Heriot-Watt University: Capital Structure & Firm Performance Analysis

This project presents an analysis of the determinants of capital structure and its impact on firm performance. The study uses panel data from a sample of firms, employing regression analysis to examine the relationships between various financial variables. The analysis explores the influence of factors such as debt-to-equity ratio, tangibility, profitability, liquidity, and firm size on firm performance, measured by metrics such as Return on Assets (ROA) and Tobin's Q. The project includes econometric models using panel least squares, fixed effects, and random effects, along with relevant statistical tests. The results provide insights into the significant determinants of capital structure and their effects on firm valuation and profitability, offering valuable information for financial decision-making. The study synthesizes the broad literature on capital structure theories, including the Modigliani and Miller model, trade-off theory, and pecking order theory, to provide a comprehensive understanding of the topic.

Dependent Variable: ROA
Method: Panel Least Squares
Date: 08/15/19 Time: 10:24
Sample: 2013 2018
Periods included: 6
Cross-sections included: 50
Total panel (balanced) observations: 300
Variable Coefficient Std. Error t-Statistic Prob.
C 0.257260 0.036005 7.145089 0.0000
TD_EQUITY 0.046040 0.011838 3.889276 0.0001
TD_T_ASSETS -0.410551 0.050888 -8.067698 0.0000
LD_ASS 0.443465 0.101004 4.390583 0.0000
LD_EQ -0.080886 0.027247 -2.968632 0.0032
TANGIBILITY -0.196710 0.023159 -8.493881 0.0000
LIQUIDITY -0.005185 0.004342 -1.194287 0.2334
GROWTH 0.017927 0.015512 1.155741 0.2488
FIRM_SIZE -0.000706 0.002141 -0.329540 0.7420
YEAR_13 0.021967 0.009976 2.201982 0.0285
YEAR_14 0.013765 0.009925 1.386855 0.1666
YEAR_15 0.012757 0.009787 1.303533 0.1934
YEAR_16 0.010454 0.009767 1.070427 0.2853
YEAR_17 0.003980 0.009871 0.403259 0.6871
R-squared 0.424900 Mean dependent var 0.079922
Adjusted R-squared 0.398759 S.D. dependent var 0.062467
S.E. of regression 0.048437 Akaike info criterion -3.171565
Sum squared resid 0.670996 Schwarz criterion -2.998722
Log likelihood 489.7347 Hannan-Quinn criter. -3.102393
F-statistic 16.25421 Durbin-Watson stat 0.500143
Prob(F-statistic) 0.000000
Dependent Variable: ROA
Method: Panel Least Squares
Date: 08/15/19 Time: 10:26
Sample: 2013 2018

Periods included: 6
Cross-sections included: 50
Total panel (balanced) observations: 300
Variable Coefficient Std. Error t-Statistic Prob.
C 0.347390 0.143864 2.414714 0.0165
TD_EQUITY 0.003192 0.009983 0.319768 0.7494
TD_T_ASSETS -0.209615 0.057127 -3.669279 0.0003
LD_ASS 0.047519 0.094390 0.503433 0.6151
LD_EQ 0.002747 0.022155 0.123972 0.9014
TANGIBILITY -0.068481 0.041859 -1.635968 0.1032
LIQUIDITY 0.004709 0.004911 0.958896 0.3386
GROWTH 0.015238 0.010947 1.392058 0.1652
FIRM_SIZE -0.015457 0.011472 -1.347397 0.1791
YEAR_13 0.014861 0.008017 1.853661 0.0650
YEAR_14 0.007083 0.007023 1.008636 0.3142
YEAR_15 0.005276 0.006479 0.814349 0.4163
YEAR_16 0.004494 0.006168 0.728643 0.4669
YEAR_17 0.003105 0.006100 0.509056 0.6112
Effects Specification
Cross-section fixed (dummy variables)
R-squared 0.824188 Mean dependent var 0.079922
Adjusted R-squared 0.778195 S.D. dependent var 0.062467
S.E. of regression 0.029420 Akaike info criterion -4.030028
Sum squared resid 0.205128 Schwarz criterion -3.252234
Log likelihood 667.5043 Hannan-Quinn criter. -3.718754
F-statistic 17.91988 Durbin-Watson stat 1.420854
Prob(F-statistic) 0.000000
Redundant Fixed Effects Tests
Equation: Untitled
Test cross-section fixed effects
Effects Test Statistic d.f. Prob.
Cross-section F 10.984773 (49,237) 0.0000
Cross-section Chi-square 355.539116 49 0.0000
Dependent Variable: ROA
Method: Panel EGLS (Cross-section random effects)
Date: 08/15/19 Time: 10:30
Sample: 2013 2018
Periods included: 6
Cross-sections included: 50
Total panel (balanced) observations: 300
Swamy and Arora estimator of component variances
Variable Coefficient Std. Error t-Statistic Prob.

