1

Running Head: PROJECT PAPER

Capital Structure and Corporate Performance: Evidence from Qatar

Student’s Name

Course

15th December 2020

PROJECT PAPER

Capital Structure and Corporate Performance: Evidence from Qatar

Introduction

Capital structure has been a largely understudied topic for several years. It is commonly argued

that firms that are more profitable usually depend on more debt in their capital structure than

firms that are not as profitable. However, practically, firm managers can find out the optimal

capital structure of the firm that can help them reduce finance costs of the firm and thus enhance

the revenue and profit. The firm's capital structure is expected to impact the performance of the

corporate as well its likelihood to default. For instance, if a company has a high ratio of debt to

equity, it may easily default as the company lacks its resources and assets to pay off the

borrowed money.

The objective of this paper is to investigate the effect of capital structure on corporate

performance in Qatar. There is not sufficient empirical evidence about the impact of capital

structure on the performance of the companies in developed as well as developing companies.

This paper covers the effect of capital structure on the performance of Qatar companies. The

Qatar economy was chosen for the reasons discussed below.

Qatar has seen a large growth in its economy in the last decade. In 2015, the economy grew by

3.6% mainly due to the large investments that occurred in the non-hydrocarbon sector (Daoud,

2016). The main source of income for Qatar is its trade in the oil sector because of the large oil

and gas reserves in Qatar. The oil prices remained volatile where they declined sharply in the

2014-2015 period, however; the decline was contributed mainly by the huge influx of oil from

the United States. Apart from the low oil prices, the economy of Qatar continued to grow

because of the non-hydrocarbon sector that accounted for a total growth of 61.4% in the total
PROJECT PAPER

GDP of Qatar in 2015 (Daoud, 2016). These factors resulted in the rise in inflation to 3.6% in

2016. Thus, the macroeconomic shocks contribute significantly to the performance of companies

which could be seen in the economy of Qatar.  

Secondly, the banking system in Qatar is different from western countries as the country has both

non-Islamic and Islamic banking. The banking industry of Qatar has 11 local banks and 1 bank

with international branches (Tabash & Dhankar, 2014). The credit policy of Islamic banks is

different from the traditional, commercial banks which could impact the performance as well as

the default risk of the companies in Qatar. The credit policies of these Islamic banks can force

the companies to choose a capital structure that is not so optimal for their company which can

impact the performance and default risk of these companies.

Literature Review

The capital structure is one of the key factors affecting the success as well as the performance of

the company. Because the cost of bankruptcy occurs, worsening returns arise with the further use

of loans to benefit from the tax deduction. Consequently, beyond which changes in bankruptcy

payments are greater than the incremental tax-sheltering gains associated with the increased

exchange of debt for equity. As mentioned in previous research, however, the underestimation of

the insolvency or reorganization bankruptcy costs, or the aligned interests of both management

and shareholders, could cause companies to have a greater amount of debt than they would

otherwise in their capital structure.

Krishnan and Moyer (1997) found that total debt to total equity had a negative and major effect

on the return on equity. Masood (2014) stressed the significance of the choice of the capital

structure as he claimed that such decisions have a significant impact not only on the company's
PROJECT PAPER

creditors but also on the company's sustainability in the face of increasingly dynamic market

environments. He observed, however, that the topic of the capital structure remains unsolved,

amid different interpretations and research studies on capital structure.

Another research by Gleason, Mathur, and Mathur (2000) showed that the capital structure of

companies has a negative and major effect performance of firms. High levels of leverage in the

capital system will also decrease the success as well as the performance of the company.

An important positive relationship between capital structure and the performance of the company

was found by Margaritis and Psillaki (2010). For the period 2003-2005, researchers used a study

of both low and high-growth French companies and found that leveraging had a positive impact

on the productivity of firms over the whole sample.

Fama and French both saw a negative relationship between the capital structure and the

efficiency of the business (Fama & French, 2002). They find that highly profitable businesses

with a smaller risk of financial loss, which undermines the trade-off principle, are also less

leveraged.

