IMPACT OF SUSTAINABILITY, CAPITAL STRUCTURE & DIVIDEND

POLICY ON FIRM FINANCIAL PERFORMANCE: A CROSS

CULTURAL STUDY

HASSAN TARIQ
(01-397201-008)

A thesis submitted in fulfilment of the Requirements for the award of the degree
of MS Finance

Department of Management Sciences

BAHRIA UNIVERSITY ISLAMABAD

2021

1
 APPROVAL FOR EXAMINATION

Scholar's Name: HASSAN TARIQ Registration No._01-397201-008_

Program of Study: MS FINANCE Thesis Title: IMPACT OF SUSTAINABILITY, CAPITAL

STRUCTURE & DIVIDEND POLICY ON FIRM FINANCIAL PERFORMANCE: A CROSS
CULTURAL STUDY. It is to certify that the above scholar's thesis has been completed to my
satisfaction and, to my belief, its standard is appropriate for submission for examination. I have
also conducted plagiarism test of this thesis using HEC prescribed software and found similarity
index 18 % that is within the permissible limit set by the HEC for the MS degree thesis. I have
also found the thesis in a format recognized by the BU for the MS thesis.

Principal Supervisor’s Signature: _________________________

Date: _________________________
Name: _SAMREEN FAHIM BABAR_

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 AUTHOR’S DECLARATION

I, HASSAN TARIQ hereby state that my MS thesis titled “IMPACT OF SUSTAINABILITY,

CAPITAL STRUCTURE & DIVIDEND POLICY ON FIRM FINANCIAL
PERFORMANCE: A CROSS CULTURAL STUDY” is my own work and has not been
submitted previously by me for taking any degree from Bahria University, Islamabad or
anywhere else in the country/world.

At any time if my statement is found to be incorrect even after my graduation, the University has
the right to withdraw/cancel my MS degree.

Name of scholar: HASSAN TARIQ

Date: _________________________

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 PLAGIARISM UNDERTAKING

I, solemnly declare that research work presented in the thesis titled “IMPACT OF
SUSTAINABILIY, CAPITAL STRUCTURE & DIVIDEND POLICY ON FIRM FINANCIAL
PERFORMANCE: A CROSS CULTURAL STUDY” is solely my research work with no
significant contribution from any other person. Small contribution / help wherever taken has
been duly acknowledged and that complete thesis has been written by me.

I understand the zero-tolerance policy of the HEC and Bahria University towards plagiarism.
Therefore, I as an Author of the above titled thesis declare that no portion of my thesis has been
plagiarized and any material used as reference is properly referred/cited. I undertake that if I am
found guilty of any formal plagiarism in the above titled thesis even after award of MS degree,
the university reserves the right to withdraw/revoke my MS degree and that HEC and the
University has the right to publish my name on the HEC/University website on which names of
scholars are placed who submitted plagiarized thesis.

Scholar / Author’s Sign: _______________________

Name of the Scholar: HASSAN TARIQ

4
SUBMISSION FORM OF THESIS FOR HIGHER RESEARCH DEGREE
BAHRIA UNIVERSITTY, ISLAMABAD

Candidate Name: HASSAN TARIQ

I submit 2 Copies of thesis for examination for the degree of MS FINANCE, Thesis Titled:
“IMPACT OF SUSTAINABILITY, CAPITAL STRUCTURE & DIVIDEND POLICY ON
FIRM FINANCIAL PERFORMANCE: A CROSS CULTURAL STUDY”,

Candidate Signature: _____________Date:_______________

Certificate of Principal Supervisor

I “SAMREEN FAHIM BABAR” being the principal Supervisor for the above student, certify
that thesis is in a form suitable for examination and that the candidate has pursued his course in
accordance with the Rules of the University.

Signature: _______________________________________Date: ______________________

Recommendation for Examination

I recommend that the thesis be examined.

Principal Supervisor______________ Date: _____________________

Not Recommended for Examination

I recommend that the thesis be examined.

Principal Supervisor: _________________________________Date: ___________________

Co-Supervisor:_______________________________________ Date: __________________

Statement by the Head Faculty/Department

I support the submission of the thesis of the above-named student for examination under the
University Rules for higher degrees.

Signature: ____________________________________________ Date: _________________

5
 BAHRIA UNIVERSITY, ISLAMABAD

APPROVAL SHEET

SUBMISSION OF HIGHER RESEARCH DEGREE THESIS

Candidate’s Name: _HASSAN TARIQ

Discipline: MS FINANCE

Faculty/Department: MANAGEMENT STUDIES

I hereby certify that the above candidate’s work, including the thesis, has been completed to my
satisfaction and that the thesis is in a format and of an editorial standard recognized by the
faculty/department as appropriate for examination.

Signature(s): _______________________
Principal Supervisor: SAMREEN FAHIM BABAR
Date: ____________________

The undersigned certify that:

1. The candidate presented at a pre-completion seminar, an overview and synthesis of major

findings of the thesis, and that the research is of a standard and extent appropriate for
submission as a thesis.
2. I have checked the candidate’s thesis and its scope, format; editorial standards are
recognized by the faculty/department as appropriate.

Signature(s): ________________

Dean/Head of Faculty/Department: ________________

Date: ________________________

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 ACKNOWLEDGMENT

Above all I am very thankful to Almighty Allah for the strength he provided
throughout this studying experience. My special thanks to my supervisor
“SAMREEN FAHIM BABAR” for his guidance and kind consideration from
commencement to conclusion of this dissertation. It has been an honor for me to
work under his supervision. I owe my thankfulness to all my teachers who
delivered to us knowledge that helped me in carrying out this piece of work.

Bahria university management also deserve special thanks for their assistance in
supplying online access to the relevant literatures, in this Covid-19 pandemic
situation. My sincere appreciation also extends to my class mates who have
provided assistance at the hour of need. I am grateful to all my family members for
their prayers and support in petty concerns.

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 Contents
Abstract.....................................................................................................................................................11
CHAPTER # 1..............................................................................................................................................12
1.0. INTRODUCTION..................................................................................................................................12
1.1. BACKGROUND OF THE STUDY.........................................................................................................13
1.2. THEORETICAL BACKGROUND..........................................................................................................14
1.2.1 MM proposition 1 without taxes..............................................................................................14
1.2.2 MM proposition 1 with taxes....................................................................................................14
1.2.3 Pecking Order Theory...............................................................................................................14
1.2.4 Static Tradeoff Theory..............................................................................................................15
1.2.5 Dividend Irrelevance.................................................................................................................15
1.2.6 Bird in the Hand........................................................................................................................15
1.2.7 Stakeholder Theory...................................................................................................................16
1.2.8 Resource Dependence Theory..................................................................................................16
1.3. PROBLEM DESCRIPTION..................................................................................................................16
1.4. RESEARCH QUESTIONS...................................................................................................................17
1.5. RESEARCH OBJECTIVES...................................................................................................................17
1.6. SIGNIFICANCE OF THE STUDY.........................................................................................................17
CHAPTER # 2..............................................................................................................................................19
2.0. REVIEW OF LITERATURE.....................................................................................................................19
2.1. CAPITAL STRUCTURE AND FIRM PERFORMANCE............................................................................19
2.2. DIVIDEND POLICY AND FIRM PERFORMANCE.................................................................................26
2.3. SUSTAINABILITY AND FIRM PERFORMANCE...................................................................................33
2.4. THEORETICAL FRAMEWORK...........................................................................................................41
2.5. RESEARCH HYPOTHESIS..................................................................................................................41
CHAPTER #3...............................................................................................................................................42
3.0. DATA AND METHODOLOGY................................................................................................................42
3.1. POPULATION AND SAMPLE.............................................................................................................42
3.2. SAMPLED COMPANIES....................................................................................................................43
3.3. MODEL SPECIFICATION...................................................................................................................43
3.3. MEASUREMENT OF VARIABLES......................................................................................................44
CHAPTER # 4..............................................................................................................................................45
4.1. RESULTS AND DISCUSSION.................................................................................................................45

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 4.2. DESCRIPTIVE STATISTICS.................................................................................................................45
4.3. CORRELATION ANALYSIS.................................................................................................................46
4.4. PANEL COINTEGRATION TEST.........................................................................................................47
4.5. SELECTION OF PANEL REGRESSION MODEL....................................................................................48
4.5.1 Hausman Test...........................................................................................................................48
4.6. FIXED-EFFECT REGRESSION.............................................................................................................48
4.7. MULTIPLE REGRESSION ANALYSIS..................................................................................................49
CHAPTER # 5..............................................................................................................................................51
5.1. DISCUSSION........................................................................................................................................51
REFERENCES..............................................................................................................................................52

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List of tables
Table 1 Descriptive Statistics........................................................................................................45
Table 2 Correlation Matrix............................................................................................................46
Table 3 Panel Cointegration test....................................................................................................47
Table 4 Hausman Test...................................................................................................................48
Table 5 Fixed effect regression......................................................................................................48

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 Abstract

The objective of this study to examine impact of sustainability, capital structure and dividend
policy on firm financial performance of countries in developing countries of the Asian region.
The purpose of the present research is to investigate whether there is any significant relationship
and what is the direction of relationship sustainability, capital structure and dividend policy with
corporate financial performance of developing country firms in the Asian region. The study
sampled included 65 firms from 13 countries that lie in the Asian region and 325 observations
were selected from every firms’ annual reports and sustainability reports for a period of 2016 to
2020. Panel data regression analysis was utilized with E-Views 10. The residual diagnostics test
such as the Hausman test was also applied for selecting Fixed effect regression model. The
endogenous variable was firm performance which was measured by ROA, while the exogenous
variables were ESG score, Debt ratio (DR), Debt-equity (D/E), Dividend payout (DPO) and
Dividend yield (DY). Control variables included were Firm size (FS) and Firm growth (FG). The
outcomes of this study revealed that capital structure has a significant negative relation with firm
financial performance, while dividend policy indicators had a significant positive relation with
corporate performance. Sustainability on the other hand has insignificant negative relation with
corporate financial performance for emerging market firms. This shows that although capital
structure and dividend policy critically influence firm performance both positively and
negatively, sustainability has no influence on firm performance and is negatively associated with
firm performance. Firm size also shows negative insignificance on firm performance, which tells
us that it is also negligible on firm financial position. Firm growth on the other hand positively
and critically influences firm position which shows that firm sales performance is directly linked
to its financial viability. Future research potential points towards the use larger use of sample
size in terms of number of years and higher use of firms which is clearly limited in this research
due to lack of countries reporting ESG scores and lack of years of data available.

