The Impact of Capital Structure Change on Firm's Performance in Romania

This study attempts to develop a model, based on current corporate finance theories, which explains the impact of capital structure changes on the performance of Romanian firms listed on,the Bucharest Stock Exchange. The paper tests the influence of changes in the debt-equity structure and of some important macroeconomic variables on the performance of Romanian companies. The major independent variables taken into consideration are changes in leverage and changes in debt tax shields. Thus a static panel analysis is used to test the relationship between these variables and the performance of Romanian companies of the three most dominant sectors of industry (engineering, fuel & power and chemical & pharmaceutical) over a period of ten years. Empirical results, obtained using a fixed effect regression, sustain the traditional theory which states that leverage is an important determinant of firm's performance, and demonstrate a negative relation between indebtedness, measured in the paper by leverage, and the value of the company. The conclusion suggests that by increasing the debt-equity ratio, companies reduce total value, peroxided in the paper by Tobin Q.