Soumadi & Hayajneh (2011) studied the impact of capital structure especially the ratio of debt to

equity on the success and efficiency of the Jordanian companies. It was found that there existed a

negative relationship between the two indicators. They also found that there was not a significant

difference in leverage on the performance between firms that had high leverage and low

leverage.

A significant negative correlation was found between the capital structure and the performance

of companies in China (Tianyu, 2013). Tianyu carried out his research on a sample of 1200 firms

that were listed on the stock exchange.

PROJECT PAPER

Abor (2005) observed that different metrics of capital structure, reflecting short-term debt, long-

term debt, and overall debt, were negatively and statistically related to firm performance. The

result indicates that businesses depend largely on funding, which does not attain tax shields,

which then contributes to a rise in borrowing rates, exposing the company to insolvency risks

and reducing returns.

The impact of capital structure on the performance and efficiency of Nigerian companies was

studied by Chinaemerem & Anthony (2012). They studied a sample of 30 listed financial

companies on the Nigerian Stock Exchange. Their study comprised of ROA and ROE as their

performance variables and debt to equity ratio as their leverage indicator. The results showed

that the capital structure of the firms had a negative correlation with the company's performance.

According to Ebaid (2009), the capital structure has a weak/no impact on the performance of the

company. He studied a sample of 64 listed Egyptian companies. He used ROA and ROE as his

performance variables and concluded that these indicators showed little to no change due to the

change in debt funding.

Overall, there is significant evidence that proves a strong negative correlation between debt

funding and the performance of the companies. This study extends this research and measures

the impact of capital structure on the performance of companies in Qatar.

PROJECT PAPER

Data and Methodology

Data and Sample

The main objective of this paper is to study and measures the impact of capital structure on the

performance of companies in Qatar. To achieve this objective, the sample comprises of 28

companies using data throughout 2010-2019. The companies are listed on the Doha Stock

Exchange Market. The data is balanced panel data with total (28 x 10) 280 firm-year

observations.

Variables and Hypothesis

Dependent Variable- Performance

Several studies have been carried out to study the impact of capital structure on corporate

performance. Most of these studies use Return on Assets, Return on Equity as their measure of

corporate performance. One of such studies includes the study by Zeitun & Tian (2007) where

they have used ROA and ROE to indicate the performance variables of the company.

In this study, three indicators of performance have been used; Return on Assets, Return on

Equity, and Earnings per Share. ROA and ROE are profitability ratios, precisely. They show how

profitable a company is and this does not mean that a profitable company will meet all of its

obligations through its cash flows. A profitable firm can also face cash flow shortages which

may lead to insolvency of the company if it does not have enough liquid cash to meet its short-

term dues.

However, these indicators denote the performance of the company and thus, are used as

performance indicators. ROA is calculated by finding the ratio between total net income and
PROJECT PAPER

total assets, ROE is calculated by finding the ratio between net income and shareholder's equity,

and EPS is calculated by dividing net income by the number of shares outstanding.

Independent Variable- Capital Structure

The independent variable in this study is leverage. The study aims to study the impact of capital

structure on the performance of the company. The capital structure of a firm is made up of debt

and equity. Leverage measures the ability of the firm to meet its obligations. Three leverage

ratios have been used in this study: Short-term debt to total assets which is denoted as STD,

Long-term debt to total assets which is denoted as LTD, and Total debt to total assets which are

denoted as TTD.

Moreover, size is also used as a control variable to measure its impact on corporate performance.

Onaolapo and Kajola (2010) and several other researchers show that larger firms can attain

economies of scale and can enjoy several other perks in their capital structure. Furthermore, size

is calculated by taking the logarithm of total assets. Thus, in this study, size has been used as a

control variable to control its impact on corporate performance. The following hypothesis will be

tested in this study:

H1: A corporate capital structure impacts the company’s performance.

H2: Short-term debt has a negative correlation with firm performance.