Keywords: Capital Structure, Dividend Policy, Sustainability, ESG score, Financial

performance

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CHAPTER # 1

1.0. INTRODUCTION
The attraction of a lucrative dividend policy, optimal capital structure and improved
sustainability has increased in global capital markets in the past few decades. Choosing an
optimal capital structure and appropriate dividend policy are 2 of the 4 most important financial
decisions made by firms in financial markets, while the 2 other decisions being asset
management and working capital decisions. The increased trend towards sustainable investing in
global countries like US and UK has also risen in recent years. These decisions collectively help
a business operate in volatile financial markets with fluctuating interest rates and also external
shareholders and prospective investors in making informed decisions to invest in the business.
The ability to identify whether debt or equity will be satisfactory for the firm helps firms prevent
any chances of defaults and also prevents shareholder equity dilution. Secondly, the ability of a
firm to identify the appropriate dividend payout for shareholders and retain a portion of income
for future growth prospects is also important as it satisfies the shareholders to make future
investments in the firm and helps firms grow in turbulent markets. Lastly, sustainable investing
by any company can help improve firm financial position, profitability and reputation of the
company as well as the industry in which the firm operates. Evaluating the financial performance
of the firm allows management to achieve the results of business strategies and goals in
economic terms. It is a basic measure of how well a company uses its assets and equity to
generate income. Many stakeholders primarily linked to the business are concerned about
tracking the financial performance. The more efficiently the firm uses its assets and equity, the
more the income generated from it and hence, the better the financial performance of the firm
(Asurumuni Anne Shiranthi Indika Perera, 2020). When determining the financing decision for
the firm, it is important for firm to use a combination of both debt and equity which maximizes
firm wealth (Jaisinghani and Kanjilal, 2017), (Ghayas and Akhter, 2018), (Odusanya et al. 2018).
Wrong financing decisions of the firm may have an adverse impact on firm’s operating, financial
and strategic objectives. It may also lead to bankruptcy if it can’t meet all the obligations of
bondholders and shareholders. Some firms are designed to not take any debt i.e they are 100%
equity financed, such firms aren’t concerned about the debt capacity and the capital structure as
they seldom have leverage in their capital structure. But most firms today are moving towards

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taking an ample portion of both debt and equity to maintain an optimal capital structure which
leads to fewest problems and maximum value to the firm. Dividend policy will decide how much
funds to be given out to investors and how much to be retained for growth and development. It is
important for a firm to determine an appropriate mix of dividend declaration and retaining some
funds for future needs. Better dividend payout sends positive signals to investors that the firm is
liquid and leads to better financial performance (Carolyne S. Musyoka, 2013). Better retention
ratios help keep up the image, reputation and financial performance of the firm. Sustainability
initiatives and sustainable investing in terms of improved environmental concerns such as
reduced carbon emissions, better social-economic policies such as conforming with local
loopholes and better governance such as improved systems of accountability, review and control
are likely to benefit the firm in the long run in a way similar to capital structure and dividend
policy. Sustainable investing improves firm performance which in turn leads to improved
dividend payouts (P. Matos , V. Barros and J. Sarmento, 2020). The Global Reporting Initiative's
(GRI's) Sustainability Reporting Standards are the most adopted structures for deliberate
reporting around the world (Brown et al. 2009). In 2018, the GRI along with the United Nations
Global Compact (UNGC) gave life to agglomerated activity pointed towards engaging corporate
activities towards accomplishing the United Nations Sustainable Development Goals (SDGs).
The SDGs have been presented in 2015 by the United Nations Procurement Division (UNDP) as
a feature of the 2030 Agenda for Sustainable Development whose focus is to provide
corporations with a platform to strive towards a more sustainable world (United Nations General
Assembly 2015). They comprise of 17 worldwide objectives organized into 169 aspiring targets
to be reached by 2030.

1.1. BACKGROUND OF THE STUDY

The study prospers to capture the impact of capital structure, dividend policy and sustainability
on firm financial performance. It includes 1 strategic variable and 2 financial variables that are
all important for the operational and strategic success of the organization. The capital structure
mix is the ideal mixture of debt and equity that finances the total capital of the organization
which then contributes to profitability and strengthens the financial position of the organization
(Carlos Correia, 2007). The ideal dividend policy is one which pays out stable or increasing
dividends to investors and communicates a positive signal to its current and prospective

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investors. It is also important for the firm to keep and appropriate mix of earnings which can be
reinvested in future when market conditions are cyclical (Carolyne. S, 2013). The alignment of a
company’s capital structure and dividend policy with business strategy is essential for firm
performance and it requires detailed analysis (Shah and Khan, 2010). Sustainability is the third
proxy used for analysis which reflects a company’s strategic decision and how company deals
with its stakeholders, shareholders and the environment. Sustainable practices leads to improved
profits, reputation, cheaper access to credit markets, lower cost of capital and maximized
shareholder wealth (Weston, 2021). The paper covers 17 GRI initiatives introduced in 2018 at an
elementary level for all UN firms to follow that leads to sustainable development in the corporate
sector of developed nations.

1.2. THEORETICAL BACKGROUND

1.2.1 MM proposition 1 without taxes

This proposition states that the company’s capital structure doesn’t affect the overall value of the
company. It makes some assumptions such as investors have homogenous expectations regarding
investment in debt and equity, capital markets are perfect and are free from transaction costs and
impediments to trading, investors can lend and borrow at risk free rate, there are no agency costs
and operating income is unaffected by changes in capital structure. It argues that companies
future cash flows are unaffected by changes in capital structure (Modigliani and Miller 1958).

1.2.2 MM proposition 1 with taxes

This theory argues that as opposed to MM proposition 1 without taxes, it states that value of a
leveraged firm will be equal the value of a non-leveraged firm plus debt tax shield. It states that
if a company raises more debt than with the addition of taxes and deb tax shield, the value of the
firm rises. With the addition of taxes, the cost of equity rises from higher usage of debt, the cost
of capital falls and value of the firm rises. In the extreme case, the value of the firm can be
maximized if the firm’s capital structure consists solely of debt.

1.2.3 Pecking Order Theory

This theory was introduced by (Myers and Majluf, 1984). This theory states that managers prefer
a mode of financing that offers the least info to shareholders and credit-holders. Managers

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initially prefer internal modes of financing than they prefer debt financing and lastly, they prefer
equity financing. Managers only raise financing through equity if they believe that the stock
overvalued as raising equity is considered a negative signal for the company. Managers don’t use
equity financing if the stock is undervalued. Issuance of more debt conveys a positive signal
about a company as an improved commitment to make timely interest and principle payments
shows management has confidence in company’s cash generation capabilities.

1.2.4 Static Tradeoff Theory

This theory states that the value enhancing effects of debt in the company’s capital structure are
reduced by the present value of costs of financial distress. It states that value of a leveraged firm
is equal to value of an unlevered firm plus debt tax shields less the present value of costs of
financial distress. It states that value of the company is highest at optimal level of debt and then
begins to fall once the value enhancing effects of debt tax shield are offset by value reducing
effects from financial distress. The same is the case for company’s cost of capital as it falls first
at optimal level of debt and then begins to rise as financial distress costs rise.

1.2.5 Dividend Irrelevance

Was introduced by (Modigliani and Miller 1961). It states that in perfect capital markets, a
company’s dividend policy doesn’t affect its cost of capital and company value; and this policy
is dependent upon financing and investment decisions. Due to market inefficiencies and
anomalies this theory doesn’t hold in the practical world. As market has transaction costs that
companies face when buying and selling stocks, there are also floatation costs that include
underwriter fees, legal and admin fees when issuing new shares. This theory also asserts that it is
difficult to develop homemade dividends when share prices are highly volatile.

1.2.6 Bird in the Hand

This theory was introduced by (Litner, 1962) and (Gordon, 1963). This theory states that in
perfect capital markets, investors prefer dividends over equal capital gains from earnings that are
reinvested. The MM countered this argument by stating that dividend policy isn’t affected by
risk of future cash flows. The cash dividends only lower the ex-dividend price, whereas the
overall shareholder wealth remains unchanged. The tax argument for this theory states that in
high tax countries, investors would prefer lower dividend payouts and prefer capital gains from

15
reinvested earnings over dividend payments. If earnings aren’t reinvested in profitable
opportunities than share repurchases are preferred by investors.

