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Capital structure and the firm performance nexus: the moderating and mediating roles of agency cost

Capital structure and the firm performance nexus: the moderating and mediating roles of agency cost The purpose of this study is to examine the linear and non-linear relationship between capital structure (CS) and firm performance (FP) and the moderating and mediating roles of agency costs in the CS-FP nexus.Design/methodology/approachThis study used static and quadratic panel data regression models to examine the linear and non-linear relationships and structured equation models to analyze the mediating effect of agency costs in the CS-FP nexus of 38 listed non-financial Mauritian firms from 2009 to 2019.FindingsLeverage has a significant negative effect on FP supporting the pecking order theory. Agency costs are significantly and positively associated with FP. There is a strong non-linear relationship between leverage and FP supporting the trade-off and agency cost theories. Agency costs are an important moderator and mediator in the CS-FP nexus. Overall, the sensitivity analyses showed that the results were robust.Practical implicationsFirms need to carefully consider the levels and types of debt and equity in their CS involving the use of dynamic strategies to adjust CS in response to changing economic conditions and FP. The moderating effect of agency costs may guide firms in optimizing CS and may contribute to corporate governance discussions, emphasizing the importance of aligning interests to foster sustainable business practices.Originality/valueThis study adds to the extant literature by providing new evidence on the non-linear relationship between leverage and FP and the moderating and mediating roles of agency costs in the CS-FP nexus in emerging capital markets, where such studies are rare. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Capital structure and the firm performance nexus: the moderating and mediating roles of agency cost

Ronoowah, Rishi Kapoor; Seetanah, Boopen
Managerial Finance , Volume 50 (9): 24 – Aug 12, 2024
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References (72)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0307-4358
DOI
10.1108/mf-03-2024-0177
Publisher site
See Article on Publisher Site

Abstract

The purpose of this study is to examine the linear and non-linear relationship between capital structure (CS) and firm performance (FP) and the moderating and mediating roles of agency costs in the CS-FP nexus.Design/methodology/approachThis study used static and quadratic panel data regression models to examine the linear and non-linear relationships and structured equation models to analyze the mediating effect of agency costs in the CS-FP nexus of 38 listed non-financial Mauritian firms from 2009 to 2019.FindingsLeverage has a significant negative effect on FP supporting the pecking order theory. Agency costs are significantly and positively associated with FP. There is a strong non-linear relationship between leverage and FP supporting the trade-off and agency cost theories. Agency costs are an important moderator and mediator in the CS-FP nexus. Overall, the sensitivity analyses showed that the results were robust.Practical implicationsFirms need to carefully consider the levels and types of debt and equity in their CS involving the use of dynamic strategies to adjust CS in response to changing economic conditions and FP. The moderating effect of agency costs may guide firms in optimizing CS and may contribute to corporate governance discussions, emphasizing the importance of aligning interests to foster sustainable business practices.Originality/valueThis study adds to the extant literature by providing new evidence on the non-linear relationship between leverage and FP and the moderating and mediating roles of agency costs in the CS-FP nexus in emerging capital markets, where such studies are rare.

Journal

Managerial Finance – Emerald Publishing

Published: Aug 12, 2024

Keywords: Capital structure; Firm performance; Non-linear relationship; Moderator; Mediator; Agency costs

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