Capital Structure and Corporate Performance: A Case of Nepal

Abstract

The objective of this study is to analyze the capital structure factors affecting the financial performance of commercial banks in Nepal. This study is based on pooled cross sectional data analysis of 19 commercial banks listed in NEPSE for the period of 2007/8-2013/2014 with 133 observations. The sample includes all sorts of commercial banks operating in Nepal like public sector, joint venture and privately owned banks. The performance measures in terms of return on assets, earnings per share and net interest margin are selected as dependent variables. Total debt to total assets ratio, long term debt to total debt ratio, short term debt to total debt ratio, size and credit risk are taken as independent variables.The study revealed that total debt to total assets ratio, long term debt to total assets ratio, short term debt to total assets ratio and size are negatively related to returns on assets whereas credit risk is positively related to returns on assets. It indicates that higher the debt in capital mix lower would be return on assets. Similarly, increase in credit risk leads to an increase in returns on assets. The result also shows that the total debt to total assets ratio, long term debt to total assets ratio and short term debt to total assets ratio are negatively related to earning per share whereas size and credit risk is positively related to earnings per share which reveals that increase in debt decreases in earnings per share. Likewise, total debt to total assets ratio, long term debt to total assets ratio and short term debt to total assets ratio are negatively related to net interest margin which indicates higher the debt in capital mix lower would be net interest margin. The result shows that there is positive relationship between bank size and net interest margin which reveals that increase in bank size will increase the net interest margin. The beta coefficients for total debt to total assets ratio, long term debt to total assets ratio and short term debt to total assets ratio were negative, while beta coefficients were positive for size and credit risk. However, the coefficients were significant for size and credit risk only at 5 percent level of significance. Thus, this study concludes that size and credit risk are the major factors affecting the financial performance of commercial banks in the context of Nepal.