1.2.7 Stakeholder Theory

Was introduced by (Freeman, 2010). This theory states that high level of ethics and corporate
sustainability should be followed by a society to improve its compliance, professionalism and
corporate governance. It is based on the idea that the firm should first identify all of its
stakeholders including internal and external stakeholders that are either directly or indirectly
involved with firm operations. Than it looks to protect the interests of its stakeholders and satisfy
the concerns of all stakeholders. In any case, the firm should not get in any dispute with
stakeholders which would result in added regulatory costs and stakeholder lawsuits.

1.2.8 Resource Dependence Theory

Was introduced by (Pfeffer and Salancik 1978). This theory states that companies should carry
out transactions with individuals and other companies in its environment to achieve external
resources. Achieving external resources more rapidly than its competitors is an important source
of competitive advantage for the firm over the competitor. This theory proves to be beneficial for
the firm but it also has some implications as gaining access to external resources can be quite
challenging and resources might also be scarce in an external environment.

1.3. PROBLEM DESCRIPTION

Although global trend states that an optimal capital structure, an appropriate dividend policy and
sustainability are positively and significantly linked to firm profitability for developed countries.
Nevertheless, most developing countries like Pakistan, Nepal, Malaysia, Bangladesh and Sri-
Lanka haven’t yet responded into these developments. In a developing countries there are highly
uncertain political and economic conditions which make financial markets very volatile. To add
to the insult, many developing countries have no idea about ESG or sustainable operations.
These conditions may or may not show a negative or insignificant trend of dividend policy,
capital structure and sustainability on firm performance. Hence, we determine whether leverage
is a good thing for firms in developing countries, or does it have significance on firm
performance. Secondly, we determine whether dividend payout has significance on firm
performance. Lastly, we determine whether sustainability in developing countries is lucrative.

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Because firms in most developed countries like US, Canada and Australia benefit from debt tax
shields due to which they pay lower taxes and have more debt servicing capacity. European firms
on the other hand, benefit from better dividend payouts as they’re positively linked to firm
performance. All developed counties who are carrying out ESG developments benefit firm
performance. The second problem for this study is that many global sustainability organizations
such as UNDP and CFAI have elaborated on the use of sales growth for measuring firm value.
This doesn’t conform with our literature as studies show that sales growth is a poor performance
measure when measuring it with sustainability (Rasmus Sjögren & Jacob Wickström, 2019).

1.4. RESEARCH QUESTIONS

1. What is the impact of Capital Structure on firm performance in developing countries?
2. What is the effect of Dividend Policy on firm performance in developing countries?
3. Does sustainability influence firm performance in developing countries?

1.5. RESEARCH OBJECTIVES

1. To examine whether solvency and financial leverage affects firm financial performance and
how it impacts firm performance in developing countries of Asian region.
2. To identify how dividend payout and dividend yield influences firm financial performance
and how it impacts firm performance in developing countries of Asian region.
3. To assess whether sustainability indicators affect firm financial performance and how they
impact firm performance in developing countries of Asian region.

1.6. SIGNIFICANCE OF THE STUDY

Our work will provide value to all those developing country firms who want to take leverage as an
essential lifeline for its business operations and to make profits. It is also important for all these firms that
want to decide an appropriate dividend policy for its investors and making decisions regarding retaining
cash for future growth purposes. Emerging market firms can also gain an in-depth knowledge of whether
they should adopt sustainability initiatives and whether these policies affect their firm’s financial
performance. This study can also help investors make informed decisions regarding investing in

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companies that follow an optimal capital structure which in turn reflects positively on their financial
strength. Companies with better dividend payout policies reflect a positive signal for prospective
investors and attract new investment, so investors can gain a better idea of whether high debt and high
payout policies positively impact firm performance so that they can make rational utility maximizing
decisions of whether to invest in the company. Lastly if a firm is adopting sustainable practices which is
improving firm profitability, it will improve the perception of the company in the eyes of investors who
will be more than willing to invest in the company because it benefits them as well. The study also adds
value to government agencies in sense that if higher debt is lucrative for the firm, government can provide
private firms with debt to help meet their obligations and finance their projects to help private firms grow
which will provide interest and principles in return to the government. The bigger the firm, the more debt
it requires and the higher return to government. Secondly, if sustainable activities are lucrative for the
firm, government can invest more in sustainable practices to help firms meet their environmental, social
and governance obligations. This will reflect positively not only on the firms but the society as a whole.

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CHAPTER # 2

2.0. REVIEW OF LITERATURE

Dividend payout policies and optimal capital structure are 2 of the main financial decisions that
help a firm generate profitability, improve their financials and also help them thrive in a
competitive environment. An optimal financial leverage strategy can boost the firm’s
profitability and productivity potential (Samuel Fosu, 2013). Effective dividend payout policies
also help the firm keep a balance between future growth prospects and current spending on
investors which guarantees prospective investment in the future and hence leads to an improved
firm performance (Muhammad Zahid, 2018). The reasons for this improved profitability
potential include the increased attraction of dividend policy and financial leverage globally in
developed countries and the effort taken by developed country firms to make capital structure
and dividend structure an essential part of the company financials. Capital structure and dividend
policy both improve the financial performance in developed countries but sometimes show an
opposite in developing countries with far less development concerns such as Pakistan,
Indonesia, Nepal or Vietnam. Sustainability on the other hand is a strategic decision that not only
improves firm financials but also improves firm reptation and dividend payout policies (P. Matos , V.
Barros and J. Sarmento, 2020). Sustainability covers 3 main categories namely environmental, social and
governance factors also called ESG.

2.1. CAPITAL STRUCTURE AND FIRM PERFORMANCE

(Zahid, M. 2020) examined the impact of capital structure on firm performance. This
examination is cross sectional and culturally diverse. South Asian nations have been thought
about as populace and test has been taken from assembling and food areas of PSE, BSE, DSE
and CSE. In general 187 organizations of four nations have been inspected during the
investigation. Panel regression model is utilized to close the outcomes. We have chosen 6
manufacturing areas for assessment and decision covering an interval of time-frame form 2007-
2016. Two ratios of firm financial performance are considered to gauge the effects. Two ratios
each for estimation of capital structure, firm value and dividend policy have been taken as

19
intermediaries. Our outcomes have shown significantly positive effect of dividend policy on firm
performance and capital structure has shown negative relation to firm performance. Future
research potential has likewise given on sector, region and variables characterization.
Suggestions are given for investors to invest in dividend paying firms that follow an optimal
capital structure.
(Ramli NA, Latan H, Solovida GT, 2018) inspect the effect of capital structure determinants on
firm financial performance along with the mediation impact of firm leverage in Malaysia and
Indonesia over the time of 1990 to 2010. Our outcomes show that some capital structure
determinants positively influence firm financial performance. We additionally see that only the
Malaysian sample has a positive significant connection between financial leverage and firm
financial performance. Malaysian firms utilize outer financing rather than inner financing to
elevate performance. Our outcomes likewise show that firm leverage plays a mediating part in
Malaysian sample but not for the Indonesian sample. The asset structure, growth prospects,
liquidity, non-debt tax shield and interest rate had were indirectly influenced by leverage on firm
performance. Further investigation for multigroup analysis (MGA) in PLS was additionally used
to test the equality of the parameters. We conclude that specific determinants of capital structure
and firm performance are altogether unique among Malaysia and Indonesia.
(Nguyen, T., & Nguyen, H. 2020) analyzed the connection between capital structure and firm
profitability of non-financial organizations recorded on Vietnam's stock exchange. The panel
data is extricated from annual reports of 488 recorded organizations somewhere in the range of
2013 to 2018. Capital structure examined is addressed by the ratios of short maturity liabilities,
long maturity liabilities and overall liabilities to total assets, and financial performance is
estimated by Return on Equity (ROE), Return on Assets (ROA) and Earnings per share (EPS).
Firm size, development rate, liquidity, proportion of fixed assets to total assets are control factors
in the investigation. The Generalized Least Square (GLS) is applied to various models, including
ROE, ROA and EPS model. Autocorrelation, multicollinearity and heteroskedasticity are also
applied to affirm the connection between capital structure and firm value. The outcomes show
that the capital structure of Vietnamese recorded non-financial organizations is indirectly related
with their performance. The results show that pharmaceutical, medical, consumer goods and the
public utility industries had a higher connection between capital structure and firm performance

20
than industrial product sectors. These confirmations provide valuable insights of knowledge to
investors, regulators and management.
(Tripathy, S., & Shaik, A. 2020) examined the relationship between firm financial performance
and financial leverage for 56 food handling firms recorded in BSE over the period 2000-2018
utilizing pooled OLS, fixed and random effect regression. The outcomes show that financial
leverage has a positive significant impact on firm performance. The results achieved are
accordingly vigorous across the estimation techniques. The pecking trade of theory and the static
tradeoff theory, both appear to clarify Indian food preparing firms choices among the elective
theories of capital structure.
(Doan, T. 2020) gives evidence from Vietnam on the effect of financing decision on firm
performance in Vietnam. The examination utilizes data of 102 non-financial firms recorded on
Ho Chi Minh Stock Exchange (HOSE) in the 2008-2018 period. Generalized method of moment
(GMM) is utilized to capture downsides of the model to guarantee steady and effective findings.
In this research, return on assets (ROA) is used to quantify firm performance. Further, financing
decision is estimated by three variables: total debt to total assets, long term debt to total assets,
and short-term debt to total assets. Plus, firm size, GDP and inflation rate are likewise utilized as
control variables. The paper uncovers that firm performance is significantly influenced by
financing decision. The discoveries affirm that increase in debt reduces firm performance. So
firms should refrain from adding debt to their capital structure. In like manner, some strong
ramifications are proposed in order that the authorities can firm management can develop
reasonable arrangements to improve financial performance and foster a sustainable development.
(Detthamrong et al. 2017) analyzed the connection between financial leverage and corporate
governance and firm performance for a board sample of 493 firms of non-financial firms in
Thailand during the period 2001–2014. We find that for the full sample, corporate governance
isn't related with leverage and firm performance. Leverage positively affects firm value. At the
point when we split firms into small and large firm sub-samples, we notice some impact of
corporate governance. The adverse impact of audit committee size on firm performance is clear
for large firms while the impact of audit reputation on firm performance is clear for small firms.
Besides, financial leverage plays a mediating role of the effect of audit committee size on
financial performance for big firms.

