Impact of Capital Structure on Firm’s Efficiency and Stability: An Empirical Analysis of Manufacturing Firms

Abstract

This article examines the impact of capital structure on firms’ efficiency and stability. To demonstrate the relationship, this research collected data from 58 manufacturing firms listed on the Dhaka Stock Exchange of Bangladesh from 2013 to 2022. It has accepted total liabilities, including both current and non-current liabilities, as a proportion of its total assets, thereby representing its capital structure. Variables in cost efficiency calculated by stochastic frontier analysis and the asset turnover ratio serve as measures of efficiency, while Z-scores and solvency ratios serve as dummies for estimating firm stability (based on the solvency ratio). The ordinary least squares, fixed- and random-effects techniques have been applied to calculate the results. The findings are mixed. It finds that short-term liability can increase the efficiency of firms, while long-term liability reduces their efficiency and stability. Conversely, stability negatively correlates with capital structure. This research guides manufacturing organizations in Bangladesh and beyond on how to operate efficiently and effectively.