BUS 485

Summer 2017

1. Introduction
This study investigate the determinants of capital structure of commercial banks of Bangladesh.
The study panel regression model in examining the capital structure of commercial banks in
Bangladesh with their financial statements of five commercial banks (MTB, UCB, TRUST
BANK, ONE BANK, DHAKA BANK) covering the period (2011-2015).

Capital structure is one of the crucial factors to make a business success. For taking financing
decision, it is required to consider capital structure of a bank so that financial manager is able to
take effective investment decision. Capital structure mainly consists of debt and equity of a bank.
The main responsibility of financial manager is to maximize value of bank more specifically
maximization of shareholder’s wealth by subsiding the cost of funds. So for maximizing the
shareholder’s wealth, financial manager needs to investigate optimal capital structure to finance.

For choosing the capital structure of a bank, it is required to consider different factors that are
related to optimize the profitability and value of a bank. Researchers have given more time both
theoretically and practically to find out the new research question. Modigliani and Miller (1958,
1963) have given significant concept for that question. There are many factors of a capital
structure have been developed by enormous national and international researchers.

Capital structure is depending on two factors one is company's leverage and other is assets. All
banks have to analyze capital structure properly so as to obtain optimal capital structure for a
banks for implementing financing decision otherwise bank will face different financial problems,
such as bankruptcy and financial distress etc. So the bank which has high leverage, it is
necessary to make an efficient capital mixture to minimize cost and maximize net profit that
maximizes value of bank. Moreover every bank exists different specific factors that are related to
capital structure are needed to consider at the time of choosing optimal capital structure. Many
banks would not able to identify the best capital structure for maximizing their profits due to lack
proper forecasting regarding to the factors related to capital structure. There are various banks
that have different capital structure techniques for optimizing shareholder’s wealth, therefore
copious research have been conducted on capital structure theories to explain variation of banks
capital structure over time,( Gul. S. et al, (2012).

Bangladesh is one of the developing countries with a great possibilities and it has an emerging
market with a lot of potential possibilities of investment that get an attention for investors of the
world and now it’s time for mangers to analyze about the influencing factors of using debt and
their extent of influence over banks. Although there have been small number of researches
emphasizing on the primary determinants of capital structure in Bangladesh such as Chowdhury
MU. (2004), Lima M. (2009), and Sayeed M.A. (2011), there is still disagreement regarding the
factors that have significant impact in determining a banks optimal capital structure. The factors
affecting optimal capital structure determination of a firm in developed countries may not be
equally applicable to a banks in developing countries like Bangladesh. There are some factors
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yet that have not been considered for analysis that are still important to further use in measuring
their impact on capital structure determination and it is require to make a bridge between present
study and capital structure theory. So this study investigates capital structure of banking industry
of Bangladesh as to identifying whether is there any association between debt asset ratio and
some independent factors to find out proper capital structure theory for the content of banking
industry of Bangladesh.

2.Problem Statement
Our topic is really basis on capital structure and their performance aspect on commercial banking
sectors in Bangladesh. Well, capital structure is defined as the blend of debt and equity capital
maintained and used by a firm to finance itself where optimal debt level which is determined by
weighing various leverage- related costs against leverage-related benefits. Before investing
money, all commercial sectors use different example for financing sectors like size, sales growth,
long term debt and short term debt, ROA, ROE and NIM (Ramakrishnan, 2012).

Capital structure of the bank depend on various economies. In Bangladesh there are four
categories bank which are Nationalized Bank, Local Private Commercial Bank, Specialized
financial institution and Foreign Bank. Among them they are 30 are local private commercial
banks and 10 are foreign bank . Commercial-Banking sectors in Bangladesh are performing well
but despite getting positive performance of different categories of banks were not equally
attractive. Cause maximizing the wealth of shareholders demands a perfect mixture of debt and
equity, whereas cost of capital has a negative correlation in this choice and it has to be as least as
possible. The fact that there are significant inter industry differences in the capital structure of
banks due to the one of a kind sort of every banking sectors, the intra-bank varieties are credited
to the business and money related danger of individual banks. Moreover, When the debt to
equity will increase, the banking sectors performance will become decreasing to save money but
Poor and wasteful capital structure increase cost that manage size, profit, sales growth have
positively related with capital structure and interest rate or dividend has negatively related each
other. (Malek, 2005)
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As we mentioned before , we conducted a research based on the determination of the capital

structure of the Ghana banks. The dependent variables used in that paper are the leverage(LEV)
as total debts divided by total capital; short-term debt ratio (SHORT) as total short-term debt to
capital and long-term debt ratio (LONG) as the total long-term debt divided by total capital. The
explanatory variables, size (SZE) and sales growth (GROW) with the regression model it showed
relationship between profitability and leverage. With same variables we are being chosen five
commercial banks and their impact on relationship with return of asset (ROA). (Amidu ,2007)

