Research Method

Sample and Data

This study was conducted based on the secondary data of the cement companies of Bangladesh

registered in Dhaka Stock Exchange (DSE). The data have been collected from annual reports of

7 cement manufacturing companies operating in Bangladesh from year 2013 to 2017. Here,

Balanced has been used to obtain results of descriptive, correlation and regression analysis by

statistical software (Stata).

Variables Description

In this research profitability ratio, return on assets and return on equity, is used as dependent

variable. It also used Abor, (2005) and Yegon et al.( 2014) in previous studies. It is broad

indicator of firm’s performance because it provides information as to how well company is using

their resources of funds to produce profits. Capital structure rations and control variables are

used in the study as independent variables of cement industry of Bangladesh (Table-1).

Determinants Variables Measures Notations

Dependent Variables
(Net Income / Total
Return on Assets ROA
Assets)
Profitability Return on Equity (Net Income / Total
ROE

Capital Independent Variables Shareholder Fund)

Structure Debt Equity Ratio (Total Debt / Total Equity) DER

(Income Before Interest &
Interest Coverage Ratio ICR
Tax / Interest

Expense)
 Debt Ratio (Total Debt / Total Assets) DR
(Short Term Debt / Total
Short-Term Debt Ratio STDR
Assets)
Long Term Debt Ratio LTDR
(Long Term Debt / Total

Assets)

Independent Variables
Total Non-Current Asset /
Tangibility TAN
Control Total Asset
Growth rate GR
Variables ROE × Retention Rate
Liquidity LIQ
Current Asset / Current

Liability

Dependent variables (Profitability Ratio)

In this study, return on asset (ROA) and return on equity (ROE) use as a determinants of firms

profitability of cement industry of Bangladesh. Return on asset (ROA) expressed in percent and

defined as net profit after tax (EBIT) over total assets. Return on equity (ROE) explained as net

profit to shareholder equity and shows in percentage. I have used EBIT because it is independent

of leverage effects of the capital structure decisions as it doesn’t include includes the effects of

tax and interest.

Independent variable (Capital Structure rations and control variables)

Capital Structure variables are explained with debt equity ratio (DER), interest coverage ratio

(ICR), debt ratio (DR), short term debt ratio (STDR), and long term debt ratio (LTDR). On the

other hand, Growth rate, Tangibility and Liquidity are used as control independent variables.
 Debt equity ratio (DER): The Debt to equity ratio shows percentage of debt an organization

is utilizing in respect of shareholders' Equity.

 Interest coverage ratio (ICR): ICR ratio used to measure how an organization can pay interest

expense on debt.

 Debt ratio (DR): The debt ratio shows that portion of firms assets are financed through debt.

 Short Term Debt Ratio (STDR): The ratio of short term debt represents the portion of

company’s assets that financed by debt below than 1 year.

 Long Term Debt Ratio (LTDR): the ratio shows the percentage of firms assets financed

through long term Debt/loans that maturity is above than 1 year.

Research Model

The balance panel data is used to study the impact of capital structure on firm’s profitability. In

balance panel data, the model consists I cross-section units, denoted i=1, observe every one of T

time period, t=1. In data position, the total observation is I×T.

𝑌𝑖𝑡 = 𝛼 + 𝛽𝑥𝑖𝑡 + ⋯ + 𝜀𝑖𝑡

In above model, the dependent variable (Profitability) denoted by 𝑌𝑖𝑡 , independent variables

(Capital Structure and Control Variables) denoted by 𝛽𝑥𝑖𝑡 and the error term and constant of

coefficient respectively denoted by 𝜀𝑖𝑡 and α.

For this paper two regression models are given below;

𝑅𝑂𝐴𝑖𝑡 = 𝛼 + 𝛽1 𝐷𝐸𝑅𝑖𝑡 + 𝛽2 𝐼𝐶𝑅𝑖𝑡 + 𝛽3 𝐷𝑅𝑖𝑡 + 𝛽4 𝑆𝑇𝐷𝑅𝑖𝑡 + 𝛽5 𝐿𝑇𝐷𝑅𝑖𝑡 + 𝛽6 𝑇𝐴𝑁𝑖𝑡 + 𝛽7 𝐺𝑅𝑖𝑡

+ 𝛽8 𝐿𝐼𝑄𝑖𝑡 + 𝜀𝑖𝑡
 𝑅𝑂𝐸𝑖𝑡 = 𝛼 + 𝛽1 𝐷𝐸𝑅𝑖𝑡 + 𝛽2 𝐼𝐶𝑅𝑖𝑡 + 𝛽3 𝐷𝑅𝑖𝑡 + 𝛽4 𝑆𝑇𝐷𝑅𝑖𝑡 + 𝛽5 𝐿𝑇𝐷𝑅𝑖𝑡 + 𝛽6 𝑇𝐴𝑁𝑖𝑡 + 𝛽7 𝐺𝑅𝑖𝑡

+ 𝛽8 𝐿𝐼𝑄𝑖𝑡 + 𝜀𝑖𝑡

Statistical Findings / Results

Descriptive Statistics

Descriptive Statistics of Sample Panel data below in table:

Variable Obs. Mean Std. Dev. Min Max

…………………………… ……… ……… ……… ……… ………
Return on Assets (ROA) 35.00 6.30 4.39 -3.01 14.80
Return on Equity (ROE) 35.00 12.97 8.76 -26.64 26.97
Debt to Equity Ratio (DER) 35.00 1.99 1.88 0.36 7.86
Interest Coverage Ratio (ICR) 35.00 12.69 13.45 0.73 42.25
Debt Ratio (DR) 35.00 55.88 19.42 26.73 88.71
Short Term Debt Ratio (STDR) 35.00 44.66 18.42 15.43 83.42
Long Term Debt Ratio (LTDR) 35.00 11.22 6.02 1.11 26.87

Descriptive analysis was conducted in order to assistant an empirical analysis to support the

findings of the analysis. Table shows that there are negative minimum values of return on assets

(ROA) and return on equity (ROE) that’s sign that there are observations of firms has operated at

loss during sample fiscal years. On the other hand, the mean of DR is 55.88 percent; it implies

that about 55.88 percent of the total assets of cement firms are financed by debt, which shows

that most of the cement companies are highly levered. The mean of debt-equity is 1.99; this

implies that most of the firms in the cement industry are financed through debt. The sample

Mean of ROA (6.30) is lower than ROE (12.97), as all of the company are levered (use debt

financing). As the difference between return on assets and return on equity give us an indication

of how leveraged a company is. For those with little debt, the numbers will be very close to each
other, but return on assets will never be greater than return on equity. So cement industry is

highly levered.

Correlation Analysis

Correlation analysis measures if the variables have any dependency over others or carried out to

find out the relationship between determinants of capital structure and the measures of the firm’s

profitability.

Short Long
Return Return Debt to Interest
Debt Term Term
on on Equity Coverage
Ratio Debt Debt
Assets Equity Ratio Ratio
(DR) Ratio Ratio
(ROA) (ROE) (DER) (ICR)
(STDR) (LTDR)

Return on Assets (ROA) 1.00

Return on Equity (ROE) 0.71 1.00

Debt to Equity Ratio (DER) (0.74) (0.48) 1.00

Interest Coverage Ratio (ICR) 0.74 0.36 (0.51) 1.00

Debt Ratio (DR) (0.80) (0.35) 0.91 (0.70) 1.00

Short Term Debt Ratio (STDR) (0.73) (0.28) 0.88 (0.64) 0.95 1.00

Long Term Debt Ratio (LTDR) (0.34) (0.28) 0.22 (0.29) 0.32 0.01 1.00

The table shows the debt-equity ratio (DER), debt ratio (DR), short term debt Ratio (STDR),

long term debt ratio (LTDR) is negatively correlated with Profitability (ROA) and (ROE). This

implies that Profitability is negatively correlated with the liabilities of the firm. This shows as the

liabilities of the firm increase its profitability decrease. The results indicate the less the leverage

level the more the profitable the firms are.

It is not to assume that incurring debt will always raise return on equity. Taking out debt incurs

interest expense, and if financing costs exceed the returns on additional assets, then net income

will fall, potentially reducing returns on equity.

Hausman Fixed Random Test

Panel data (also Known as longitudinal or cross-sectional time-series data) is a dataset in which

the behaviors of entities are observed across time. For analyzing the panel data I have used

hausman fixed random test. Hausman test was used to identify the appropriate regression model

between fixed effect and random effect.

To decide between fixed or random effects we can run a hausman test where the null hypothesis

is that the preferred model is random effects vs. the alternative the fixed effects.

Null Hypothesis: 𝑯𝟎 = Fixed effect model is appropriate.

Alternative Hypothesis: 𝑯𝟏 = Random effect model is appropriate.

Both fixed effect and random effect panel regression analysis were performed to test the impact

of capital structure on the performance of cement companies measured in terms of ROE and

ROA. If the chi value is less than .05 then fixed effect regression will be appropriate. But of the

value is over .05 then random effects will be appropriate. The test results indicate that random

effect is applicable for both the models including ROE and ROA.

It shows that chai value, for this two model, is higher than 5% and it refers to reject null

hypothesis. So, we accept the null hypothesis in where random effect test is appropriate to run

regression model that is used for the analysis.

Summary results of Hausman test are presented in Table

 Hausman Test for Fixed and Random Effect Model

Model 1 (ROE) Model 2 (ROA)

Chi2 0.06 7.06
Prob>Chi2 1 0.4229

Multi-Collinearity

As the results of standard regression may be noisy due to the existence of multi-colliniearity,

Collinearity diagnostics test was performed to check the multi-collinearity before running the

regression analysis. It is seen from the correlation matrix that the debt ratio (DE) and Debt-equity

ratio (DER) are having the correlation of 0.91. on other hand the correlation between debt ratio

(DE) and Short term debt ratio (STDR) are having the correlation of 0.95. This correlations

show an Indication of multi-collinearity problem of DR with DER and STDR. Multi-collinearity

problem causes an increase in the standard error of the coefficients. To find is there any multi-

collinearity problem between these variables, we used variance inflation factor (VIF).

It can be seen from Table that the VIF of DR, STDR and LTDR is
Variable VIF 1/VIF
much more high than 10 and high correlation DR with DER and STDR
LIQ 3.53 0.28
indicate multi-collinearity. So debt ratio (DR), Short term debt ratio
DER 2.97 0.34
(STDR) is dropped from the study while doing the next two phase of
ICR 2.82 0.35
analysis. As a result the multi-collinearity problem does not exist.
TAN 2.58 0.39

GR 1.77 0.57

LTDR 1.26 0.79

Mean VIF 2.49