The effect of capital structure on profitability: An empirical application on borsa İstanbul

The basic goal of corporate finance is to maximize firm value by making efficient and true decisions. Maximizing firm value is possible by decreasing cost of capital and increasing profitability. There are several capital structure approaches about the effect of capital structure on cost of capital and firm value. However, in order to identify the optimal capital structure that maximizes firm value it is necessary to determine the effect of capital structure on profitability. The goal of this study is to analyze the effect of capital structure on profitability and contribute to the literature. To reach this goal, three regression models were designed by making use of DuPont equations. Using the data for the period from 2006 to 2014 of 117 firms that are listed on Borsa Istanbul, these three regression models were estimated by both fixed effects model and cross section analyses year by year. The results showed that capital structure has negative effect on profitability. This finding is consistent with empirical evidence. Furthermore, it is observed that short term financial debt has negative effect on market value, whereas long term financial debt has positive effect. These findings support existence of agency costs.