We observed that there is a negative relation between profitability and leverage which evaluated
the effect of capital structure on the execution of banks in Bangladesh for the period (2011-
2015). In here, the Performance was measured by profit for resources (ROA) (dependent
variable) which creates a profit from and, labor, management, and capital. They also find LTD
ratio, STD ratio and TD ratio to help understand the capital structure. The ratio of long term debt
(independent variable) as equity financing. Financial structure of banks affects its profit
performance. For that, Banks use internal sources of financing but the internal funds are not
enough to provide financial requirement than the banks use debt financing to equity financing.
Another issue we observed that, liquidity management is profitable for bank to pay its short term
debt (STD) commitment as well as going to pay long term commitment. When the debt to equity
has increased, the banking sectors performance has been become decreasing to save money and
created negative relationship. Optimal debt ratio is generally defined as the one which minimizes
the cost of capital for the company, while maximizing the value of company. In other words, the
optimal debt ratio is the one which maximizes the profitability of company. With this in mind, a
company has to attend both factors while optimizing working capital and maximizing
profitability. however there is not yet a completely upheld and regularly acknowledged
hypothesis; and the open deliberation on the critic-mess of dissuade meant components is still
unfurled.

The problem statement is: to investigate the relationship between ROA, STD, LTD, SIZE,
SALES , TD and linking all of them together to find out the total impact on capital structure of
commercial banks.
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3.The objectives of this study

1. To identify the impact of structure of capital on the profitability of listed Ganaian banks.

2. To examine the effect of equity ratio on the profitability of listed Ganaian bank.

3. To inspect the effect of capital structure on gainfulness of center business operation of

business banks.

4. In the study, the impact of aggregate obligation proportion on the productivity.

5. To be valid data for public consumption.

6. To search new studies or discoveries based on the past report.

7. To observe the equation models and find a result.

8. To examine the relationship between independent and dependent variables.

9. To search for new discoveries which have been as restrictions on the past reports.

10. To study, the impact of aggregate obligation proportion on the productivity.

11. Experimental studies on bank administration framework.

12. To search for new discoveries which have been as impediments on the past reports.

13. To recognize what issues and why the banks are confronting this issue.

14. To observe at the impact of value proportion on the benefit.

15. In the study, the relationship between capital structure factors and benefit of center
business operation of business banks.
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4.Literature Review
A literature review is that indicates relationship between Independent variables and dependent
variables. In researcher it must determine which variable needs to be manipulated to generate
quantifiable results; for the vast majority of research methods are the independent and dependent
variables. Our Dependent variables are Return on Asset (ROA). Our dependent variables are
Short-term Debt (STD), Long-Term Debt (LTD), Total Debt (TB), Firm Size and Sales Growth
Rate.

In this research the capital structure to firm value, theoretical and empirical analyses have been
developed to discuss the determinants of corporate financing decisions in practice. Moreover, it
has generally followed traditional finance theory and comprises the trade-off theory, the pecking-
order theory and more recently the market timing theory where it mentioned about debt and
equity. Firm s performance is significantly affected by various factors and capital structure is one
of the significant factors among them. Lot of empirical studies has been done to explore if there
is any (Positive, negative or no relation) relation between firm s performance and capital
structure and these studies produced mixed results there is no universal theory of capital structure
(Frank and Goyal, 2004; Myers , 1984).

Moreover, there are several studies that have shown the importance of capital in the banking
sector. The capital adequacy is important for banks. Commercial banks have a legal obligation to
maintain adequate capital. Moreover, it should be noted that the main function of the bank is to
provide the funds necessary to absorb potential future losses (Morgan, 1984).

Based on our variables their relationship is showing below

4.1 Return On Asset (ROA): Dependent variable

Return of Assets (ROA) is the proportion of net wage to aggregate resources where The
managing an account association's net salary isolated by the normal of its on-accounting report
resources toward the start and end of the year (ROA) (H. KIM , 2016, Brewer et al,2008)
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ROA is contrarily identified with STD, LTD, GDP and firm size, yet is definitely not factually
and measurably critical and their relation emphatically identified with deals development and
conversion scale are also critical. The expansion is decidedly identified with ROA in any case,
not critical inferring that high swelling has the likelihood of expanding ROA and a fall in
swelling is probably going to lessen ROA which is a measure of benefit. (GatsiJ. G. ,2012)

The arrival on resources proportion, frequently called the arrival on aggregate resources. While
incorporating net wage to the normal aggregate resource ROA is computed. As per different
creators, the arrival on resources proportion or ROA measures how proficiently an organization
can deal with its advantages for deliver benefits amid a period. This proportion shows how
gainful an organization is in respect to its aggregate resources. Moreover, as indicated by The
creator, return on resources (ROA) proportion shows how well administration is utilizing the
organization's aggregate advantages for make a benefit. The higher the arrival, the more effective
administration is in using its advantage base. The ROA proportion is ascertained by contrasting
net salary with normal aggregate resources, and is communicated as a rate. (Copeland, Koller
and Murrin , 1996:105, Richard Loth,).