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(Le, T. P. V., & Phan, T. B. N. 2017) Carried out an examination that utilizes unbalanced panel
data from all non-financial listed firms during the period 2007–2012 to explore the impact of
capital structure on firm financial performance in Vietnam. The results show that all capital
structure ratios have significantly negative relation to firm performance. This result isn't as per
most investigations directed in developed nations, which place a positive connection between
capital structure and firm performance; notwithstanding, it is aligned with certain examinations
with regards to developing markets. This paper contends that in normal developing market like
Vietnam, the benefits of debt tax shields are exceeded by present value of costs of financial
distress. Moreover, the monetary role of debt isn't generous because of high info asymmetry and
less developed financial markets. Our exploration results are robust by utilizing various
methodologies.
(Dang, T. D., & Do, T. V. T. 2021) examined whether the capital structure and a few
components have critical effects on firm value in Vietnam. To accomplish this goal, 435 non-
financial recorded organizations have been chosen from 2012 to 2019 on Vietnamese stock
exchange. Four groups of firms keep on being chosen from overall to explore the contrasts in the
results among businesses. The outcomes altogether utilizing the GMM approach show that the
effect of capital structure and other control factors on firm value is significant, yet unique across
industries: capital structure has a positive significant impact on firm value in food and beverage
industry, but has a negative significant on value in wholesome trade, construction and retail
industry, while insignificant influence on enterprise value in all industries. Aside from the firm
size, the effect of other control factors on firm value shows mixed results.
(Javed et al. 2014) attempted to examine the effect of capital structure on firm performance of 63
organizations recorded on Karachi Stock Exchange. Data contained 5 years, 2007 to 2011.
Balance Sheet Analysis gave by State Bank of Pakistan was utilized for data collection. Fixed
Effects Model was utilized as pooled regression model to discover the connection between firm
performance (ROA, ROE, ROS) and capital structure (DTA, EQA, LDA). Results showed that
there exists a relationship yet association of the relationship was blended. Capital structure
showed positive effect on firm performance when return on assets was utilized as an endogenous
variable. At the point when return on equity was utilized as endogenous variable the debt to
assets ratio showed positive effect, however equity over assets ratio and long-term debt to total
assets ratio uncovered negative impact on endogenous variable and when return on sales was

22
utilized as endogenous variable then DTA and EQA showed negative relation to ROS yet LDA
uncovered positive effect over ROS. It was demonstrated that capital structure has impact over
firm performance so managers should embrace vital caution while making decisions regarding
capital structure.
(Iavorskyi, M. 2013) Researches the connection between the capital structure and firm
performance. The primary hypothesis is that financial leverage positively affects form
performance through disciplining managers, debt tax shields and signaling effects. Utilizing the
sample of 16.5 thousand Ukrainian firms for a period of 2001-2010 we found that connection
between the leverage and firm performance is really negative. Outcomes appear to be robust to
different performance measures and sub-examples, just as to alternative assessment strategies.
This outcome isn't consistent with the free cash flow or trade-off theories of capital structure. In
any case, the legitimacy of the pecking order theory is upheld.
(Dao, B. T. T., & Ta, T. D. N. 2020) aims at giving insights on the connection between capital
structure and performance of the firm by utilizing meta-analytical approach to obtain a combined
outcome out of disputable examinations and sources for such disparities. Utilizing secondary
data, the investigation is separated into two principle parts with worries to the general strength of
the relationship, the effect size and the potential paper-explicit qualities affecting the magnitude
of impact between financial leverage and form performance (mediators of the relationship).
Generally, an absolute number of 32 journal, reviews and school presses were chosen other than
online libraries and publishing platforms. There were 50 papers with 340 examinations looked
over 2004 to 2019, of which data ranges from 1998 to 2017. Descriptive and quantitative
analysis have been directed to affirm that corporate performance is adversely affected by capital
decisions, which slants toward trade-off model with agency costs and pecking order theory. As
far as mediator analysis, random effects meta-regression models of three unique methods are
utilized to expand the power in research discoveries, showing statistically significant findings as
publication status, industry factors and firm performance proxies.
(Vu, T., Le, T., & Nguyen, T. 2020) considers the effect of the capital structure on the firm
performance of construction organizations recorded on the Vietnam Stock Exchange by utilizing
a sample of 59 recorded construction organizations in three years which includes 177
observations. This exploration is cultivated by applying a linear regression and correlation
analysis model. The outcomes show that: (1) variables like number of years of activity, firm size,

23
debt/equity don't influence return on assets (ROA) and return on equity (ROE); (2) the variable
of total fixed assets/total assets yields a positive and significant effect on ROA and ROE; (3) the
ratio of total debt/equity and long-term debt/equity show an adverse effect on ROA; and (4)
debt/equity has a strong direct relation on ROE.
(Ahmed, R., & Bhuyan, R. 2020) Utilizes cross sectional panel data more than eleven years
(2009–2019), or 1001 firm-year observations, this examination looks at the connection between
capital structure and firm performance of services sector companies from Australian stock
exchange. In contrast to different investigations, in this examination directional causalities of all
performance measures were utilized to recognize the reason for firm performance. The
examination tracks down that long term debt rules debt decisions of Australian services sector
organizations. In spite of the fact that the finding is partially similar to patterns under debt
financed operations in both developing and developed nations, the finding is unforeseen on the
grounds that the sectoral and institutional borrowing rules and guidelines in Australia are
different from those in different places of the world.
(Musa et al. 2021) argues that discussion on capital structure issues is ceaseless. The significant
place of this article is to investigate whether capital structure expands firm-value of African non-
financial firms. The investigation used two stage System Generalized Method of Moments
(GMM) to break down panel data of 406 firms from eight African countries for the period 2010-
2018. The examination discovers proof that capital structure expands firm-value of firms in the
eight African countries. The outcomes propose that organizations in Africa favor debt financing
in their capital structure to receive the reward of debt tax shields which builds firm-performance.
Additionally, investors ought to urge firm-managers to exploit gains from debt tax shields to
increase their investments value.
(PHAM, C. D. 2020) This examined the impact of capital structure on the financial performance
of pharmaceutical ventures which are listed on Vietnam's securities exchange. The examination
assembles regression using ROE as endogenous variable and four exogenous variables, including
self-financing, financial leverage, long-term asset and debt ratios. Also, we utilize different
factors as control variables, like firm size, fixed asset rate and growth variables. We gather
information for the period from 2015 to 2019 of every one of the 30 drug firms which are as of
now listed on Vietnam's securities exchange. The ordinary least squares regression (OLS) is
utilized to test the impact of capital structure to the organizations' firm performance. The

24
investigation results show that the leverage ratio, long term asset ratio and debt ratio have
positive connection with firm performance, on the other hand oneself financing influences
indirectly to the return on equity. Upon the discoveries we propose that the Vietnamese
government should zero in on balancing out macro-economic environment to create favorable
environment for firms. . Furthermore, the pharma firms should assemble more sensible capital
structure with higher debt position than equity, broadening credit assembly channels like giving
long term bonds. Moreover, the organizations ought to grow the scale properly to keep up with
advancement and capacity to pay obligations.
(Spitsin et al. 2020) examined the impacts of the capital structure on company performance
(ROA). The investigation is led in an enormous sample of manufacturing and service companies
in transition country (Russian Federation). With the inclusion of accumulated analysis, separate
analysis are directed to examine the effect of organization age, size and area factors. This
examination hypothesizes the presence and inconstancy of the optimal capital structure and its
reliance on financial crisis. We used an enormous sample that incorporates 1,826 firms over the
period from 2013 to 2017. The assessment was performed utilizing the panel corrected standard-
error estimation method (Prais–Winsten model) to represent the panel nature and distributional
properties of our information. The presence of the optimal capital structure was evaluated on a
curvilinear function. The outcomes are reliable with the Static Trade-off Theory and show that
this hypothesis is pertinent to nations with transition economy. They exhibit that compelling
management of the capital structure can positively increment return on assets by 16–22%. The
optimal portion of acquired capital is higher for small companies contrasted with bigger ones and
for ventures situated in agglomerations contrasted with those situated in other regions. A more
prominent expansion in profits can be accomplished by bigger firm organizations contrasted with
more smaller ones. High portion of acquired capital prompts negative profits. No significant
contrasts in profitability development were recognized among youthful and mature ventures. The
optimal portion of borrowed capital that expands return on assets is in the scope of 0–21%.
Because of the SPARK approaches, our access to data has been restricted to a five-year window,
which forced certain impediments on the decision of econometric techniques we could have
utilized and to some degree restricted our capacity to differentiate the impact of the crisis period
with the period of steadiness. Future exploration ought to consider stretching out the panel to
incorporate more years into analysis. We recognized huge contrasts between optimal capital