C 0.227431 0.056280 4.041061 0.0001
TD_EQUITY 0.011147 0.009538 1.168635 0.2435
TD_T_ASSETS -0.258333 0.049824 -5.184871 0.0000
LD_ASS 0.135756 0.086981 1.560765 0.1197
LD_EQ -0.016576 0.021107 -0.785324 0.4329
TANGIBILITY -0.117408 0.031422 -3.736533 0.0002
LIQUIDITY 0.000915 0.004404 0.207685 0.8356
GROWTH 0.011415 0.010639 1.072988 0.2842
FIRM_SIZE -0.002641 0.004002 -0.659840 0.5099
YEAR_13 0.022061 0.006464 3.412803 0.0007
YEAR_14 0.012622 0.006271 2.012879 0.0451
YEAR_15 0.009720 0.006116 1.589207 0.1131
YEAR_16 0.007368 0.006044 1.218925 0.2239
YEAR_17 0.004025 0.006063 0.663747 0.5074
Effects Specification
S.D. Rho
Cross-section random 0.038920 0.6364
Idiosyncratic random 0.029420 0.3636
Weighted Statistics
R-squared 0.297304 Mean dependent var 0.023567
Adjusted R-squared 0.265363 S.D. dependent var 0.034755
S.E. of regression 0.029789 Sum squared resid 0.253794
F-statistic 9.307989 Durbin-Watson stat 1.168699
Prob(F-statistic) 0.000000
Unweighted Statistics
R-squared 0.375961 Mean dependent var 0.079922
Sum squared resid 0.728095 Durbin-Watson stat 0.407377
Correlated Random Effects - Hausman Test
Equation: Untitled
Test cross-section random effects
Test Summary
Chi-Sq.
Statistic Chi-Sq. d.f. Prob.
Cross-section random 0.000000 13 1.0000

Dependent Variable: TOBIN_S_Q
Method: Panel Least Squares
Date: 08/15/19 Time: 10:33
Sample: 2013 2018
Periods included: 6
Cross-sections included: 50
Total panel (balanced) observations: 300
Variable Coefficient Std. Error t-Statistic Prob.
C 11.50254 1.360260 8.456131 0.0000
TD_EQUITY 1.906773 0.447226 4.263557 0.0000
TD_T_ASSETS -16.90139 1.922532 -8.791216 0.0000
LD_ASS 15.59829 3.815874 4.087738 0.0001
LD_EQ -2.202123 1.029376 -2.139280 0.0333
TANGIBILITY -8.149492 0.874937 -9.314373 0.0000
LIQUIDITY -1.190363 0.164023 -7.257317 0.0000
GROWTH 0.665132 0.586024 1.134990 0.2573
FIRM_SIZE -0.093606 0.080893 -1.157164 0.2482
YEAR_13 -0.258513 0.376896 -0.685901 0.4933
YEAR_14 0.061595 0.374964 0.164269 0.8696
YEAR_15 0.276952 0.369730 0.749067 0.4544
YEAR_16 0.345214 0.368976 0.935600 0.3503
YEAR_17 0.203355 0.372912 0.545317 0.5860
R-squared 0.376155 Mean dependent var 1.677336
Adjusted R-squared 0.347799 S.D. dependent var 2.265909
S.E. of regression 1.829925 Akaike info criterion 4.091970
Sum squared resid 957.7071 Schwarz criterion 4.264813
Log likelihood -599.7955 Hannan-Quinn criter. 4.161142
F-statistic 13.26518 Durbin-Watson stat 0.253025
Prob(F-statistic) 0.000000