Since organization resources fundamental design is to produce incomes and make benefits. They
said, this proportion helps both administration and financial specialists perceive how well the
organization can change over its interests in resources into benefits. It can take a gander at ROA
as an arrival on speculation for the organization since capital resources are frequently the greatest
venture for generally organizations. As indicated by the case, the organization puts cash into
capital resources and the arrival is measured in benefits. So, this proportion measures how
gainful an organization's advantages are. This proportion can likewise be spoken to as a result of
the overall revenue and the aggregate resource turnover. Either equation can be utilized to
compute the arrival on aggregate resources. At the point when utilizing the main equation,
normal aggregate resources are typically utilized in light of the fact that advantage sums can shift
consistently. Just gather the starting and closure resources into a single unit on the accounting
report and gap by two to figure the normal resources for the year. It may be self-evident, yet
specify that normal aggregate resources is the verifiable cost of the advantages on the monetary
record without contemplating the amassed devaluation.( My bookkeeping course)
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The arrival on resources proportion measures how viably a bank can acquire an arrival on its
interest in resources. At the end of the day, ROA indicates how proficiently an organization can
change over the cash used to buy resources into net wage or benefits. Since all advantages are
either supported by value or obligation, a few financial specialists attempt to slight the expenses
of securing the benefits in the arrival computation by including back intrigue cost in the recipe.
Because there is argument that the deposit relationships associated with commercial bank
borrowing facilitate monitoring; non-bank private lenders do not have such relationships with
their borrowers. (Fama, 1985 and Nakamura 1993)

The greater Return on Assets (ROA) shows the better the company's performance, because of the
greater rate of return on investment. The profitability of a company's ability to generate earnings
for a certain period. It just bodes well that a higher proportion is more good to financial
specialists since it demonstrates that the bank is all the more successfully dealing with its
advantages for deliver more noteworthy measures of net wage. A positive ROA proportion more
often than not demonstrates an upward benefit drift also and for that; ROA is most valuable for
looking at organizations in an indistinguishable industry from various enterprises utilize
resources in an unexpected way. (Riyanto, 2001:267; Harahap , 2002: 304)

There is another considerably more enlightening approach to ascertain ROA. On the off chance
that we regard ROA as a proportion of net benefits over aggregate resources, then two telling
variables decide the last figure: net revenue (net wage separated by income) and resource
turnover ROA likewise determines a noteworthy weakness of profit for value (ROE). ROE is
apparently the most broadly utilized productivity metric, yet numerous financial specialists
rapidly perceive that it doesn't let to know whether an organization has inordinate obligation or is
utilizing obligation to drive returns. Financial specialists can get around that problem by utilizing
ROA. The ROA denominator - add up to resources - incorporates liabilities like obligation
(recall add up to resources = liabilities + shareholder value. Therefore, everything else being
equivalent, the lower the obligation, the higher the ROA. (Perused A Breakdown Of Stock
Buybacks for more foundation data.)
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There was an argument that ROA gives financial specialists a dependable photo of
administration's capacity to force benefits from the advantages and undertakings into which it
contributes. The metric additionally gives a decent observable pathway into net edges and
resource turnover - two key execution drivers. (Copeland, Koller and Murrin , 1996:105)

4.2 Short Term Debt(STD) :Independent variable

STD is expressed as a ratio of total capital to determine how much STD is used to finance and
their performances. The short-term debt ratio is measured as debt repayable within one year, as a
percentage of total assets where , all variables in the current study were based on book value.
(Majumdar and Chhibber,1999; Abor, 2007; Sheikh and Wang, 2011 ).

There is no well-defined target for a firm’s debt ratio. For instead, owners and managers usually
rely on retained earnings, i.e. available liquid assets, as their main source of financing for
operations and investments because of their desire to retain independence and autonomy. If the
retained earnings are insufficient, they tend to use STD rather than LTD, and LTD rather than
external equity capital . These circumstances affect the capital structure of firm or banking
sectors.(Myers and Majluf, 1984 ; Hutchinson, 1995; Sogorb Mira, 2005)

Financial performance measured by return on asset (ROA) with capital structure measured by
total debt, Short term debt (STD) and long term debt (LTD) where it focus on a sample size and
collected data from the annual reports of the firms. The type of data is being collected including
short term debt (STD) is one of them independent variables where it helps to get size of the
company was measured by natural logarithm of total assets, while growth was measured by the
change in total assets. Correlation and regression analysis was used to establish the association
and effect of the variables .