25
structure and actual capital structure for high-tech companies. The contribution of this
examination is that the estimations were made for a country with a transition economy under
turbulent conditions. Nations with transition economies and developing nations will in general be
portrayed by a high degree of financing costs on loans and a high extent of borrowed capital in
total assets. This postures troubles for organizations depending on borrowings to finance their
activities. Simultaneously, our outcomes exhibit that in transition economies, ventures in high-
tech businesses do have an optimal capital structure that permits augmenting firm performance.
That is, Static trade-off theory is relevant to transition economies described by high financing
costs on loans.
(Mukumbi et al. 2020) stated that picking whether to fund a business with debt or equity has
prompted a ceaseless quest for the best capital structure. Researchers have led a few exploration
studies attempting to discover the optimal capital structure. Some demonstrate that a firm having
a serious level of leverage appears to have an optimal capital structure and hence prompts better
financial performance. There are others, for example, that of Modigliani-Miller that varies in
contention by reasoning that high leverage doesn't impact the value of the firm. This exploration
study pointed toward deciding the effect of capital structure on the financial performance of non-
financial firms cited at the Nairobi Securities Exchange. The examination was led on 16 non-
financial firms that were in operations in Kenya and cited at the NSE somewhere in the range of
2013-2017. Financial performance was estimated by return on assets and return on equity, while
the capital structure was estimated utilizing the change in debt and debt to equity ratios.
Secondary data used was acquired from audited financial statements obtained from organization
sites and NSE handbook covering the period 2013-2017. Correlation and regression were utilized
in the statistical analysis that was done with the guide of STATA 15 version. The discoveries
showed that capital structure directly affects the financial performance of firms recorded at the
Nairobi stock exchange. The outcomes showed that the financial performance of firms augments
with the expansion in the debt in the capital structure. This accordingly upholds debt financing in
running the organizations compared to equity financing. The examination subsequently
suggested that organizations should expand debt financing in their capital structure to improve
financial performance and improve value to the organizations' shareholders.

26
2.2. DIVIDEND POLICY AND FIRM PERFORMANCE
(Khan et al. 2016) had an essential goal of this investigation is to look at whether the dividend
policy makes an impact on the firm performance in Pakistan. Data which is utilized for research
is gathered from the reports of firms which are recorded from 2010-2015. Ordinary least squares
regression method was utilized to check the regression estimates. Discoveries show that there is
a positive connection between return on assets, dividend policy, and growth in sales. Generally
the consequences of the examination are closely tied with the past research. Results show that
dividend payout proportion and leverage have negative significant connection with the return on
equity. The Basic reason for study is to research what the dividend policy means for the
performance of the firms which are recorded in the Pakistan stock exchange.
(SHIRANTHI, A. A., & PERERA. 2020) endeavored to contemplate the effect of dividend
policy on Firm future financial performance of recorded organizations in Sri Lanka. Dividend
choices are perhaps the main vital choice in the organization. Dividends are for the most part
characterized as the allocation of earning in the form of real assets among investors of the firm in
relation to their stake ownership. The executives' essential objectives are the maximizing of
investors wealth and improve firm performance. The examination data was recovered from the
CSE site and yearly reports from the chosen organizations during the period 2014 to 2018.
Descriptive analysis, correlation, trend analysis and multivariate analysis was used to analyze the
data. The outcome of the study uncovered that there was a significant connection between
dividend payout proportion, and return on equity, total debt to equity, net debt to EBITDA and
sales growth. Trend analysis showed the behavior of endogenous and exogenous variable for
earlier years and future years. As indicated by the literature, the examination has recognized
components which affected the dividend policy and firm future financial performance.
(Hafeez et al. 2018) examined the relationship between dividend policy and firm performance.
The sample consists of 15 manufacturing organizations in the time of 2014 to 2017. Time series
data were determined from the fiscal report of the chosen manufacturing firms. Return on assets
and return on equity were utilized as endogenous variables while dividend payout, earning per
share, price earnings ratio were demonstrated as exogenous variables. Multiple regressions,
correlation and descriptive were utilized as data analysis methods. Discoveries uncover that all
the exogenous variables have a positive relationship with endogenous variables. Dividend
payout, earning per share, price earnings ratio directly impact return on investment. Limitation of

27
our investigation is that we analyze only 15 manufacturing firms, other researchers utilize
enormous size test and other sector forms other than manufacturing.
(Zahid, M. 2020) examined the impact of dividend policy on firm performance. This
examination is cross sectional and culturally diverse. South Asian nations have been thought
about as populace and test has been taken from assembling and food areas of PSE, BSE, DSE
and CSE. In general 187 organizations of four nations have been inspected during the
investigation. Panel regression model is utilized to close the outcomes. We have chosen 6
manufacturing areas for assessment and decision covering an interval of time-frame form 2007-
2016. Two proportions of firm financial performance are considered to gauge the effects. Two
ratios each for estimation of capital structure, firm value and dividend policy have been taken as
intermediaries. Our outcomes have shown profoundly positive effect of dividend policy on firm
performance and capital structure has shown negative relation to firm performance. Future
research potential has likewise given on sector, region and variables characterization. The paper
has given recommendations to investors to invest in companies that follow an optimal capital
structure and pay stable dividend payouts which is a positive signal for investors.
(Farrukh et al. 2017) Uncovered that in the field of corporate finance the question regarding
whether dividend policy influences the shareholders wealth actually stays unsettled. The goal of
this paper is to build up the effect of dividend policy on shareholders' wealth and firm
performance in Pakistan. The conduct of dividend policy has been one of the most talked about
issues in writings of corporate finance. Various researchers have endeavored to uncover issues
related to dividend policy, notwithstanding, we still don't have a commendable explanation in
regards to the conduct of dividend policy. The factors utilized in this research are dividend
policy, shareholders wealth, and firm performance. Dividend per share and dividend yield are
utilized to quantify dividend policy. For shareholders wealth, earning per share and share price
are utilized as proxies. Return on equity is utilized to quantify firm performance. From the
regression result, it is discovered that dividend policy has a positive significant impact on
shareholders' wealth and firm performance. This study upheld dividend relevance theory,
signaling theory, bird in the hand theory and clientele effect theory. The examination praises the
implementation of steady, effective, managed and target-oriented dividend policy by firm's
finance managers along with viable supervisory system represented by capital market
administrative bodies to improve firm performance and shareholders wealth in Pakistan. Besides,

28
relevant firm disclosures regarding dividend payout and dividend per share is expected to
monitor the potential investors in making the most appropriate investment.
(Uwuigbe et al. 2012) explored the relationship between the firm financial performance and
dividend payout among recorded firms in Nigeria. It likewise takes a peek at the relationship
between ownership structure, size of firms and the dividend payouts. The yearly reports for the
period 2006-2010 were used as the fundamental source of data collection for the 50 sampled
firms. The regression analysis technique was utilized as a statistical analysis technique for
investigating the data gathered. We find that there is a positively significant association between
the performance of firms and dividend payout of the chosen firms in Nigeria. The examination
likewise uncovered that ownership structure and firm's size also has a significant effect on the
dividend policy of firms.
(Gul et al. 2020) Examined the factors that influence dividend policy by considering
pharmaceutical's organizations enlisted on PSX from 2013 to 2017. Population dependent on all
areas of Pakistan Stock exchange in which pharmaceutical organizations are taken as a sample
by utilizing census sampling since all organizations of pharmaceutical sector were included.
Panel VAR model, fixed effect model and regression model to characterize the impact of
exogenous variable on endogenous variable. The results uncovered that managerial ownership,
debt policy, Return on assets, firm size and FCF had a significant impact on dividend policy. The
discoveries of this examination also exhibited that the organization's future performance has
more concern for the improvement of financial investors than current income. There ought to be
dynamic attention on the future viewpoints to work on firm performance.
(Reddy, T. N., & Santosh, M. K. 2021) examined the connection between dividend payout and
firm profitability among top information, communication and technology organizations in India.
The current examination is carried on the basis of secondary data. Correlation and multiple
regression were used for analysis of secondary data. Based on the data analysis only TCS has
significant connection among profitability and dividend payout and remaining organizations are
insignificant. But in terms of correlation analysis there is a solid positive relationship between
dividend payout and profitability. Subsequently the investigation presumes that dividend payout
and firm profitability is applicable with dividend policy and furthermore it will further augment
shareholders value.

