Authors: Georgios Pilas

Title: Sector Analysis: The impact of capital structure on profitability.Evidence from the United States.

Abstract

Abstract

This dissertation was written as part of the MSc in Banking and Finance at the International Hellenic University.

This study addresses the effect of capital structure on profitability of listed non-financial firms in the United States. Similar to Abor’s (2005), and Gill, et al., (2011) investigation of industrial companies in Jordania. Although, it will be implemented a Sector Analysis through a 9year-period sampling the companies with the largest market capitalization. Research questions that are analyzed in this study: How capital structure decision affects the profitability of large-cap firms? Does the Sector factor affect the sensitivity of profitability results? One preliminary point of this dissertation is that Sector dependence should impact the capital structure of a company. This study sample encompasses 364 companies across ten sectors. Models are structured having as dependent variables the ROA, ROE and Gross Profit Margin. Applying panel data analysis for each sector and identifying the correlation matrixes and descriptive statistics, the results expose three levels of mixed negative and positive effects. Specifically, regarding the high-level effects, the most negatively dependent Sector on leverage is the Information Technology sector, indicating that profitable companies of this Sector choose primarily the equity financing. The inverse is objected for Industrials Sector. In addition, limitations through the whole process are presented, suggesting topics for further research regarding medium and small-cap firms or other explanatory variables. The paper suggests that profitability ratio sensitivities regarding the capital structure alter significantly between the ten sectors studied.