Reaching a satisfactory debt level is critical for any business or company , not only because of
the need to achieve profitability and firm value, but also it increases an organization’s ability to
deal with its competitive environment. The relationship between debt financing and firm
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performance is a crucial; cause according to trade-off theory said that debt financing is
associated with the trade-off between costs and gains . Although a growing body of empirical
research treats the impact of financial leverage on firm performance, especially in terms of
profitability. By using a regression model to investigate the relationship between debt ratio and
performance, proxies by return on net value of total assets.(Harris and Raviv, 1991;Majumdar
and Chhibber ,1999)

In most capital structure models, an optimal debt level is determined by weighing various
leverage and it can be described as optimal when the costs and advantages of debt are equal. The
optimal capital structure may differ from firm to firm depending on their characteristics,
including size, age and tax and asset structure(Fama and French, 2002).

Not only that, the relationship between capital structure and profitability of listed banks in Ghana
showing that STD and TTD are positively related with firm’s profitability (i.e.ROE), whereas
LTD is negatively related with firm’s profitability (i.e. ROE).Cause when tax rate is high STD
can be used for this term of issues. STD least costly and easiest way to adjust debt and avoid
potential cost of the future debt. Moreover, for internal financing to external financing, pecking
order theory suggests that short-term debt (STD) is preferred to long-term debt (LTD). It is also
suggested that STD and LTD in some cases can be substitutes for each other (Petersen and
Rajan, 1997 ; Abor, 2005)

It is an important fact that banks across many countries and throughout history have borrowed
predominantly via short-term debt (STD). This fact holds across many different tax and
regulatory regimes. Thus, an explanation relying on the favorable tax treatment of debt cannot be
the first-order reason for the predominance of debt. During the free banking period of the US in
the 19th century, there was no insurance on bank deposits (or lender of last resort) and yet banks
carried high leverage. An explanation that relies on government insurance on bank deposits also
cannot be the first-order reason for banks’ reliance on short-term debt. Cause it is One reason for
banks in industrial countries to lend short-term to emerging markets is that longer maturities
carry greater risks. For that, these circumstance , go for short term debt rather than long term
debt.(Gorton 2012),
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Short-term debt mirrors the nature of the investment being financed and the institutional
environment that enables investors to enforcere payment. It is no surprise that illiquid or poor
quality investment when a bank or banking system is close to its debt capacity will result in a
buildup of short-term debt. The higher likelihood of crisis stems not from the short-term debt but
from the illiquidity and potentially low creditworthiness of the investment being financed.
(Diamondand Rajan , 2001)

4.3 Long-Term Debt(LTD): Independent variable

The long-term debt ratio was defined as the total debt repayable beyond one year, as a
percentage of total assets where debt divided by a size of variable based on book value . Long-
term debt dependent firms maintain sufficient physical fixed capital that can be used as
collateral, so they can secure debt by pledging the tangible assets as collateral rather than project
tangibility. (Majumdar and Chhibber,1999; Abor, 2007; Salimand Yadav, 2012).

Long-term debt converts to short-term debt when the period left until the debt must be repaid
becomes less than one year with the passage of time. Long-term debt is used to finance business
investments that have longer payback periods. Long term debt financing is advantageous as it is
usually less prone to short term shocks as it is secured by formally established contractual terms.
Hence, they are relatively more stable than short-term debt (Lancett, 2008)

For asset tangibility is related to information asymmetry, moral hazard and agency costs, a firm’s
tangibility ratio is expected to affect its capital structure in terms of LTD. Accordingly, firms
with a high tangibility ratio where it is having a large number of collateral-based assets ;are more
likely to borrow money from banks and other financial institutions where STD is not connected
to the firms’ number of collateral-based assets in this way. Cause There is a negative relationship
between the asset tangibility with STD but positive with LTD.(Rajan and Zingales, 1995;
Titman and Wessels, 1988)

Although that firms can gain the benefits of tax-deductible interest payments by increasing the
amount of debt in their capital structure, this view has been questioned due to its assumption of
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market perfection and its limited applicability to small firms. Firms who lack long-term
borrowing capacity maintain higher information asymmetric problems, consequently not able to
satisfy the conditions for long-term borrowing.(Fazzari et al., 1988 ; Grabowski and Mueller,
1972; Chaganti et al., 1995).

The functioning of markets for banks’ long-term debt differs across segments and banks’ access
to this source of funding also varies considerably across issuers. Many of the challenges faced by
euro area banks in relation to obtaining long-term debt financing are to some extent faced also by
banks in other advanced economies. In their model banks will usually be financed by a mix of
demand deposits and long-term capital. Although long-term capital can sometimes prevent a run
and allow the bank to remain open, long-term investors may be forced to absorb losses stemming
from a decline in the bank's asset quality while depositors run on the bank's assets.

