Impacts of Change in Capital Structure on the Profitability of Pharmaceutical Firms: A Study of Pharmaceutical Industry in Singapore
- 10.2991/978-94-6463-036-7_253How to use a DOI?
- Capital Structure; Leverage Ratios; Profitability; Pharmaceutical Industry
An optimal capital structure can reduce the cost of capital and then contribute to corporate profitability. Debt financing usually plays a critical role since the proper use of debt is expected to increase revenues and profits. Some academicians find some positive effects of operating or financial leverage on profitability, while other studies on corporate leverage conclude that debt will impede profit growth in the pharmaceutical industry. This study aims to investigate the correlation between leverage and profitability in the Singaporean pharmaceutical industry. This study constructs a regression model with one dependent variable, Return on Equity (ROE), and four independent variables, including Debt-to-Equity, Long-term Debt, Operating Leverage, and Interest Coverage ratios. The model is based on the secondary data collected from 30 SGX-listed pharmaceutical companies in the period from 2017 to 2021. Both correlation analysis and ordinary least squares (OLS) are adopted to explore the effects of leverage on profitability. The results show that Debt-to-Equity and long-term Debt ratios are negatively correlated with ROE, and Operating Leverage and Interest Coverage ratios have a positive correlation with ROE. Based on these findings, this study suggests managers avoid taking unnecessary debt, and short-term debt is required to maintain high operating leverage that positively affects profitability. Also, managers should not rely on long-term debt but rather finance the business growth with equity.
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Cite this article
TY - CONF AU - Chenxin Zhang PY - 2022 DA - 2022/12/31 TI - Impacts of Change in Capital Structure on the Profitability of Pharmaceutical Firms: A Study of Pharmaceutical Industry in Singapore BT - Proceedings of the 2022 2nd International Conference on Economic Development and Business Culture (ICEDBC 2022) PB - Atlantis Press SP - 1690 EP - 1696 SN - 2352-5428 UR - https://doi.org/10.2991/978-94-6463-036-7_253 DO - 10.2991/978-94-6463-036-7_253 ID - Zhang2022 ER -