Optimal capital structure and companie's performance : an empirical study on the FTSE 350

Abstract

This study examines the relationship between capital structure and financial performance in the UK market by using FTSE 350 companies. The hypothesis tested is whether there is a significant relationship between capital structure and companies' performance. The null hypothesis (Ho) stated that there is no relationship between capital structure and firms' performance. The methodological approach taken was a sample of 129 companies from FTSE 350 compromising top UK companies. These companies were analyzed to find a relationship between the capital structure and financial performance. Data relating to the leverage and performance of these companies were downloaded from DATASTREAM. Regression tests conducted on the data were significant at 1% level. The results found led to the rejection of the null hypothesis. This result is consistent with the Trade-off theory, Agency theory, and Signalling theory. Moreover, this result is inconsistent with Modigliani and Miller 1958, Modigliani and Miller 1963, and the Pecking Order model.