For long term debt ratio , ROA can be effect positively or negatively on firm company or bank
firm’s performances. Based on research on firm’s financial performance where dynamics and
stock returns, they found that firms which are highly indebted recorded low profitability. They
used return on asset to measure financial performance and least square regression model in
estimation of the empirical results. They found that long term debt has a significant negative
effect on firms’ financial performance as measured by ROA.On the other hand ,in capital
structure is considered to be under-researched in Ghanaian banks, even though the case is
different in the developed economies. There ROA is quiet positive effect on firm performances.
(Cai & Zhang 2006; Abor and Biekpe 2005)

4.4 Total Debt(TD) : Independent variable

A total debt ratio is a financial ratio that measures the limit of a company’s or consumer’s
leverage. The debt ratio is defined as the ratio of total – long-term and short-term debt to total
assets, expressed as a percentage or decimal (Hillier et al. 2010).

There are many reasons important for examining the relationship between debt level and firm’s
performance. Firstly, explanation of impact of debt level on firm’s performance is needed due to
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the rising debt level of the firm over the years. so the debt level decisions can be made in a
particular firm effectively. Secondly, investors and managers may have different power, it is
necessary to know the specific effects of debt on firm’s performance. In the end the most
important reason for studying debt level and firm’s performance is to examine the relation
between debt level and shareholders wealth, because shareholders wealth maximization is a
primary goal of firm’s managers. Even they found that the use of debt may increase the
manager’s share of equity and decrease the loss that arises because of conflicts between
managers and shareholders which is known as agency costs. The bankruptcy often become costly
for managers for loosing benefits or control over the firm. During that critical moment high level
of debt can create an incentive for managers to work harder and make better investment
decisions. These findings clearly states that even in the threat of financial distress, high debt
levels can affect the performance level of the firm by influencing the managers In a study on
micro-finance institutions in Ghana, it was found out that highly leveraged micro-finance
institutions perform better by reaching large number of client and getting the economies of scale.
The data of French firms from low-and-high growth industries it was found that higher leverage
improves efficiency of the firm. By using US banking industry data they found that higher
leverage is associated with higher profit efficiency. On the other hand, the strong debt
agreement might limit the manager’s ability to operate freely, which literally affects firm’s
performance. many studies have been conducted to estimate the relationship between capital
structure and performance. (Kinsman and Newman , 1999 ; Harris and Raviv, 1991 ;
Grossman and Hart et al,1982)

However, it remains unclear whether the debt is good or bad. Both arguments and empirical
findings have gone through this matter. Some researchers have argued that debt has a positive
effect on performance, whereas, other researchers fight back against such claims by arguing that
debt has a negative effect on performance.

Phillips and Sipahioglu (2004) tested the Modgliani and Miller’s debt irrelevance theory by
using the data of 43 UK organizations bears interest in owning and managing hotels. They
observed that no serious relationship exists between the level of debt in the capital structure and
firm performance. Similarly. It was found out that the relationship between capital structure and
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performance of Indian firms. They observe that debt level is negatively related with
performance. Many research argued that high debt levels increase the manager’s risk fear and
reduce their willingness to invest in profitable but risky projects.Usingthe data of US
manufacturing firms observed that higher leverage negatively influences the future investment in
R&D which may leads to negative impact on long-term operating performance and future
growth opportunities.(Balakrishnan and Fox 1993 ; Singh and Faircloth , 2005)

Based on these literature it is clear that the studies on the relationship between firm’s total debt
and firm performance have created various results. There are more statement on positive relation
among the variables compare to the negative relation. There is no common agreement on how
total debt is related to performance of the firms. So, the results are inconclusive and require more
empirical work.

4.5 Firm Size :Independent Variable

In most of the financial literature, bank size is represented by the total assets of the banks. As a
proxy for bank size Natural logarithm of total assets is used. The most important questions in the
literature is if there is an optimal bank size to maximize bank profitability, the effect of bank size
on profitability is generally expected to be positive. There are available facilities in larger firms
can help those firms to perform better than smaller ones. Generally these facilities are
opportunities to use external funds and visibility in the economy, which reflect the value of the
firm and the possibility to get the government support which might attract better qualified staff
and more investors. In other research work it has been argued that a growing bank size is
positively related to bank profitability. Larger bank will have a higher number of production and
have loan diversification compare to the smaller one, for the higher diversification potential
larger firm can enjoy economies of scale. Bank size has positively effect on bank profitability as
diversification reduces risks and economies of scale increases operational efficiency . In more
studies it was found that there is a positive relationship between size and profits. found size has
positively related to profitability. In most of the finance literature, the total assets of the banks
are used as a proxy for bank size. Bank size (LOGTA) is generally used to capture potential
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economies or diseconomies of scale in the banking sector. ( Molyneux and Thornton ,1992 ;
Bikker and Hu ,2002 and Goddard et al. ,2004)