Dependent Variable: TOBIN_S_Q
Method: Panel Least Squares
Date: 08/15/19 Time: 10:34
Sample: 2013 2018
Periods included: 6
Cross-sections included: 50
Total panel (balanced) observations: 300
Variable Coefficient Std. Error t-Statistic Prob.
C -1.992061 3.399269 -0.586026 0.5584
TD_EQUITY 0.062750 0.235874 0.266033 0.7904
TD_T_ASSETS -3.793784 1.349817 -2.810592 0.0054
LD_ASS 2.639021 2.230281 1.183269 0.2379
LD_EQ -0.130821 0.523487 -0.249903 0.8029
TANGIBILITY -2.748065 0.989071 -2.778429 0.0059
LIQUIDITY -0.347168 0.116028 -2.992097 0.0031
GROWTH -0.006097 0.258652 -0.023573 0.9812
FIRM_SIZE 0.534418 0.271064 1.971561 0.0498
YEAR_13 0.010027 0.189430 0.052930 0.9578
YEAR_14 0.224320 0.165935 1.351851 0.1777
YEAR_15 0.290802 0.153088 1.899576 0.0587
YEAR_16 0.297718 0.145742 2.042769 0.0422
YEAR_17 0.280798 0.144137 1.948134 0.0526
Effects Specification
Cross-section fixed (dummy variables)
R-squared 0.925401 Mean dependent var 1.677336
Adjusted R-squared 0.905885 S.D. dependent var 2.265909
S.E. of regression 0.695139 Akaike info criterion 2.294868
Sum squared resid 114.5227 Schwarz criterion 3.072662
Log likelihood -281.2302 Hannan-Quinn criter. 2.606142
F-statistic 47.41882 Durbin-Watson stat 1.122009
Prob(F-statistic) 0.000000

Redundant Fixed Effects Tests
Equation: Untitled
Test cross-section fixed effects
Effects Test Statistic d.f. Prob.
Cross-section F 35.610907 (49,237) 0.0000
Cross-section Chi-square 637.130551 49 0.0000
Dependent Variable: TOBIN_S_Q
Method: Panel EGLS (Cross-section random effects)
Date: 08/15/19 Time: 10:37
Sample: 2013 2018
Periods included: 6
Cross-sections included: 50
Total panel (balanced) observations: 300
Swamy and Arora estimator of component variances
Variable Coefficient Std. Error t-Statistic Prob.
C 3.226132 1.935735 1.666618 0.0967
TD_EQUITY 0.204522 0.232058 0.881339 0.3789
TD_T_ASSETS -4.898301 1.271292 -3.853009 0.0001
LD_ASS 4.325224 2.159919 2.002494 0.0462
LD_EQ -0.300035 0.513170 -0.584670 0.5592
TANGIBILITY -3.848602 0.874344 -4.401704 0.0000
LIQUIDITY -0.431474 0.111366 -3.874366 0.0001
GROWTH 0.037577 0.254956 0.147385 0.8829
FIRM_SIZE 0.172914 0.146023 1.184162 0.2373
YEAR_13 -0.129216 0.161502 -0.800087 0.4243
YEAR_14 0.141754 0.152659 0.928566 0.3539
YEAR_15 0.243536 0.147055 1.656088 0.0988
YEAR_16 0.277203 0.143998 1.925049 0.0552
YEAR_17 0.279190 0.143751 1.942177 0.0531
Effects Specification
S.D. Rho
Cross-section random 1.643495 0.8482
Idiosyncratic random 0.695139 0.1518
Weighted Statistics
R-squared 0.169191 Mean dependent var 0.285409
Adjusted R-squared 0.131427 S.D. dependent var 0.771107
S.E. of regression 0.718651 Sum squared resid 147.7073
F-statistic 4.480210 Durbin-Watson stat 0.891136
Prob(F-statistic) 0.000001
Unweighted Statistics
R-squared 0.214990 Mean dependent var 1.677336

Sum squared resid 1205.122 Durbin-Watson stat 0.109223
Correlated Random Effects - Hausman Test
Equation: Untitled
Test cross-section random effects
Test Summary
Chi-Sq.
Statistic Chi-Sq. d.f. Prob.
Cross-section random 0.000000 13 1.0000