THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF FIRMS: EVIDENCE FROM ITALY

Abstract

Despite the theories regarding the capital structure decision and the work done in this area starting from the Modigliani and Miller (1958) we still don’t see any clear picture on which the best capital structure is for a company. While addressing the issue of what is the best capital structure for a firm, we have to keep in mind a lot of factors including the industry type, country of origin, size of the company, economic situation and evaluation methods we want to apply. Theories like pecking order theory, Agency cost theory and trade-off theory serves as bases for the work done before. Despite these theories and their theoretical appeal, researchers have not found an optimal capital structure for firms in various studies carried out in different countries to examine the relationship between capital structure and performance. Still the results we see are contradictory and mixed. (Dessi R.and Donald R., 2003), found that financial leverage affect positively the financial performance of UK firms, while on the other hand (Majumdar,S.K., Chhibber, P. 1999) (Gosh, 2009) reached that capital structure is inversely related to the financial performance of the firm. In a few more studies in this area we find conflicting results. This research will fill the gap on the capital structure and firm’s performance in Italy based on the firm size. As evident from BACH Outlook (2014) by Socio (Banca d’Italia), Maza (Banco de España), Silveira (Banco de Portugal) Bürker (Banque de France) confirms that firms in Italy mostly rely on debt to finance their business activities which begs the question that how a debt dependent firm do financially when there are changes in leverage.