An Empirical Study on Capital Structure of the Companies Listed on the Dhaka Stock Exchange

Academic literature suggests that corporate managers could create value for their shareholders by investing in positive net present value projects, but not by tuning the capital structure of the firm. Use of debt in capital structure could add some value due to tax-shield effect, although it increases the risk of bankruptcy. Hence companies generally maintain an optimal capital structure. We examined the capital structures of 118 companies listed on the Dhaka Stock Exchange and their shareholders returns. Regression results show that use of debt in the capital structure insignificantly increases the risk. Therefore, leverage has insignificant effect on the shareholders return in the Dhaka Stock Market. This could be due to a possibility that companies generally keep their debt level within a limit. For example, average debt-asset ratio for DSE companies is 0.64, which is significantly less than unity. About 80 percent of the companies have debt-asset ratio below 0.70. Overall, the empirical findings from Dhaka stock market do provide  primafacie confirmation to the capital structure theory.