29
(KANAKRIYAH, R. 2020) This examined the nature of relationship between dividend policy
and a company's financial performance in developing nations, as well as the primary variables
that may affect financial performance. The investigation included 92 industrial and service sector
organizations recorded on the Amman Stock Exchange (ASE) during the period from 2015 to
2019. The examination utilized Panel Data Analysis and, cross-sectional time-series data to use
simple and multiple regression models. A multiple regression model was used in request to test
whether mediating variables may potentially affect financial performance e.g Dividend Yield,
Dividend Pay-out, Firm Size, Financial Leverage and Current Ratio. The data was gathered
from the yearly reports and data that was accessible on the ASE site covering the period from
2015 to 2019. The outcomes identify a strong connection between Dividend yield, Dividend
payout, and Firm size factors that gauge firm performance. Likewise leverage is adversely and
significantly connected with Return on assets and AOE. In addition, no relations were
distinguished between current ratio and financial performance. The investigation's decision is
that dividend policy clarifies a majority of an organization's financial performance, implying that
the dividend policy essentially affects organization financial performance.
(Arsal, M. 2021) Investigated the effect of earnings per share and dividends per share on the
value of the company on the Indonesian stock exchange for the period 2014-2017. This
investigation utilizes data from 6 food industry organizations recorded on the Indonesian Stock
Exchange to look at the effect of these factors. multiple regression models are utilized to decide
the impact of earning per share and dividend per share. The consequences of the exploration
show that earning per share independently has a positive significant effect on company value.
Nonetheless, the dividend per share insignificantly influences the value of the company. The
discoveries of this paper additionally tracked down that firm value is influenced simultaneously
by EPS and DPS. The study presumes that investors can utilize Earnings per Share as the reason
for making investment decisions, especially on the Indonesian Stock Exchange for organizations
in the food business. Practically, the ramifications of this paper show that the management of
organizations recorded on the Stock Exchange should figure out a dividend policy and develop a
company procedure focused on internal and external factors that likely increases company
wealth.
(Murimi, K. V., & Mungai, J. 2021) stated that earnings of a firm can be delivered out as
dividends or be re-contributed. There are various reasons why the firm should deliver dividends

30
or not. Investors focus attention to dividends and accordingly the dividend policy behavior, is as
yet an issue of concern in finance literature. While a portion of the insurance organizations have
been performing admirably as far as assets growth and productivity, there are other recorded
insurance organizations whose return on assets has been decreasing throughout the years under
examination. This was partially credited to helpless dividend policy. The research pointed toward
filling the research gap by building up the significance of viable dividend policy and the
connection existing between dividend policy and insurance organizations' financial performance.
The purpose directing the study are; to decide the impact of dividend payout ratio, retained
earnings, and dividend yield on financial performance of insurance organizations recorded in the
Nairobi Securities Exchange. A descriptive analysis was utilized to measure data normality.
Secondary data from4financial4statements of the Nairobi Securities Exchange recorded
insurance companies4for4the period 2013-2018 was gathered. Descriptive measurements and
regression model utilizing SPSS software version 2 was utilized for the analysis. The
examination concluded that dividend payout doesn't influence the performance of insurance
organizations recorded in Nairobi securities exchange, retained earnings has a positive
significant impact on financial performance of insurance organizations recorded in Nairobi
securities exchange, and that dividend yield has a positive impact on the performance of
insurance organizations recorded in Nairobi Securities Exchange. The investigation suggests that
Insurance organizations recorded in Nairobi securities exchange ought to guarantee that they
have a decent and effective dividend policy set up that can augment their degree of profits and
furthermore draw in investments. The examination suggests that Insurance organizations
recorded in Nairobi Securities Exchange should foster approaches and laws administering
dividend payment and should be fortified and enforced to guarantee a more regular dividend
payment to build their market capitalization through share price increases. It is likewise
suggested that and investment policy ought to be created and executed; this will guarantee that
the management isn't left to settle on the best way to utilize the little surplus left yet would rather
prefer to be directed by the investment policy. The BOD of insurance firms should be reasonable
in dividend declaration as higher dividend yield could imply that the share price is undervalued
which could influence future dividends.
(Vu, L. T., Vu, A. T., & Nguyen, T. T. 2021) examined the connection between the layers of
debt, dividend policy and the performance of firms recorded in Vietnamese securities exchange.

31
The dividend policy is represented by the dividend yield while firm's performance is estimated
by ROE, ROA, and P/E. The absolute number of observations is 552, gathered from 92 recorded
organizations on Hochiminh Stock Exchange during 2012 and 2019. The examination results
from generalized least squares (GLS) models report that the decision of firm's performance
variable influences the connection between firm performance and leverage just as dividend
policy. While leverage directly affects ROE and ROA, it adversely affects P/E. Interestingly,
dividend yield ratio is indirectly connected with ROA and P/E but positively associated with
ROE. In any case, the effect of debt levels on firm's performance is independent with the
decision of leverage variable. The discoveries of this examination are required to give better
comprehension about the association between debt, dividend and performance of the firm that
can support management in making informed investment decisions.
(Nwankwo, S. N., & Agbo, E. I. 2021) analyzed the connection between dividend policy and the
performance of firms in Nigeria. It utilized the ex-post factor research plan and simple OLS least
squares regression procedure for examination. The secondary data utilized for the period were
acquired from the distributed annual reports of nine Nigerian firms utilized as contextual analysis
for the period 2010-2018. The outcomes of the investigation propose that there is negative and
non-significant connection between dividends per share on net income of the chose firms, a
positive and non-significant connection between dividends per share and total sales of the chose
firms, and a positive and non-significant connection between dividends per share and total asset
of the chosen firms. Thus, this examination upholds the important speculations of dividend
policy.
(Cyril et al. 2020) empirically investigated the connection between dividend policy and firm's
financial qualities of consumer goods manufacturing organizations in Nigeria. It used yearly time
series secondary data acquired from yearly reports of the chosen firms for a period of 10 years
(2009-2018). Dividend policy was represented by Dividend per Share and Dividend Payout
Ratio while the financial performance attributes considered were Return on Assets, Return on
Equity, and Earnings per Share (EPS). Retrospective research design was embraced while
analytical methods utilized were Pearson Product Moment Correlation (PPMC) and, Pairwise
Granger Causality method. Discoveries uncovered that Dividend per Share connects positively
with the chosen firm's financial qualities while there is a negative and insignificant connection
between Return on Assets, Return on Equity, and Dividend Payout Ratio of the chosen firms. A

32
positive relationship was shown among DPR and EPS for the period. Meanwhile, the connection
among ROA and DPS was significant at 5% level. Additionally, proof from the pairwise granger
causality test uncovered that there is no directional connection between dividend policy and
financial performance of consumer goods firms in Nigeria. The investigation also proposed that
the financial framework be transformed to improve the functional proficiency of the financial
market in order to determine the profitability of cited firms through the dividend policy channel.
It was additionally suggested that Managers of consumer good firms in Nigeria ought to
guarantee that they have all around organized dividend policies set up as this will make the
organization shares appealing to investors and nonetheless lead to expanded stock prices and
upgraded profits.
(Musa et al, 2020) argued that in Corporate Businesses dividend policy have been the most
primary issues looked by management in decision making process. This examination tends to
Investigate the Impact of dividend policy on the financial performance of consumer good firms
in Nigeria. Ex-post Factor research design was utilized and data was extricated from the yearly
reports of the sampled organizations covering a time span of around 8 years (2010-2017). The
data were examined utilizing multiple regression model and the outcome showed that dividend
per share has positive with significant relationship on return on assets and insignificant
relationship on return on equity separately. Dividend payout has negative and insignificant
relationship on return on assets. Dividend payout has positive and insignificant relationship on
return on equity. The examination concluded that DPR has positive and negative effect on ROA
and ROE individually. The investigation suggested that Managers should insure that their
organizations have a decent dividend policy that provides higher dividend per share and limited
dividend payout ratio for it to have great financial performance.
(Kafle, N. 2020) conducted a study with the goal to investigate the degree of relationship
between dividend policy and financial performance of firms. With the objective of the study,
yearly reports data of 50 Indian organizations recorded in National Stock Exchange have been
utilized. DPS has been utilized as the proxy for dividend policy while ROE, ROA and Tobin’s Q
have been utilized as the proxies to quantify financial performance of the chosen organizations.
In light of the correlation and regression analysis, the examination finds that there is a significant
positive relationship between dividend policy and firm financial performance.

33
2.3. SUSTAINABILITY AND FIRM PERFORMANCE
(Nguyen et al. 2021) carried out an examination that tries to add to the current business strategy
and the environmental theories by looking at the impact of governance structures on Chinese
firms' environmental performance, and subsequently learn the degree to which the financial
performance–environmental performance relation is moderated by governance components.
Utilizing s sample of Chinese organizations from intensely polluting ventures over a 5-year
period, outcomes suggested that board size and governing board gatherings are directly
connected with Chinese firms’ environmental performance, while board independence and
gender orientation diversity have positive, yet insignificant relationship with firms'
environmental performance. Our proof recommends further that the analyzed internal
governance systems have a blended moderating impact on the connection between financial
performance and environmental performance. Our discoveries have significant ramifications for
organization executives, environmental activists, policy makers and regulations. Our outcomes
support bits of knowledge drawn from agency, resource dependence, stakeholder, and legitimacy
hypotheses.
(Elkholy, M. A. A. 2020) planned to analyze the impact of Sustainability accounting to corporate
financial performance. Three material perspectives detailed in the Sustainability accounting are
economic performance information(ECO), environmental performance data (EN), and social
performance data (SCO) are utilized as the exogenous factors in this exploration and the
endogenous variable is the corporate financial performance which is addressed by utilizing sales
growth. This research was led utilizing standard quantitative strategies to test the two developed
hypothesis. the questionnaire was planned and circulated to a sample of senior management, cost
accountants, managerial accountants, financial accountants, equity analysts and all ordinary
worker that belong to oil and gas organizations in Egypt that convey interest to sustainability
reports utilizing GRI-G4 rules. This standard is the most recent release gave by the Global
Reporting Initiative, which can be applied beginning from 2018. The outcomes introduced that
economics, environmental, and social perspectives have a direct significant impact on corporate
financial performance. And the two control factors (top management and innovation) have a
positive significant impact on the connection between sustainability accounting and corporate
financial performance. The practical ramifications of this examination that, the oil and gas
organization should know the worth of social, economics, and environmental report in

