Analyzing the Impact of Capital Structure on Stock Returns: A Study of NEPSE-listed Companies

Jai Kumar Mahato

Jai Kumar Mahato Lecturer, Faculty of Management, Tribhuvan University, MMAMC Campus Biratnagar, Nepal

Keywords: Stock returns, Nepal Stock Exchange, Corporate Finance and Market Dynamics

Abstract

This study delves into the intricate relationship between capital structure and stock returns, focusing on companies listed on the “Nepal Stock Exchange” (NEPSE) during the period from 2016 to 2020. Capital structure, a critical facet of financial management, entails the strategic mix of equity and debt employed to fund a company's operations. The study aims to contribute valuable insights to managerial decision-making and policymaking by investigating the implications of various capital structures on stock returns.Financial managers are tasked with striking a delicate balance between potential gains and losses while formulating the optimal capital structure. Debt, often considered a cost-effective alternative to equity financing, presents additional benefits such as tax deductions. The complexity of this decision-making process lies in the profound impact that the chosen capital structure can have on the overall worth of the company. Drawing on secondary data derived from the financial filings of NEPSE-listed companies, this research employs correlation and regression analyses to unravel the intricate dynamics between capital structure and stock returns.

References

Adami R., Gough O., Muradoglu G., & Sivaprasad S. (2010). The Leverage Effect on Stock Returns. Oxford Business & Economics Conference Program, https://dx.doi.org/10.2139/ssrn.1690183

Bhandari L. C. (1988). Debt/Equity ratio and expected common stock returns: Empirical evidence. Journal of Finance, 43(2), 507–528. https://doi.org/10.2307/2328473

Babalola Y. A. (2013). The Effect of Firm Size on Firms Profitability in Nigeria. Journal of Economics and Sustainable Development, 4 (5), 90-94.

Banchuenvijit W. (2012). Determinants of Firm Performance of Vietnam Listed Companies. Academic and Business Research Institute. Retrieved from http://aabri.com/SA12Manuscripts/SA12078.pdf

Dimitrov V. & Jain P. C. (2005). The Value Relevance of Changes in Financial Leverage http://ssrn.com/abstract=708281

Fama E. F. & French K. (1992). The cross-section in expected stock returns. Journal of Finance, 47, 427-466. https://doi.org/10.2307/2329112

Haugen R. A. & Baker N. A. (1996). Commonality in the determinants of expected stock returns. Journal of Economics, 41, 401-439. https://doi.org/10.1016/0304-405X(95)00868-F

Hall M., & Weiss L. (1967). Firm size and profitability. Review of Economics and Statistics, 49(3), 319–331. https://doi.org/10.2307/1926642

Korteweg A. G. (2004). Financial leverage and Expected Stock Returns: Evidence from pure exchange offers. http://dx.doi.org/10.2139/ssrn.597922

Khan W., Naz A., Khan M., Khan W. K. Q. & Ahmad S. (2013). The Impact of Capital Structure and Financial Performance on Stock Returns: A Case of Pakistan Textile Industry. Middle-East Journal of Scientific Research, 16(2), pp. 289-295.

Masulis R. W (1983). The Impact of Capital Structure Change on Firm Value: Some Estimates. The Journal of Finance 38 (1) 107-126. https://doi.org/10.1111/j.1540-6261.1983.tb03629.x

Pastor L. & Stambaugh R. F. (2003). Liquidity Risk and Expected Stock Returns. Journal of Political Economy 111, 642–685. https://www.journals.uchicago.edu/doi/10.1086/374184

Strong N. & Xu G. (1997). Explaining the Cross Section of UK Expected Stock Returns. British Accounting Review 29: 1-23.

Saliha T., & Abdessatar A. (2011). The Determinants of Financial Performance: An Empirical Test Using The Simultaneous Equations Method. Economics and Finance Review, 10(1), 1–19.

Shepherd W. G. (1972). The Elements of Market Structure. The Review of Economics and Statistics, 54 (1), 25-37. https://doi.org/10.2307/1927492

Simon L. (1962). Size, Strength and Profit, Proceedings of the Casuality Actuarial Society - Arlington. Virginia, XLIX: 41-48. https://www.casact.org/sites/default/files/database/proceed_proceed62_62041.pdf

Titman S. & Wessels R. (1988). The Determinants of Capital Structure Choice. Journal of Finance, 43 (1), 1-19. https://doi.org/10.2307/2328319

Yang C. C., Lee C. F., Gu Y. X. & Lee Y. W. (2010). Co-determination of capital structure and stock Returns. A LISREL approach: An empirical test of Taiwan stock markets. Quarterly Review of Economics and Finance, 50(2), pp. 222–233. https://doi.org/10.1016/j.qref.2009.12.001