most important decisions in the field of financial management which involves assessment about the choice of combination of different sources of funds. These sources of funds include short term debt, long term debt, preferred stock and common stock or equity stock financing and the decision about the perfect mixture of these sources is a difficult task for the financial manager in every business firm. The perfect or ideal mixture is that where the risk and costs are minimum at the same time profits and shareholders’ wealth are maximum. Capital structure decision is a continuous process and becomes optimal when it maximizes the market value of the firm involved. Therefore, the continuous process of capital structure decisions involves an attempt to strike a balance between risks and returns in firm’s operation. Managing of optimal capital structure is of paramount importance as it would affect the profitability and ultimately the value of the firm. However, what constitutes an optimal capital structure is still a unsolved question. Despite the fact that there are many theories which tried to explain the optimal capital structure, researchers in finance have never yet find a model to determine the optimal capital structure

The intent of this study is to investigate that factors identified in developed countries which are attributed as imperative ones to attain optimal capital structure, provide compelling justifications for capital structure decisions in insurance companies of Pakistan. Empirical exploration of factors, that drives optimal capital structure apply on panel data of 31 insurance firms from 2004 to 2009. Two econometric panel data techniques, fixed effects and random effects are pertained. Hausman’s specification test is performed in order to test appropriate model for the study. The outcomes of study advocate that, profitability, age and earnings volatility have inverse relation with leverage and are significant. Liquidity also has inverse relationship with debt ratio but it is not significant. Alternatively, size and growth opportunities have direct relationship with leverage but only size is significant. These outcomes are in line with theoretical theories such as pecking order theory and trade off theory. This research has provided an initial foundation to ascertain the factors influencing decisions of capital structure of Pakistan’s insurance sector and it can be a preliminary base for more methodical investigation. Moreover, this can also be helpful for the managers in making decisions about optimal capital structure. This study, to the author’s knowledge, is conducted first time in Pakistan for investigating the capital structure theories and their implications on insurance companies of Pakistan with the most recent panel data available. Furthermore, this study validates that some features have an effect on capital structure of Pakistani insurance companies as acknowledged in developed countries. Key words: Capital structure, insurance association, insurance companies, Pakistan.

Past literature attempts to resolve the issue of the motivation behind managers' choice of a given capital structure. Despite several decades of intensive research, there is still no consensus about which theory dominates capital structure decisions. The present study empirically investigates the relative importance of two prominent theories of capital structure- the trade-off and the pecking order theories by exploring the conditions under which each theory can explain the financing choices of firms. These conditions are defined along two dimensions: (i) a firm's degree of information asymmetry, and (ii) its observed leverage relative to target leverage. The results show that, in the short-run, pecking order theory has more explanatory power in explaining the financing choices of firms. The target leverage theory assumes limited importance: Over-leveraged firms, when faced with low adverse information, are more inclined to adapt to the trade-off policies. In the presence of high information asymmetry, however, firms appear to be more concerned about adverse selection costs and make financing decisions that are more consistent with the pecking order theory. An analysis of the market reaction to seasoned equity issuances during announcement periods reveals that firms with high information asymmetry are penalized more than firms with low information asymmetry. This may explain the contradiction when over-leveraged firms continue to issue debt. However, the situation is reversed in the long run. Firms' long term financing goals appear to follow the leverage re-balancing theory. An analysis of financial activities over a five-year period, subsequent to security issuance decisions when they appear to be inconsistent with trade-off theory, reveals that firms follow an active policy of moving closer to the target leverage. In sum, the notion of target capital structure appears to exist. In the short-term, the management's financing decisions are consistent with the modified version of the pecking order theory, leading to tactical deviations from the optimal capital structure. However, long-term analysis indicates that the pecking order effect is largely transitory in nature and firms actively pursue strategic reversals towards an optimal capital structure.

This study investigated the nonlinear relationship between the firm's market value and capital structure of 37 non-financial companies in the top 50 corporations in Taiwan as denominated by Taiwan 50. Using panel smooth transition regression (PSTR), we conducted empirical analysis on quarterly data from the selected 37 corporations which are considered most information symmetric from 2003 Q1 to 2010 Q4.Our results revealed an optimal capital structure, and thus the threshold value of transition variable capital structure pertaining to the maximum firm's market value of the sample companies, whose capital structures conform to predictions based on the capital structure theories of the trade-off theory and the signal factor hypothesis (Chou, Yang, & Lee, 2011). In addition, firm's market value and capital structure presented a nonlinear relationship in the form of an inverted U. At 29.87 %, the optimal capital structure maximized firm's market value.