34
sustainability accounting. Stakeholders become inspired by such reporting that helps augment the
financial performance of the organization.
(Weston, P., & Nnadi, M. 2021) stated that in the course of recent many years, there has been a
sharp expansion in premium by investors to turn out to become more socially responsible
concerning their decision making regarding their selection of investments and an altogether
make-up of their portfolios. This paper conducts different tests to set up a connection between
Corporate Social Responsibility (CSR) and Corporate Financial Performance (CFP). This paper
adds a strategic management component by building up different frameworks that companies can
remember for the decision-making perspective and incorporates CSR and ESG principles when
making investment choices. The sample picked for this paper incorporates the iShares MSCI
KLD 400 Social exchange traded funds, iShares Core S&P 500 ETF just as firms that follow the
Principles for Responsible Investing (PRI). In general, there is no proof to recommend that
ethical ETFs beat historical ETF's but PRI following firms beat the firms who don't follow the
sustainability guidelines.
(Sjögren, R., & Wickström, J. 2019) stated that sustainability is an expanding subject of aptitude
among customers, society and corporate professionals. As firms are adjusting towards a more
sustainable and responsible business, prospects towards a leading position where both long
duration corporate social responsibility and financial performance is regarded as an area of
interest. The motivation behind this proposal is to research the company's Environmental, Social
and Governance (ESG) rating and its impact on their financial performance. The investigation is
directed on firms situated in the European locale. A connected goal is to examine singular sectors
to understand whether this relationship is diverse relying upon the sector attributes in which the
organizations work in. This study utilizes secondary information for a few firms throughout a
time span going from 2008-2017. To examine a few elements throughout this time span, the data
was used was panel data. To explore the purpose, panel regression was performed. The overall
datasets, including firms from all sectors, shows that the Environmental rating has statistical
importance on financial performance. The individual sectors that shows importance with any of
the ESG-rating, demonstrates a negative connection among ESG and financial performance. This
proposal contributes as a continuous investigation in the field of ESG and financial performance.
The understanding from this and future investigations help customers, shareholders and
corporate professionals when approaching towards a more socially responsible activities. Further

35
examination in the European sector could be of importance, which enables firms to keep
exploring positive or negative parts of ESG and their association with financial performance.
(Aggarwal, P. 2013) argued that sustainability is a critical issue for corporate world. The interest
of shareholders and prospective investors in Socially Responsible Investment has developed
generously over last decade. Hence, sustainability can possibly impact organization performance.
The motivation behind this paper is to discover "whether economical organizations that are
sustainable are more profitable or not". Different investigations were directed in past for
inspecting this relationship. Results, in any case, have been blended and uncertain. Besides, the
greater part of the researches have been directed in developed nations.
(Alshehhi et al 2018) examined the effect of corporate sustainability on corporate financial
performance. The connection between corporate sustainable activities and financial performance
has gotten rising consideration in research, yet an agreement stays tricky. This paper recognizes
creating patterns and the issues that hinder definitive agreement on that relationship. We utilized
content investigation to look at the literature and build up the present status of examination. A
sum of 132 papers from top-level journals are shortlisted. We find that 78% of papers report a
positive connection between corporate sustainability and financial performance. Varieties in
research philosophy and estimation of factors lead to the dissimilar perspectives on the
relationship. Moreover, literature is gradually supplanting total sustainability with smaller
corporate social responsibility, which is overwhelmed by the social measurement of
sustainability, while enveloping little to nothing of environmental and financial measurements.
Studies from emerging nations stay few. More analysis is expected to encourage an
understanding between the connection between corporate sustainable activities and financial
performance.
(Keskin, et al 2020) argued that the effect of sustainability on corporate financial performance
has been a significant subject of both scholarly and professional discussion since the 1990s.
Nonetheless, there is an absence of consensus in the literature, and studies from emerging nations
stay scant. Likewise, this study utilizes discriminant analysis to reveal insight into the factors that
segregate between sustainable and non-sustainable organizations utilizing the organizations
present in Borsa Istanbul (BIST100) and the Borsa Istanbul Sustainability Index for a three-year
time frame. Financial and market factors are utilized in the investigation. Financial factors
include return for equity, return on assets, leverage ratios, and firm size. The investigation

36
additionally fuses market factors like alpha, beta, instability, earnings per share, and the price to
book ratio. The outcomes show that the relationship among sustainability and performance is
altogether affected by the organization size, leverage, instability, and price to book ratio. The
enormous organizations are considered to be more sustainable as their responsibility is very
much perceived. Due to these reasons large companies draw in more investors, their stock prices
are less unpredictable and accomplish a superior price to book ratio. They get simple access to
outer financing methods contrasted with organizations considered to be non-sustainable.
Additionally, they are perceived to be less unstable in the market and better esteemed by
investors.
(De Lucia et al 2020) argues that the expanding consciousness of climate change and human
capital issues is moving organizations towards areas other than historic financial earnings.
Specifically, the changing practices towards sustainability issues of the worldwide community
and the accessibility of environmental, social and governance indicators are drawing in investors
to socially responsible investment decisions. Besides the essential significance of ESG
measurements has been especially analyzed for private firms, little attention has been given to
public organizations. To address this problem, the present work has focused on three points—1.
To predict the precision of principle financial indicators like, the Return of Equity and Return of
Assets of public ventures in Europe based on ESG indicators and other financial measurements;
2. To recognize whether ESG activities influence the financial performance of public European
firms; and 3. To talk about how ESG factors, in light of the discoveries of points 1 and 2, can
contribute to the progressions of the current discussion on Corporate Social Responsibility
arrangements and practices in public ventures in Europe. To satisfy the above points, we utilize a
joined machine learning strategies and inferential (ordered logistic regression) model. The ML
predicts the precision of ROE and ROA on a few ESG and other economic measurements and
satisfies point #1. The inferential method is utilized to test whether any causal relationships
between ESG investment decisions and ROA and ROE exist and whether these relationships are
present to evaluate their extent. The inferential method satisfies point #2. Main discoveries
recommend that ML precisely predicts ROA and ROE and inferential regression model shows
the presence of a positive relationship between ESG measures and the financial indicators. In
addition,

37
the current relationship is more significant when organizations put resources into environmental
innovation, work efficiency, diversity and equivalent freedom strategies. Accordingly, to satisfy
point #3 firms must focus on more effective CSR procedures and sustainability advancement
activities in European public ventures.
(Lo, F. Y., & Liao, P. C. 2021) researched the reasons behind the achievement and sustainability
of extremely old organizations and further investigates their connected forerunners. In light of
the resource and strategy perspective theories, we look at the effect of human resources, business
strategies, and financial performance on corporation’s sustainability from a test of 3,587
Japanese-listed corporations from the OSIRIS data set and utilize logistic regression for testing
the theories. The empirical discoveries support that resource and strategy factors influence the
sustainability of exceptionally old Japanese firms, though transient financial performance
doesn't. This investigation offers an aide for augmenting human resource management and the
essential decision of diversification, rather than short run financial performance, to help
exceptionally old organizations at being sustainable.
(Okon, E., & ACA, O. E. C. 2020) explored the Impact of Sustainability Reporting on Corporate
Performance of Selected listed Companies in Nigeria. The particular goals of this exploration is
to
determine the degree of effect of sustainability reporting on return on equity, return on assets,
earnings per share and net revenue of organizations recorded on the Nigerian Stock exchange.
This exploration utilized ex-post facto methodology. The sample for the investigation was
comprised of 64 organizations chosen from 76 non-financial organizations cited on the Nigerian
Stock Exchange. This exploration used secondary data. A model specification regression model
was utilized for the study. The measurable method utilized in testing the hypothesis was the t –
test measurement. Discoveries from this investigation show that Sustainability Reporting
positively affected financial performance for cited organizations in Nigeria Stock Exchange.
Organizations are urged to embrace this revealing framework to focus on more social,
environmental and economic qualities which fill in as tools for effective investment decision
making.
(Ka’oje et al. 2019) argued that principle objective of this longitudinal paper is to exactly inspect
the bi-directional relationship between sustainability exercises and the financial performance of
oil and gas organizations in Nigeria. Secondary information were gathered from six oil firms for

38
more than fifteen years. The paper depends on stakeholder and institutional hypotheses. For the
exact investigation, eight multivariate regression models and Granger causality models were
figured, and for the analysis, the paper used STATA version 15. The discoveries drawn from the
paper demonstrated positive relationships in the two directions, implying that sustainability
exercises are beneficial and productive. The paper subsequently prescribed oil firms to mirror an
inclination for estimation and fragmenting information into quantifiable component to explain
both the achievement and failures if any of sustainability investment.
(Gupta, A. K., & Gupta, N. 2020) contended that moderately little examination exists practically
of sustainable procedures, and organizations should concentrate and like the gravity of the issue.
Academicians have begun to make mindfulness among the organizations. In any case, a
consistent and comprehensive association of corporate sustainability with the company's
performance actually requires more investigation. Subsequently, the critical point of this paper is
to disentangle the effect of environmental sustainability on different dimensions of an
association's performance. Sustainability taken for the investigation is the environmental
dimension of corporate sustainability. This investigation considered financial performance,
customer performance, operational performance, and learning and development performance as
four dimensions of a firm's performance. We utilized well-grounded scales for the concepts
utilized in the paper, and all are approved in Indian demography utilizing confirmatory factor
analysis in AMOS. We gathered 200 cross-sectional respondents test from the senior
management of Indian business organizations. We then, at that point broke down the
corporation’s environmental sustainability on firm performance utilizing structural equation
modelling in AMOS. We saw that environmental sustainability has a positive and critical impact
on the four indispensable functional performance indicators of firms.
(Balatbat, et al 2012) presented the effect of ESG (environmental, social and governance)
activities on the financial performance of organizations recorded in Australian Securities
Exchange. ESG scores for 2008 to 2010 are obtained from the examination work conducted by
Corporate Analysis Enhanced Responsibility (CAER). Financial performance is estimated
utilizing a scope of financial ratios to catch profitability and equity valuation. Our outcomes
show that correlation between financial performance and ESG scores is weak positive, including
both 1-year and 2-year lags. We likewise track down a weak negative association between errors
in analyst forecasts and ESG scores. As opposed to our expectations, portfolio returns of ESG