H3: Growth opportunities have a positive influence on firm performance.

H4: A firm's size is expected to have a negative influence on the company's performance.

H5: There is a negative relationship between financial leverage and corporate performance.
PROJECT PAPER

The Econometric Model

ROA i ,t =α 0+ α 1 STD i , t +α 2 LTD i ,t + α 3 ¿ ¿ i, t+ α 4 TTD i ,t +ε i , t ¿

ROEi , t=α 0 + α 1 STD i ,t +α 2 LTDi , t +α 3 ¿ ¿ i ,t +α 4 TTD i ,t + ε i ,t ¿

EPS i ,t =α 0 +α 1 STD i ,t + α 2 LTD i ,t + α 3 ¿ ¿ i, t+ α 4 TTD i , t +ε i , t ¿

Results and Analysis

Summary Statistics

Table 1 below shows the Summary Statistics for independent and dependent variables. From the

table below, it can be seen that the performance variables: ROA, ROE, and EPS have a mean

value of 0.333, 0.559, and 1.265, respectively. The mean for ROE and ROA is below 1 which

indicates the poor performance of Qatar companies. Although, the EPS mean is not ideal but it is

comparatively better than the other two indicators which shows that the Qatar companies' shares

have performed well in the stock market. Considering the capital structure variables and size

which are the independent variables in this study, we can see that the mean of STD, LTD, and

TTD is 0.18, 0.169, and 0.374, respectively. This shows the mean value of leverage in Qatar

companies is quite low denoting that Qatar companies do not heavily rely on debt financing.

However, from the table below it is evident that the Qatar companies use more short-term debt as

compared to long-term debt. Considering the minimum and maximum values of the Size

variable, the minimum value is 4.63 and the maximum value is 7.45. This indicates that the

sample firms were more or less of the same size thus making this study more controlled, except

these firms, belonged to different sectors.

PROJECT PAPER

Table 1: Summary of Statistics Data

Mean Standard Deviation Kurtosis Skewness Range Minimum Maximum Count
ROA 0.333 1.118035599 38.5334 5.913564 10.17 -0.04936 10.12016 280
ROE 0.559 1.855545878 54.0281 6.675278 19.958 -0.06802 19.88958 280
Earnings per share 1.265 2.741777961 75.9021 7.785768 30.563 -0.51648 30.0467 280
STD 0.18 0.132822804 1.05516 1.036097 0.7233 0 0.723265 280
LTD 0.169 0.177998417 1.22286 1.234868 0.7701 0 0.770112 280
TTD 0.374 0.230996558 -0.6322 0.413002 0.9536 0 0.953564 280
Size 6.1 0.713669555 -0.6394 -0.238436 2.8221 4.62678 7.44892 280

Correlation Analysis

Table 2 (below) shows the correlation between the variables under study. As can be seen in the

table, the highest correlation is of value 0.87688 which exists between ROA and ROE. All the

other predictor variables correlate less than 0.8 which shows that there is no multi-collinearity

problem in this study. Multi-collinearity exists when there is a high correlation between

independent variables. Furthermore, the table shows that LTD has a negative correlation with the

performance variables whereas STD is positively correlated with performance variables. This

means that if LTD increases the performance of the corporate decreases and vice versa. Whereas,

when STD increases, the performance of the corporate also increases.

Table 2: Correlation Matrix

ROA ROE Earnings per share STD LTD TTD Size

ROA 1
ROE 0.87688 1
Earnings per share -0.0462 -0.03281 1
STD 0.093914 0.115948 0.400027661 1
LTD -0.14279 -0.00992 -0.086524791 -0.07172 1
TTD -0.07775 0.04033 0.173843146 0.535335 0.773881 1
Size -0.4231 -0.41002 0.056497014 -0.06565 0.362984 0.294315 1

Regression Analysis

Regression Results for Panel Data Models (Dependent Variable- ROA)

PROJECT PAPER

The analysis of the impact on the corporate performance of the capital structure is presented in

the tables below. Table 3 shows the results between capital structure denoted by Long-term debt

to the asset (LTD), Short-term debt to the asset (STD), and Total Debt to asset TTD and Size on

corporate performance which is measured by Return on Asset.