structure theory is one of the most important areas of finance and forms the basis for modern thinking on the capital structure of firms. Much controversy has resulted from comparisons of the theory of capital structure originally developed by Franco Modigliani and Merton Miller to real-world situations. Two competing theories have emerged over the years, the optimal capital structure theory and the pecking order theory. While hundreds of scholarly articles have been written on the subject of capital structure, this is the first book to test competing theories against measurements of firms' performance and their underlying capital structure. Ghosh begins with an overview of the controversies regarding capital structure theories, then statistically tests both the optimal capital structure and pecking order theories. Using the binomial approach to test the theories, he analyzes the determinants of capital structure, while discussing the role of market power in determining capital structure decisions. Ghosh probes the questions of new stock offerings and stockholders' returns, and analyzes capital structure and executive compensation. He then looks into debt financing and ownership structure, and the relationship between capital structure and firm profitability - a hotbed of controversy in the capital structure realm. Finally, he discusses the latest developments in the field of capital structure. Capital Structure and Firm Performance is a concise overview of a major issue in business economics and finance, provides a fuller understanding of its influence on the financial performance of firms, and will certainly stimulate further debate on this important topic.

Capital structure policy is used to help companies determine the optimal composition of capital between debt and equity. This study aims to determine the optimal capital structure of companies in the pharmaceutical industry listed on the Indonesia Stock Exchange for the 2015-2019 period. The data used is secondary data obtained from the financial statements of PT Indofarma Tbk, PT Herbal and Pharmaceutical Industries sido Appear Tbk, PT Kimia Farma Tbk, and PT Merk Tbk which are processed using the method of calculating the cost of capital and comparing returns. On Equity (ROE) with a weighted average cost of capital (Average Weight Cost of Capital). The results showed that PT Indofarmas Tbk had an optimal structure in 2015 and 2019. PT Industri Jamu and Pharmacy Sido Appear Tbk had an optimal capital structure from 2015 to 2017, and PT Kimia Farma Tbk and PT Merk Tbk had an optimal capital structure from 2015. 2015 to 2019. These results can be seen from the ROE generated by the company, which is greater than the WACC in each period.

The purpose of the article is to substantiate the theoretical and applied aspect of ensuring the effectiveness for the strategy of financing the working capital at the enterprise. Methodology of research. The achievement of the purpose set in the article is carried out with the help of the following research methods: logical generalization and scientific abstraction, structural analysis, analytical method. Findings. The optimization of the capital structure at the enterprise on the basis of identification of the need for incoming and outgoing cash flows is offered; compliance with the rules of working capital formation at the enterprise (golden rule of financing, golden rule of balance); the choice of sources of financing the assets at the enterprise and taking into account the criteria of minimizing the level of financial risk and the timing of raising capital. The need for replenishment of working capital is determined and the conditions of observance of the optimal structure of working capital are offered. It is proved that the result of the proposed approaches is increased forecast values of financial ratios, which are aimed at improving the level of financial stability, liquidity and solvency of the enterprise. Optimization of the capital structure is the basis for ensuring the effectiveness of the working capital financing strategy. Practical value. The basis for ensuring the effectiveness of the working capital for financing strategy of PRJSC "KREMENCHUG DAIRY PLANT" (PRJSC "DANONE KREMEZ") is proposed to adhere to a conservative approach to financing. This involves the use of equity and longterm liabilities to form non-current assets and half of the variable part of current assets, including cash, other current assets and deferred expenses. The need to attract additional working capital is proved and the optimal capital structure is proposed: financing of 80 % of equity by 20 % of debt. This approach helps to ensure financial independence from external sources of financing, hedge financial risks and preserve the financial stability of the company. The use in practice of the proposed theoretical and applied approaches will increase the effectiveness of the strategy of working capital financing in the enterprise. Keywords: formation rules, choice of funding sources, risk minimization, effectiveness, strategy, working capital, structure, optimization. REFERENCES 1. Deineka, O.V. & Yurchenko, K. M. (2012). Optymizatsiia struktury dzherel formuvannia oborotnoho kapitalu pidpryiemstva [Optimization of the structure of sources of working capital of the enterprise]. Innovatsiina ekonomika - Innovative economy, 3, 257–260 [in Ukrainian]. 2. Koshelok, H. V., Koval, V. V. & Belik, D. O. (2015). Teoretychni osnovy optymizatsii struktury oborotnykh koshtiv pidpryiemstva [Theoretical bases of optimization of structure of working capital of the enterprise]. Zovnishnia torhivlia: ekonomika, finansy, pravo – Foreign trade: economics, finance, law, 1, 50–57 [in Ukrainian]. 3. Maiboroda, O. V. & Khlopkova, S. Yu. (2018). Optymizatsiia struktury kapitalu ta yoho vplyv na finansovyi potentsial pidpryiemstva. [Optimization of capital structure and its impact on the financial potential of the enterprise]. Efektyvna ekonomika – Efficient economy, 12. Retrieved from http://www.economy.nayka.com.ua/?op=1&z=6763 (accessed 29 July 2020) [in Ukrainian]. 4. Parkhomenko, O. P. (2012). Oborotnyi kapital v umovakh hlobalnykh vyklykiv: formuvannia ta vykorystannia [Working capital in the context of global challenges: formation and use]. Luhansk: Vyd-vo "Noulidzh" [in Ukrainian]. 5. Khromushyna, L. A. Finansova rivnovaha pidpryiemstva: metodolohichnyi ta praktychnyi aspekt otsinky [Financial balance of the enterprise: methodological and practical aspect of evaluation]. Retrieved from http://www.confcontact.com/2017pecproekt/%D0%95%D0%9A8_Hromushina.htm (accessed 19 July 2020) [in Ukrainian]. Published: 2021-05-27

