The financial performance using Capital Structure to evaluating the company of aChinese state-owned company called Inner Mongolia BaoTou Steel Union Co., Ltd.

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 Abstract

51education | 01.23.2015

To find out the optimal determinants of capital structure remainsthe hot issue in literature, so that one can gear the performance of theirorganizations. For this purpose many researchers have developed many theoriesand made explanations to determine the best capital structure where a firm canperform at its optimal level. The basic concept of capital structure introducedby Miller and Modigliani (1958), they theoretically and mathematically analyzedthe determinants of capital structure and its effects on the overall value ofthe firm. Miller and Modigliani suggest that the capital structure have noeffect on the performance or growth of the firm. This result became anestablish theory and opened the new way of discussion about this topic. Lateron, other researchers found different results to this theory, as they foundthat the capital structure and cost associated with this capital is necessarycomponent in determining overall value and growth of the firm (Agymin, 1998).Some of other studies also suggest that capital structure choices showrelationship with firm assets and other variables (Titman and Wessels, 1988),(Huang and Song, 2006).

 

     It is obvious that the choices of selection of capital effects onthe performance and earnings of the firms because these choices carries costswith them. And if we talk about the best choices to determine capital structurethen we can see that there are diverse results found in literature. In thisbackground this current study is a step to find out the most significantdeterminants to capital structure. In this way this study contributes to thebody of literature about the significance of established theories by taking thedata of China listed largest firm. This study analyzes the financial data ofInner Mongolia Bao Tou Steel Limited for the period of 2002 to 2012 to find outthe relationship of capital structure with different performing variables inthe context of literature.

 

     Inner Mongolia Bao Tou Steel Union Limited is a Chinese State ownedcompany which deals in steel related products. It is the largest firm among alllisted firms in Western China. This study analyzes the data of this largestfirm over the period of a decade and observes the relationship of its capitalstructure with other firm characteristic variables. More specifically, thisstudy measures the relationship of firm size, cash flows, firm age, firmassets, profits, firm growth and risk attached to the firm with itscapital structure. To measure therelationship of selected variables, firstly this study develops co-relationaltable for all variables with each other, secondly this study developed OrdinaryLeast Square (OLS) regression model by assuming leverage as dependent and allother variables as independent. This study also conducted a handsome literaturereview to support the significance of results.

 

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