Bigger banks gain higher leverage on the economies of scales to achieve higher profitability.
Large bank have other advantages such as they can enter variety of product lines and they can
spend on research and development. Every firm has some risks and uncertainties. Bigger
companies are expected to meet these uncertainties as they have better and bigger resources.
Large size bring bargaining power over suppliers and competitors . There are two factor in this
variable (farm size), first is cost differences in product and second is risk diversification
according to the size of the financial institution. The first factor could lead to a positive
relationship between size and bank profitability if there are actual economies of scale. The
second factor could lead to a negative relationship between size and bank profiability if increased
diversification leads to lower credit risk and thus lower return . The big scale firms have a higher
performance as compared to small scale firms. Similarly, another researcher studied the relation
between profitability and size of the firms operating in Iceland. Results of the analysis showed
that bigger firms have higher profitability as compared to smaller firms. Fiegenbaum and
Karnani (1991) have found a positive relation between firm size and profitability. Results of the
study have showed that big firms have a higher profitability compared to small firms. Likewise,
the relation between the size and performance of big and small scale firms operating in Portugal.
They found positive and statistically significant relations between the size and performance of
the firms. Lee (2009) also has found a positive relation between the size and profitability of the
firms operating in USA between the years of 1987-2006. The factors influencing the profitability
of 960 big firms operating in Australia. The result of the study has indicated that firm size affects
firm profitability in a positive way.(Bikker and Hu 2002; Goddard et al. 2004).Ozgulbas et al.
2006)

Some researcher found negative relationship between size and bank performance. The larger
and more diversified banks performs poorly, where smaller and specialized banks can more
efficiently reduce asymmetric information problems related with lending. The relationship
between firm size and profitability of all the branches of Bank of Ceylon (government-owned)
and Commercial Bank in Sri Lanka. They observed that there was a positive relationship
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between firm size and profitability in Commercial Bank but there was no relationship between
firm size and profitability in Bank of Ceylon. Shepherd (1972) has found a negative relation
between firm size and profitability. Another researcher argued that firm profitability is
independent from firm size.(Velnampy and Nimalathasan , 2010 ; Whittington 1980)

Based on these literature it is clear that the studies on the relationship between firm size and
profitability have created various results. There are more statement on positive relation compare
to the negative relation among the variables. There is no common agreement on how firm size is
related to the profitability of the firms. So, the results are unsolved and require more empirical
work.