As Table 3 shows, there is no significant relationship between STD and ROA, TTD and ROA,

and LTD and ROA. The correlation between TTD and ROA is negative which shows that if the

TTD increases, ROA decreases. However, the relationship is not statistically significant at a 5%

significance level. This result is not consistent with the study of Ebaid (2009), who stated that

when the company's performance is measured by ROA, there is a statistically significant

relationship between STD and TTD. However, the control variable, the size of the firm has a

negative relationship with the company's performance when measured by ROA. This

relationship between size and ROA is statistically significant as the prob. value is less than 0.05.

This is coherent with the study by Onaolapo & Kajola (2010), who stated that the size of the firm

may influence its performance.

PROJECT PAPER

Table 3: Regression Results for Panel Data Models (Dependent Variable- ROA)
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.428561496
R Square 0.183664956
Adjusted R Square 0.171790991
Standard Error 1.017479358
Observations 280

ANOVA
df SS MS F Significance F
Regression 4 64.0533378 16.01333445 15.46787166 2.00035E-11
Residual 275 284.697667 1.035264243
Total 279 348.7510048

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 4.2616 0.5605 7.6027 0.0000 3.1581 5.3650 3.1581 5.3650
STD 0.6953 1.3213 0.5263 0.5991 -1.9058 3.2964 -1.9058 3.2964
LTD 0.2315 1.2964 0.1786 0.8584 -2.3206 2.7836 -2.3206 2.7836
TTD -0.1252 1.1957 -0.1047 0.9167 -2.4791 2.2287 -2.4791 2.2287
Size -0.6634 0.0932 -7.1209 0.0000 -0.8468 -0.4800 -0.8468 -0.4800

Table 4 shows the relationship between STD and ROE, TTD and ROE, and LTD and ROE. The

company’s performance is measured using ROE in this table. The relationship between TTD and

ROE is negative which shows that if the TTD increases, the company's performance as measured

by ROE decreases and vice versa. Whereas the relationship between STD and ROE and LTD and

ROE is positive. However, all these relationships are statistically insignificant as the prob. value

is greater than 0.05 at a 5% significance level. Thus, this study shows that Qatar companies'

performance is not affected by corporate structure when the performance is measured through

ROE. These results are coherent with the study of Ebaid (2009) as well as Saeedi & Mahmoodi

(2011) who stated that there exists no significant relationship between corporate structure and a

company's performance when measured by ROE. However, the control variable, size has a

negative significant relationship with the company's performance when measured by ROE. This
PROJECT PAPER

is again coherent with the study by Onaolapo & Kajola (2010), who stated that the size of the

firm may influence its performance.

Table 4: Regression Results for Panel Data Models (Dependent Variable- ROE)
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.447195856
R Square 0.199984134
Adjusted R Square 0.188347539
Standard Error 1.671693876
Observations 280

ANOVA
df SS MS F Significance F
Regression 4 192.1069769 48.02674421 17.18579564 1.35167E-12
Residual 275 768.5041143 2.794560416
Total 279 960.6110912

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 7.335106 0.920940 7.964802 0.000000 5.522118 9.148095 5.522118 9.148095
STD 1.925976 2.170832 0.887206 0.375743 -2.347585 6.199537 -2.347585 6.199537
LTD 2.291690 2.129945 1.075938 0.282898 -1.901380 6.484760 -1.901380 6.484760
TTD -0.546171 1.964535 -0.278015 0.781210 -4.413609 3.321268 -4.413609 3.321268
Size -1.197973 0.153056 -7.827048 0.000000 -1.499283 -0.896664 -1.499283 -0.896664
PROJECT PAPER

Table 5 shows regression results between corporate structure and a company's performance when

measured by earning per share (EPS). The table shows the relationship between STD and EPS,

TTD and ESP, and LTD and EPS. As can be seen from the table below, STD has a positive,

significant relationship with the company's performance when measured by EPS. The

relationship is significant as the t-value is greater than 1.96 at a 5% significance level. These

results are consistent with the findings of Suleiman (2013) and Hadlock & James (2002) who

stated that the Short-term debt to total asset ratio is positively correlated with the company's

performance when measured by EPS. Also, EPS has a significant relationship with the control

variable, firm size at a 5% significance level.

