The Effect of Capital Structure on Firm Performance for Listed Companies in Oman refferences.docx

However from the provisions of the theory it is

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capital structures of different firms and organizations. However, from the provisions of the theory, it is evident that various firms, irrespective of the industry that they are in prefer to source for funds to finance their needs from within as opposed to external financing. However, in cases where the firms, may opt source
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EFFECT OF CAPITAL STRUCTURE ON FIRM PERFORMANCE 11 funds from outside, they prefer to have debt over equity. Hence with this preference in financing options. Companies prefer internal as opposed to external financing which is costly and expensive ( KARUGA, 2017) . Thus for profitable firms, they are likely to use fewer debts in their financial needs as opposed to those firms with fewer earnings. The trade-off theory In research on the capital structure of firms, the trade-off theory offered justification to moderate debt ratios. In capital structure, the theory explains the strategies that firms use to fund their investments, namely debts and equity. The theory predicts firms, which do not perform well will solely depend on the bank for debt capital. Additionally, the trade-off theory implies that those firms which do not have tangible assets should turn to equity financing for its investments whereas, those firms with tangible assets should turn to debt financing. However, the studies have shown that there are significant advantages and disadvantages associated with debt financing. Hence the trade-off theory points out the advantages of the tax on debt, and at the same time, it identifies the risk of bankruptcy it is associated with. They are thus explaining the reasons as to why most firms avoid excessive debts in financing ( KARUGA, 2017) . 2.2 Empirical studies on the effect of Capital structure on a firm’s performance. The nature of the capital structure of a firm is critical in making the decisions for a firm or in any other business organization. The decisions made by the leadership is not only crucial to the firm's leadership or motivated by the desire to maximize a firm's returns but also due to the effect that such a decision has on the ability of an organization to survive in an unfair or competitive environment. There have been studies to establish the influence that the firm’s choice of capital structure has on the firm’s performance. Most companies are faced with
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EFFECT OF CAPITAL STRUCTURE ON FIRM PERFORMANCE 12 difficulties when it comes to structure their finances is in determining their impact on its overall performance, the survivability and the value of a firm are in its performance( Ahmad et al., 2017) . The trade-off theory implies that firms a firm can determine its capital structure by balancing between the cost relating to debt financing and the benefits. Myers (1984), found out that to attain this, companies sets target debts in relation to the value ratio, and then they set mechanisms which are adjusted towards achieving the target ratio for them to attain the target ration to balance, that is the trade-off between bankruptcy cost and tax savings. Thus the trade- off theory is meant to explain the financing mechanisms that a firm uses. However, the theory
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