4.6 Sales Growth: Independent variable

Sales growth is another independent control variable which focus on as a key to profitability. It is
important in that from capital structure theories, such as pecking order theory and information
asymmetry to get sustainable performance at the bottom line. Cause there is a relationship
between profitability and sales growth where it changes in net income. For Regression and
descriptive method is used growth of firm has Significant with short and long term debt ratio,
Size, business risk, and profitability significant with short term debt ratio. And age of firm, assets
structure, gender of owner has significant with long term debt ratio. To organized in banking
companies in Ethiopia to evaluate the financial performance descriptive is nature. Same goes on
bank performances are significant to Macro-economic variable.(KokobeSeyoumAlemu, 2013 ;
Bassey, 2013 ; Fortune , 1998)
ROA used as the measure of profitability and sales growth as the measure of growth. There is
regression effect between ROA and sales growth which is show that increase in the growth will
lead to increase in profitability . In terms of sales growth rates, the value known as return on
assets to determine a company's internal growth rate and it is the maximum growth rate which a
firm can achieve without resorting to external financing. Many study reveals that all the
profitability has strong positive relationship with the growth of the firm And their expected
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association between dependent and independent variables are positive.; however size has less
significant and negative impact on the profitability. The size and the growth have negative
relationship. When the size of the firm is small, it grows faster. The profitability is not
significantly influenced by the size of the firm but it is highly affected by the growth of the firm
or bank sectors. ( Asimakopolous et al.,2009; Coad 2007).
During the period of flourishing economic activity, demand for finance from banks increases to
finance various needs of the deficit units in the economy. It is linked to bank growth where the
size distribution of banks is of fundamental interest to bankers and policymakers, given that size
is a key determinant of risk taking credit availability lending relationships and lending
specialization . The analysis indicates that growth is inversely related to both size and age,
suggestive of the fact that learning effects are higher for small banks.
Second, the analysis augments the literature on productivity. The study of productivity is
relevant because it is a summary measure of performance. Thus, productivity analysis may be
relevant to those involved in M&A issues, like industry practitioners and competition authorities.
M&T banks annual revenue for the fiscal year ended 2016, grew by 13.52% to 5105.88 million,
from 4797 million achieved a year ago. M&T banks growth rate for sales improved from -5.04%
decline in the fiscal year 2015(M&T bank income statement 2016). Also, to the extent that low
productivity can work as an early warning signal, policymakers can use productivity measures as
an additional monitoring instrument. (Demsetz and Strahan, 1997 ; Peek and Rosengren,
1996 ; Stein, 2002; Berger et al., 2005 )
Research conducted on developing countries shows that capital structure directly effect on firm
performance and economic growth rate. Capital structure fulfills the expectation of stockholder
and Creditor. Theory of capital structure shows that capital structure fulfills the need of
stakeholder and help to economic growth. Varies stages of economic develop countries like
;Pakistan, Japan and Malaysia shows that capital structure are significant in economic
development. Capitalization decisions of corporate are important in economic decision. Financial
intermediaries like banks and firm fulfill the requirement of financing decision. Second way get
financing is issue share in stock exchange. Multiple debates on capital structure but it are till
continuous. Study shows that use multiple mixtures of debt and equity Companies play important
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role in economic development. Financial institute play important role in economic and industries
development (Dr. Nwankwo , 2014 ; MAHMUD, 2003)
Moreover, it was found out the type of capital structure are choice in small or rapidly growing
firm. One of the firm , Data are taken from 405 firm, data are taken from high growth 27.2%.in
research it shows that management preference ,tax , cost agency , signaling theory and
information asymmetry impact on capital structure.The purpose of this research to determine the
performance growth and various ratios. Result shows that There are positive relationship
between equity ratio, total assets, and ratio of financing to total assets. there are zero significant
of liquidity ratio. In the present study, a positive relationship is also expected between the
dependent variables and sales growth. The positive relationship between the dependent variables
and sales growth indicates that, non-financial firms in Ghana really gain much from their core
businesses(Rajha&Alslehat, 2014 ; Norton, 1991; )
There is another control variables are GDP and inflation. GDP is important because the overall
economic activities affect the banking business Inflation spells out the rate at which prices of
goods and services change over a period of time. This feeds into the level of interest rate, and
hence the lending rate of banks. Both GDP and inflation are positively and insignificantly related
to NIM. Exchange rate is negatively and insignificantly related to NIM.
Pecking order theory and agency cost theory describe the relationship between capital structure
and growth rate. High Degree of deposit increase growth rate. Growth rate is equal to advances
divided by total assets into100.
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5.Conceptual Frame Work

Regression model

Y = 0 + 2X1 + … + nXn + 

Where,

Y = the dependent variable

0 = the y-axis intercept of the regression line

n = the coefficient of the independent variable

 = error item, which represents the error in predicting the value of the dependent variable ,

given the value of the independent variables..

We have used the following model to establish a relationship between Return On Assets and the
selected independent variables.

Y = 0 + 1X1 + 2X2 + 3X3 + 4X4 + 5X5 + 

Here,

Y = Return on Assets (ROA)

X1 = Short Term Debt (STD)

X2 = Long Term Debt (LTD)

X3 = Total Debt (TD)

X4 = Size

X5 = Sales
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6.Research Question & Hypothesis

Questions Null Hypothesis Alternate Hypothesis

1. STD (Independent H1 : There is no significant HA1 : There is significant
variable) - Does STD relationship between STD and relationship between STD and
have a relation with ROA ROA
ROA?
2. LTD (Independent H2 : There is no significant HA2 : There is significant
variable) - Does LTD relationship between LTD and relationship between LTD and
have a relation with ROA ROA
ROA?
3. TD (Independent H3 : There is no significant HA3 : There is significant
variable) - Does TD relationship between TD and relationship between TD and
have a relation with ROA ROA
ROA?
4. SIZE (Independent H4 : There is no significant HA4 : There is significant
variable) - Does SIZE relationship between SIZE and relationship between SIZE and
have a relation with ROA ROA
ROA?
5. Sales (Independent H5 : There is no significant HA5 : There is significant
variable) - Does Sales relationship between SALES and relationship between SALES and
have a relation with ROA ROA
ROA?

7.Research Design
7.1 Degree of Question Crystallization

Formal study: Formal study is a developed research question and the hypotheses are already
examined. It gives precise procedures and data source specifications. We use a formal study
because it is a structured research question and easily find the answers from the research design.
The goal of formal research design is testing the hypotheses.

