Abstract

The overall objective of the present study is to investigate the capital structure scenario of
enlisted companies of Dhaka Stock Exchange. To conduct the research with meaningful
outcomes, about 36 companies under 12 sectors of Dhaka Stock Exchange of Bangladesh from
the 562 enlisted companies are taken purposively. The objectives of the present study were
accomplished in some stages where the first one is to overview the existing scenario of capital
structure of the enlisted companies of Dhaka Stock Exchange, then to examine the factors
affecting the capital structure decision of the enlisted companies of Dhaka Stock Exchange.
Another focusing objective of this study is to determine the impact of capital structure on the
growth and financing behavior of the enlisted companies of Dhaka Stock Exchange. Then the
study is designed to analyze the relationship between capital structure and performance of the
enlisted companies of Dhaka Stock Exchange and finally to find out the problems of capital
structuring of the enlisted companies of DSE to enhance the suggestions and provide
recommendations to overcome.
The study conducted shows some influential factors that affect the capital structure decision and
financing behavior from the view point of the shareholders surveyed are business risk, growth
rate, market condition, size of the firm or company, companys earnings, debt service capacity,
cash flow stability, nature of the company, Asset structure, lender and rating agency attitudes,
financial flexibility, management styles.
During the ten years study period i.e. 2004-2005 to 2013-2014, different findings have been
investigated using the key variables of the study. The descriptive statistics has been designed to
examine and investigate other specific objectives of the study and test the hypotheses. This study
shows the relationships between both dependent variables such as Share Price, EPS, Dividend,
ROA, Capital Growth and ROE and the independent variable debt to equity to know the capital
structure of the selected sample companies and their efficiency and optimization as well using
both primary and secondary data collected from Dhaka Stock Exchange of Bangladesh. Most of
the values of the selected companies show the positive relationships even high positive
relationships among the variables though some values show negative.
The study has been investigated that a firms leverage is negatively influenced by the level of its
ROE. It is also found that fluctuations in EPS have large effects on leverage. This work
investigates the short- and long-term effects of the level of earnings per share (EPS) on corporate

capital structures. It is explicitly shown not only the short-term effect but also the long-term and
persistent effect of EPS on corporate capital structures.
However, overall data analyzed in this study shows that the hypotheses taken are all most
accepted that there is a positive relationship between capital structure and firms performance as
well as firms share price. Moreover, there is a positive relationship between liquidity and
performance as well as between leverage and profitability of the selected sample companies in
Dhaka Stock Exchange. During the study period, some problems are investigated by the
researcher from the study both of fieldwork and of secondary data investigation. Arising from the
findings of the study, some suggestions regarding the capital structure and its usefulness for
taking proper decisions in the DSE are highlighted in this study.

1.1 Background of the Research

Every company needs capital in order to maintain or expand its business. So, it is an important
and critical resource for all companies. This resource can be divided into two main categories,
namely equity and debt. Equity arises when companies sell some of its ownership rights to gain
funds for operation and investing activities. Debt is a contractual agreement, whereby companies
borrow an amount of money and repay it with interest within a specific period.
Many researchers defined capital structure in different ways. Brigham, (2004) referred to capital
structure as the way in which a firm finances its operations which can either, be through debt or
equity capital or a combination of both. Brealey and Myers (1991) defined capital structure as
comprising of debt, equity or hybrid securities issued by the firm. Myers (2001) also noted that
capital structure attempts to explain the mix of securities and financing sources used by
companies to finance investments. Bos and Fetherston (1993) pointed out that capital structure,
being total debt to total asset at book value, influences both profitability and riskiness of the firm.
The standard capital structure of a firm includes retained earnings, debt and equity; these three
components of capital structure reflect firm ownership structure in the sense that the first and
third components reflect ownership by shareholders while the second component represents
ownership by debt holders. Therefore, capital structure can be defined as the combination of
sources of funds (debt, preferred shares, and ordinary shares) a firm uses.
The amount of debt that a firm uses to finance its assets is called leverage. A firm with a lot of
debt in its capital structure is said to be highly levered. A firm without debt is said to be
unlevered. When financial leverage increases, it may bring better returns to some existing

shareholders but its risk also increases as it causes financial distress and agency costs (Jensen
and Meckling, 1976). The cost of financial distress can be both direct and indirect. The
bankruptcy cost is an example of direct financial distress cost while extraordinary administrative
costs, loss of trade credit, loss of sales and key personnel are examples of indirect financial
distress costs. Therefore, optimal capital structure is determined by the trade-off between
benefits and costs of debt financing. The benefits are typically tax savings and the costs are
financial distress and agency costs (Titman and Tsyplakov, 2004). An appropriate capital
structure is a critical decision for any business organization. The decision is important not only
because of the need to maximize returns to the shareholders, but it is also important because of
the impact of such decision on an organizations ability to deal with its competitive environment
(Simerly and Li, 2002).