Table 5: Regression Results for Panel Data Models (Dependent Variable- EPS)
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.419397069
R Square 0.175893901
Adjusted R Square 0.163906904
Standard Error 2.507030399
Observations 280

ANOVA
df SS MS F Significance F
Regression 4 368.9092521 92.22731303 14.67372434 7.0604E-11
Residual 275 1728.43039 6.28520142
Total 279 2097.339643

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -2.71917 1.38113 -1.96881 0.04998 -5.43810 -0.00025 -5.43810 -0.00025
STD 7.63790 3.25559 2.34609 0.01968 1.22886 14.04693 1.22886 14.04693
LTD -2.19263 3.19427 -0.68643 0.49302 -8.48095 4.09570 -8.48095 4.09570
TTD 0.60997 2.94620 0.20704 0.83614 -5.19001 6.40994 -5.19001 6.40994
Size 0.45077 0.22954 1.96385 0.05056 -0.00110 0.90265 -0.00110 0.90265

H1: A corporate capital structure impacts the company’s performance.

PROJECT PAPER

From H1, it is expected that the capital structure of a company is expected to influence the

performance of the company. In this study, the three indicators of capital structure are Long-term

debt to the asset (LTD), Short-term debt to the asset (STD), and Total Debt to asset TTD. From

the regression analysis above, it was found that the capital structure had no significant

relationship with the company’s performance when measured by ROA and ROE at a 5%

significance level. However, when the company's performance was measured by EPS, the STD

had a strong positive relationship with the company's performance. Overall, the null hypothesis

is rejected because, for Qatar companies, the capital structure did not have a significant

relationship with companies’ performance at a 5% significant level.

H2: Short-term debt has a negative correlation with firm performance.

From H2, it is expected that the short-term debt of a company is expected to have a negative

relationship with the performance of the company. As can be seen in the tables above, the short-

term to asset ratio denotes short-term debt. STD did not have a significant relationship with the

performance of the company at a 5% significance level when the performance of the company as

measured by ROA and ROE. However, when the company's performance was measured by EPS,

the STD had a strong positive relationship with the company's performance.

H4: A firm's size is expected to have a negative influence on the company's performance.

From H4, it is expected that the size of a company is expected to have a negative impact on the

performance of the company. As can be seen from the regression analysis above, the size of the

firm is used as a control variable. However, the hypothesis is not rejected as the firm's size

showed a significant negative impact with the company's performance when measured by ROA,
PROJECT PAPER

ROE, and EPS. This is again coherent with the study by Onaolapo & Kajola (2010), who stated

that the size of the firm may influence its performance.

PROJECT PAPER

H5: There is a negative relationship between financial leverage and corporate performance.

From H5, it is expected that the leverage of a company is expected to have a negative impact on

the performance of the company. The leverage in this study is indicated by Long-term debt to the

asset (LTD), Short-term debt to the asset (STD), and Total Debt to asset TTD. From the results

above, it can be seen that the financial leverage did not have a significant relationship with the

company's performance at a 5% significance level. Thus, this hypothesis is rejected as for Qatar

companies, there did not exist a significant negative relationship between financial leverages and

companies' performances.

Conclusion

To conclude, this report contains companies’ data from Doha Stock Exchange from the period

2010-2019. The objective of this paper is to investigate the effect of capital structure on

corporate performance in Qatar. There is not sufficient empirical evidence about the impact of

capital structure on the performance of the companies in developed as well as developing

companies. To achieve this objective, the sample comprises of 28 companies using data

throughout 2010-2019. The companies are listed on the Doha Stock Exchange Market.