7.2 Method of Data Collection

Monitoring: Our research design is given to us for that we have been monitoring our subject.
Monitoring is a study where the researcher inspects the activities of subjects. We are monitoring
our variables and their relationship and how they related to each other. Monitoring is a following
process where the entire elements are present with their activities. Data collection is already
given in the report.
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7.3 Researcher control of variables

Ex-post-facto: Ex-post-facto design is a process where we or investigators have no control over

the variables in the sense of being able to manipulate them. We can only report that what has
happened and what is happening. It made after-the-fact based on measured variables. We are
limited to holding factors constant by variables and we made a report to relate the variables only.
We cannot change the variables and relations.

7.4 Purpose of the study

Causal-explanatory: Causal-explanatory is a study process that is how one variable produces

changes in another variable. In causal explanatory study, we try to explain the relationship
between variables. We can use asymmetrical relationship in this study. In the report statement of
the probability that independent variable produces dependent variable based on what we observe
and measure.

7.5 Time dimension

Longitudinal study: Longitudinal study is repeated over an extended period and it can change
track over time. In longitudinal study, we used panel variety. We study the same people over
time. It helps us to collect data easily.

7.6 Topical scope

Statistical study: Statistical study is designed for breadth rather than depth. We try to capture a
population’s characteristics by making inferences from a sample’s characteristics and testing the
hypotheses result. Hypotheses are tested quantitatively. It is also generalization which is
representativeness of the samples and validity of design.

7.7 Research environment

Simulation: we are doing simulation process in our design because it creates major
characteristic of various conditions and relationships in actual situation in mathematical models.
We are working and monitoring mathematical models so it s a suitable process for our research
design.

8.Sampling
8.1 Sample methods: We are using random samples of 5 banks out of all 2nd generation
Bangladeshi commercial banks and it is free for base and error.

8.2 Sample size: In sample size, we take data of 5 banks and we are collecting data from 2011-
2015.
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8.3 Sample unit: The sample units for this study is chosen 2nd generation banks. The banks
name are Mutual Trust Bank Limited, UCB Bank, Dhaka Bank Limited, One Bank, Trust Bank
Limited.

8.4 Data Collection: We are going to collect secondary and statistical data. We are observed
and monitored the longitudinal data for this study.

9.Data Analysis
VARIABLES AND RESPECTIVE FORMULAS

S/N Variables Formulas

o
1. ROA Net Income/Total assets
2. LTD Long Term Debt / Total Capital
3. STD Short Term Debt / Total Capitals
4. TD (STD + LTD ) / Total Capital
5. SALES LN Value
6. SIZE LN Value
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9.1 Descriptive Statistics of the Variables

The descriptive statistics for the six measures of profitability, namely ROA, STD, LTD, TD and
Sales are presented in the table.

9.2 Correlation Matrix

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Here,

0 to 0.29 or 0 to -0.29 = weak correlation

0.3 to 0.69 or -0.3to -0.69 = Moderate correlation

0.7 to 0.99 or -0.7 to -0.99 =Strong correlation

9.3 Regression Analysis

The table represents the summary statistics of the variables of this study. Total observations of
this study were 25, owing to a time period of 5 years and 5 listed Commercial Bank of
Bangladesh. Our study, we used multiple regression analysis.
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The dependent variable is ROA

We used the Panel Least Squares method.

We took the data from 5 Commercial Bank, MTB, Trust Bank, Dhaka Bank, ONE Bank, UCB,
for 5 year period from 2011-2015.

9.4 The Model

ROA = C + 1 STD + 2 LTD + 3 TD + 4 Sales + 5 Size

From the above regression table we can now rewrite our equation as

ROA = 0.068838+0.027211STD +0.030058LTD - 0.100826TD+0.000926 Sales - 0.002958 Size

10.Findings
For this study main purpose is how to maximize our profitability . After doing the literacy
review we saw that STD,LTD,TD negative relationship with the profitability(maximum articles)
and Firm size and Sales are positive relationship but some articles shows negative relationship
with profitability. But after doing our correlation matrix we shows that ROA with STD,LTD,TD
are negative relationship and ROA with firm Size & Sales are positive relationship. But after
hypothesis test all the "p-value " of independent variable grater then significant level that means
"Do Not Reject Null", So all the independent variable has no significant relationship on Return
on Assets (ROA). Basically main reason is our sample size small and do not proper way of
sampling. Large sample size are provide more accuracy and minimize the sampling error. So
finally we got that based on our analysis our independent variable STD,LTD,TD has no effect on
dependent variable Return on Asset.

11.Conclusion
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This report is about the capital structure of five commercial banks of Bangladesh and there
profitability. Our study meant to investigate how much impact on the Capital Structure as
indicated by the money related organizations of Bangladesh. Our study utilized as a part of
distinct insights and relapse model to test our announcements. We have analyzed these banks
under model and tested the result under some criteria. We have found that model which we have
analyzed that is not of good fit for those banks.

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