Impact of capital structure decisions on company’s profitability: evidence from Ukraines companies

Abstract

The choice of financing and search for an optimal capital structure mix has been an area of significant interest during last fifty years, and it becomes especially topical in today’s fast changing environment and highly competitive market conditions. This paper seeks to analyze the impact of capital structure decisions on profitability by examining the current financing decisions and the effect of capital structure composition on profitability of the Ukrainian manufacturing firms. A sample of 274 public listed companies in Ukraine for a period of 8 years (from 2007 till 2014) was selected. The correlation and regression analyses were applied to estimate the impact of leverage, measured by Debt to equity, Total debt, Shortterm debt to total assets and Long-term debt to total assets ratios, on profitability, measured by ROA, ROE and EBIT margin. The results of the research reveal an inverse relationship between the debt level in capital structure and firms’ profitability, confirming the Agency cost and Pecking order theories.