In order to investigate the impact of South Africa’s unique historical secondary tax on companies (STC) on optimal capital structure, we adapt the US methodology developed by Lewellen and Lewellen (2006) to cater for STC. Using our derived STC-models, we examine the combined effect of South Africa’s capital gains tax and, respectively, its historical and current dividend tax regimes, on the relative costs of internal and external equity, and thus the theoretical optimal South African capital structure both historically and currently. We examine the expected position of each of these areas in light of South Africa’s transition from STC to the new shareholder dividend tax (SDT) regime that replaced it on 1 April 2012. We conclude that there is a net tax benefit to utilising internal equity under certain conditions and that firm financing and payout decisions that ignore this benefit are fundamentally incomplete.

The determinants of the firm’s optimal capital structure have been a contentious issue in the theory of finance for three decades now and the debate, that was started by the publication of Modigliani and Miller’s (1958, 1963) seminal papers, is still far from being concluded. As Modigliani and Miller’s initial conclusions of capital structure irrelevance and, subsequently, of optimal capital structure at a 100% debt financing are clearly incompatible with observed capital structures, their findings initiated a considerable research effort to identify costs of debt financing that would offset its corporate tax advantage. Robichek and Myers (1965) and Baxter (1967) were among the first to suggest that the dead-weight losses associated with bankruptcy and reorganization might represent the major missing element. Since then, Kraus and Litzenberger (1973), Scott (1976), Kim (1978) and other authors, using a variety of approaches, have shown that the combination of leverage related costs and a corporate tax advantage of debt produces an optimal capital structure at less than a 100% debt financing, as the tax advantage is traded off against the likelihood of incurring the costs. However, both major elements in this “tax savings-bankruptcy costs” model became subject to criticism. This criticism is mainly of empirical nature and directed to the quantitative result of the model (i. e. the locus of optimal capital structure). Authors like Haugen and Senbet (1978) have argued that bankruptcy costs may be too small to have substantial influence on optimal leverage. Miller (1977) questioned the tax savings side of models of optimal capital structure, arguing that, under certain conditions, the corporate tax advantage of debt may be offset by tax disadvantages at the personal level, making leverage again irrelevant.KeywordsCapital StructureOwnership StructureAgency CostFinancial DistressDebt FinancingThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

A corporate financial officer who has conscientiously deciphered the academic literature to determine what decisions should be made relative to capital structure (the mixture of debt and equity financing) would have had an interesting time over the past 50 years. Prior to 1958, a CFO would have begun by concluding that there was an optimum capital structure (the so-called classical position). In 1958 they would have been shocked by the Miller-Modigliani 1958 article, which informed the finance community that the value of a firm was invariant to capital structure decisions. Later modifications of the M-M position indicated that in the presence of corporate income taxes a firm should have as close to 100% debt as it can achieve. Eventually, just as the assumption behind these recommendations were being understood, the theoretical finance literature suggested that perhaps the optimum capital structure is somewhere between 0 and 100% debt. The classical position was reasonable.

In this paper a structural model of corporate debt is analyzed following an approach of optimal stopping problem. We extend Leland model introducing a dividend δ paid to equity holders and studying its effect on corporate debt and optimal capital structure. Varying the parameter δ affects not only the level of endogenous bankruptcy, which is decreased, but modifies the magnitude of a change on the endogenous failure level as a consequence of an increase in risk free rate, corporate tax rate, riskiness of the firm and coupon payments. Concerning the optimal capital structure, the introduction of dividends allows to obtain results more in line with historical norms: lower optimal leverage ratios and higher yield spreads, compared to Leland’s results.

Numerous empirical studies in the finance field have tested many theories for firms’ capital structure. The pecking order theory and the trade-off theory of capital structure is among the most influential theories of firms’ capital structure. The trade-off theory predicts optimal capital structure, while the pecking order theory does not predict an optimal capital structure. According to pecking order theory, the order of financial sources used is the source of internal funds from profits, short-term securities, debt, preferred stock and common stock last. The main objective of this study is to econometrically test whether the listed companies in Indonesian Stock Exchange follow the pecking order theory or the trade-off theory. Samples in this study are public companies listed during 2009-2010. The research questions are tested by running regression models. The empirical result of this study shows that the pecking order theory is not supported, while the trade-off theory is supported. This suggests that the capital structure of listed companies in Indonesian Stock Exchange is financed based on optimal capital structure, not by the order financial resources.