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ABSTRACT: This research aims to establish the determinants of financial performance in 126 Romanian companies listed on the Bucharest Stock Exchange, over a period of ten-years (2003-2012). The analysis is based on cross sectional regressions. Return on assets is the performance proxy, while the variables expected to have a significant impact on profitability are debt, asset tangibility, size, liquidity, taxation, risk, inflation and crisis. Regression results indicate that profitable companies operate with limited borrowings. Tangibility, business risk and the level of taxation have a negative impact on return on assets. Although earnings are sustained by significant sales turnover, performance is affected by high levels of liquidity. Periods of unstable economic conditions, reflected by high inflation rates and the current financial crisis, have a strong negative impact on corporate performance.
KEY WORDS: profitability, leverage, regression analysis.
JEL CLASSIFICATIONS: G3, G32.
(ProQuest: ... denotes formulae omitted.)
1.INTRODUCTION
Over time, the financial theory and practice focused on finding the capital structure that maximizes the company value. In order to understand the financial decisions, many studies in the corporate finance literature refer to the relationship between capital structure and corporate performance. Therefore, the financial framework, consisting of the mix of equity and debt, ensuring the lowest costs reveals the optimal capital structure. Besides, it is also important to identify factors maximizing the company value through funding resources.
This paper intends to identify how debt influences return on assets in 126 companies listed on Bucharest Stock Exchange (BSE). Previous research on the same sample returned fixed assets, size, liquidity, business risk, taxation, inflation rate and crisis as determinants of financing decisions in Romanian listed companies. Therefore, these factors will be used along with the capital structure proxy, in order to demonstrate their influence on firm profitability. The companies were selected based on the availability of information needed for this research, information available yearly, for a decade, from 2003 until 2012.
2.LITERATURE REVIEW
The choice between debt and equity suggests somehow a tradeoff between business and financial risk. When companies choose more borrowings to finance their needs, they do not affect corporate ownership. However, ensuring a large proportion of equity based on shareholders' investment offers a better credit rating for the company. Therefore, companies using large borrowings face higher risks...