University of Twente Student Theses
The effects of external debt financing and internal financing on firm performance: empirical evidence from automobile listed firms
Li, Yan (2020) The effects of external debt financing and internal financing on firm performance: empirical evidence from automobile listed firms.
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| Abstract: | This research investigates the impacts of external debt financing and internal financing on firm performance using panel data from listed companies in automobile industry during the year from 2011 to 2019. Five different factors (return on equity, return on asset, Tobin’s Q, return on capital employed, return on invested capital) are used to measure firm performance. Three different factors (short term debt ratio, long term debt ratio and total debt ratio) are used to measure external debt financing. Internal financing ratio is used as the fourth independent variable. Tangibility, size, liquidity and asset growth are control variables. The results suggest that firm performance, measured by return on equity (ROE), return on asset (ROA), Tobin’s Q, return on capital employed (ROCE) and return on invested capital (ROIC) all have negative relationship with short term debt ratio (STDR), long term debt ratio (LTDR), total debt ratio (TDR), as independent variable. Moreover, internal financing ratio (IFR) is not only increasingly important for automobile firms, but also positively affects firm performance (ROE, ROA, Tobin’s Q, ROCE and ROIC) for all sectors. According to the agency theory, the negative relationship between debt ratios and firm performance indicates that the monitoring role of debt is not substantial. Instead, debt financing increases conflicts between shareholders and creditors, decreasing firm performance. Based on pecking order theory, the positive relationship between internal financing ratio and firm performance supports that internal financing has the lowest capital cost and avoids insufficient external financing caused by information asymmetry, thus benefiting firm performance. |
| Item Type: | Essay (Master) |
| Faculty: | BMS: Behavioural, Management and Social Sciences |
| Programme: | Business Administration MSc (60644) |
| Link to this item: | https://purl.utwente.nl/essays/85395 |
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