Capital Structure and Profitability: Panel Data Analysis

Capital structure is one of the important areas of firms’ strategic and financial decision making as it enables managers to finance a firm's overall operations with different sources of funds. Several financial and business factors play a fundamental role in an effective decision making of firms’ choices of capital structure. In the corporate financial literature it is well accepted theories indicates that financing decisions plays important role in the profitability of the firm. This study constitutes an attempt to investigate the relationship between debt - to equity ratio and firm's profitability, taking into consideration the level of firms’ investment and the degree of market power. The study uses panel data for various industries, covering the period 2007 to 2009. The main conclusions of our study are: a) firms which prefer to finance their investment activities through self-finance are more profitable than firms which finance investment through borrowed capital; b) firms prefer cooperating with each other than competing; c) firms use their investment in fixed assets as a strategic variable to affect profitability.