In this study, three indicators of performance have been used; Return on Assets, Return on

Equity, and Earnings per Share. ROA and ROE are profitability ratios. Three leverage ratios

have been used in this study: Short-term debt to total assets which is denoted as STD, Long-term

debt to total assets which is denoted as LTD, and Total debt to total assets which are denoted as

TTD. Moreover, firm size is used as a control variable in this study.

PROJECT PAPER

To study the impact of capital structure on the performance of companies in Qatar, regression

analysis was carried out. At a 5% significance level, it was found that the STD, LTD, and TTD

did not have a significant impact with the performance of the companies that were measured by

ROA and ROE. However, STD had a strong positive relationship with the performance of the

companies at a 5% significance level when the performance was measured by EPS. But no

significant relationship was found between LTD and TTD with the performance of the company.

Thus, it was concluded that under this study, there was no significant impact of capital structure

on the performances of companies in Qatar. Furthermore, it was also found that the control

variable, firm size had a significant impact on the performance of the companies at a 5%

significance level. Therefore, further research would be required with evidence from Qatar to

examine the impact of capital structure on corporate performance using other indicators.
PROJECT PAPER

Bibliography

A., S. (2013). Capital structure effect on firms’ performance: Evidence from Saudi listed

companies.

Abor, J. (2005). The effect of capital structure on profitability: an empirical analysis of listed

firms in Ghana. Journal of Risk Finance, 438-47.

Chinaemerem, O. C. (2012). Impact of capital structure on the financial performance of Nigerian

firms. Arabian Journal of Business and Management Review, 43-61.

Daoud, Z. (2016). Qatar Economic Insight. Doha: QNB.

Ebaid, E. (2009). The impact of capital-structure choice on firm performance: empirical evidence

from Egypt. The Journal of Risk Finance, 477-487.

Fama, E. F. (2002). Testing trade-off and pecking order prediction, about dividends and debt.

Review of Financial Studies, 1-33. Retrieved from http://dx.doi.org/10.1093/rfs/15.1.1

Gleason, K. C. (2000). The Interrelationship between Culture, Capital Structure, and

Performance: Evidence from European Retailers. Journal of Business Research, 185-191.

Hadlock, C. &. (2002). Do banks provide financial slack? Journal of Finance, 1383–420.

Krishnan, V. S. (1997). Performance, Capital Structure, and Home Country: An Analysis of

Asian Corporations. Global Finance Journal, 129-143.

Margaritis, D. &. (2010). Capital structure, equity ownership, and firm performance. . Journal of

Banking & Finance, 621–632.

PROJECT PAPER

Masood, A. (2014). Relationship between ownership structure and capital structure: A case of

the Manufacturing sector of Pakistan. Journal of Basic and Applied Scientific Research,

180-188.

Onaolapo, A. a. (2010). Capital structure and firm performance: evidence from Nigeria.

European J. Economics, Finance, and Administrative Sciences, 70-82.

Saeedi, A. A. (2011). Capital Structure and Firm Performance: Evidence from Iranian

Companies. International Research Journal of Finance and Economics, 11.

Soumadi, M. &. (2011). Capital structure and corporate performance: an empirical study on the

public Jordanian shareholdings firms listed in the Amman stock market. European

Scientific Journal, 173-189.

Tabash, M. I. (2014). Islamic banking and economic growth: An empirical evidence from Qatar.

Journal of Applied Economics and Business, 51-67.

Tianyu, H. (. (2013). The comparison of impact from capital structure to corporate performance

between Chinese and European listed firms. Retrieved from http://urn.kb.se/resolve?

urn=urn:nbn:se:hj:diva-21994

Zeitun, R. a. (2007). Capital structure and corporate performance: evidence from Jordan.

Australasian Accounting Business and Finance Journal, 40-53.