39
leading indicators are discovered to be lower contrasted and ESG lagging indicators. One
potential suggestion of the weak outcomes is that ESG scores don't advise adequately about the
genuine sustainability activities that give a stream on impact to firm performance.
(Chouaibi et al 2021) explored the direct and indirect connections between environmental, social
and governance activities and financial performance utilizing the intermediate part of green
innovation. To test the current examination theories, the researchers applied linear regressions
with a panel data utilizing the Thomson Reuters ASSET4 and Bloomberg data set from a sample
of 115 UK and 90 Germany organizations chosen from the ESG list over the period 2005–2019.
The outcomes show that the strong ESG increment the firm value and the weak ESG decline it.
In addition, the researchers track down that green innovation completely mediates the
relationship between ESG activities and financial performance in UK and Germany. The
discoveries give fascinating implications to practitioners and regulators who are keen on finding
ESG score, financial performance and green innovation. The results additionally give
experiences to regulators and the governing body on future growth opportunities for the
organization and the country.
(Naimy et al 2021) argued that given the disrupted Environmental, Social, Governance-
Corporate Financial Performance relationship and the shortage of studies covering developing
business sector firms and the effect of every one of the ESG pillars on CFP while considering the
business sector classes, this paper is pioneer in exploring this relationship for 108 East Asian
recorded firms working in the Industrial sector for the period stretching out from 2011 to 2017.
The generally ESG scores together with their components are utilized to examine their effect on
CFP while considering bookkeeping (Return on Assets and Return on Equity), and market
measures (Stock Return (RET) and Price-to-Book ratio (PB)). We utilized panel corrected
standard errors to address the cross-correlations identified with the panel cross-sections. Our
discoveries showed that the ESG-CFP relationship relies upon the ESG principles, type of CFP
measures, and the nature of business. No relationship was distinguished among ESG and CFP
when proxied by bookkeeping indicators while a concave relationship with RET and a convex
relationship with P/B were uncovered. When ESG pillars were considered independently, a
convex relationship was acquired among Environmental and bookkeeping measures and among
Governance and P/B while a concave relationship was portrayed among Social and bookkeeping
measures. At industry level, ESG contrarily affected the market performance in the

40
Transportation business contrasted with no effect in the Capital Goods industry. Consequently,
ESG decisions in East Asian firms should be very much adjusted and arranged out to keep away
from undesired financial results, while a change in the mentality of directors toward a superior
ESG improvement is important to achieve momentary additions and sustainable monetary and
social benefits.
Therefore few studies have been conducted to explain the impact of sustainability on firm
performance in developing countries in the Asian region (P. Matos , V. Barros and J. Sarmento,
2020). Further (T. Skevas, I. Skevas, Victor E. Cabrera, 2021) state that cross cultural analysis
between developing countries is required to examine sustainability and corporate financial
performance. (Mahmoud Abdul Aleem Elkholy, 2020) explained the impact of sustainability
accounting on firm performance, he argued that one must add other financial variables along
with sustainability to assess their combined impact on firm performance. Further (A. Keskin,
2020) examined the impact of sustainability indicators in turkey on corporate financial
performance using discriminant analysis but left an important gap to examine the cross-cultural
impact of sustainability on firm performance in other developing countries. Lastly (Nguyen, T.
H., Elmagrhi, M. H., Ntim, C. G., & Wu, Y. 2021) have also explained the impact of ESG
factors on financial performance in China, but has clearly mentioned the use of doing cross-
cultural study to better explain the results.
Almost no study explains the combined effect of sustainability, capital structure and dividend
policy on firm performance in developing countries among Asia. So, in this paper we aim to
explain the combined effect of 2 main financial decisions such as capital structure and dividend
policy and 1 non-financial decision such as sustainability on firm financial performance in
developing countries of Asia. Which is clearly a research gap in recent papers.

2.4. THEORETICAL FRAMEWORK

Sustainability

Firm Performance Capital Structure

41
 Control Variables Dividend Payout

Firm Size Firm Growth

2.5. RESEARCH HYPOTHESIS

H1: There is a positive impact of Capital Structure on Firm Performance
H2: There is a positive impact of Dividend Policy on Firm Performance
H3: There is a significant impact of Capital Structure on Firm Performance
H4: There is a significant impact of Dividend Payout on Firm Performance
H5: There is a positive impact of Sustainability on Firm Performance
H6: There is a significant impact of Sustainability on Firm Performance

CHAPTER # 3

3.0. DATA AND METHODOLOGY

3.1. POPULATION AND SAMPLE

This study was based on data research and analysis, it employs secondary quantifiable data of
ESG, Capital structure and Dividend policy of 13 countries that lie in the Asian region. Each
country includes 5 companies with a total of 65 companies from around the Asian region. The
study takes five years of panel data from the period 2016 to 2020, as panel data is the
combination of both the time series and the cross-sectional data. A sample size of 65 financial
and non-financial companies from Thomson Reuters was collected for 5 years. The study
includes only those companies who had the largest market capitalization and whose ESG data
was readily available. Additionally, this study uses a balanced panel sample and excluded the

42
firms that had low market cap, low liquidity and unavailability of ESG data at arm’s length . So
the final sample consists of 65 firms with complete information related to ESG, leverage and
dividend policy. This study utilized descriptive statistics, correlation analysis, OLS regression
and panel data regression (pooled regression, random effect or fixed effect) selected by applying
the Hausman test to choose the best model.

3.2. SAMPLED COMPANIES

Serial # Country Number of Firms
1 Pakistan 5
2 Taiwan 5
3 Thailand 5
4 India 5
5 UAE 5
6 Singapore 5
7 Saudi Arabia 5
8 South Korea 5
9 Philippines 5
10 China 5
11 Malaysia 5
12 Israel 5
13 Indonesia 5
Total 65

3.3. MODEL SPECIFICATION

Econometric Model:

43
FPit = αi + β1ESGit + β1CSit + β1DPit + β1FSit + β1FGit + µit

FP = Firm Financial Performance (ROA, ROE)

ESG = Environmental, Social and Governance (ESG score)
CS = Capital Structure (Debt ratio, Debt-Equity)
DP = Dividend Policy (Dividend Payout, Dividend Yield)
FS = Firm Size
FG = Firm Growth
µit = Error term
α = Intercept term
i = Cross sections
t = Time period

44
3.3. MEASUREMENT OF VARIABLES
Name Symbol Representation Measurement
Financial Performance FP ROA Net Income/Total Assets
ROE Net Income/Total Equity

Sustainability/ ESG ESG score Combined ESG score

Environmental, Social and
Governance
CS Debt ratio/DR Total Debt/Total Assets
Capital Structure Debt-Equity/D-E Total Debt/Total Equity

DP Dividend Dividend paid/Net income

Dividend Policy Payout/DPO Dividend per share/Market
Dividend Yield/DY price per share

FS Log of Total Assets

Firm Size Firm Size
FG (Current sales/Past sales)-1
Firm Growth Firm Growth

45
 CHAPTER # 4

4.1. RESULTS AND DISCUSSION

This chapter includes the results of analysis and discussion of related results. Results are shown
and discussed for the data obtained from 65 most liquid companies from 13 countries that lie in
the Asian region. These results are shown with reference to descriptive statistics, correlation
analysis, cointegration analysis and regression model of concerned variables in the chapter.

4.2. DESCRIPTIVE STATISTICS

Table 1 Descriptive Statistics

MEASURE ROA ESG DR D-E DPO DY FS FG

Mean 0.0372 51.083 0.213 1.737 0.4 0.0337 8.78 0.0526
Median 0.0203 54.94 0.174 0.793 0.38 0.0325 8.59 0.0563
Maximum 0.2304 94.939 0.843 283.6 2.39 0.1274 12.2 1.1431
Minimum -0.271 3.86 0 -68.7 0 0 6.69 -0.736
Std. Dev. 0.0537 20.76 0.176 16.31 0.3 0.024 1.18 0.1632
Skewness 0.1546 -0.361 1.015 15.72 0.98 0.8381 1.02 0.8288
Kurtosis 7.6856 2.1689 3.687 277.3 7.27 3.9603 4.18 11.337
Probability 0 0.0003 0 0 0 0 0 0

Observation
s 325 325 325 325 325 325 325 325

Table 1 shows the descriptive statistics of the variables. The sample consist of 65 firms of 13
countries from the Asian region with 325 observations of 5-year panel data from 2016-2020 used
in the regression analysis. Our average ROA is around 3.7%, with minimum value of -27% and
maximum value of 23%. The mean of combined ESG score is 51, with minimum score given as
3.86 and maximum score given as 95. Average debt ratio and debt to equity ratio is 23% and
173% which shows that most companies have higher debt relative to equity and most companies
have around debt that is 20% of their equity. The highest debt taken as a proportion of total
assets is around 84% and lowest debt taken is around 0% of total assets which shows 100%

46
equity financing. Average dividend payout and dividend yield is around 40% and 3.4% which
shows that on average atleast 40% of earnings are paid out as dividends. Maximum payout is
239% which means that in a single year a concerned company pays out $2.39 for a single dollar
of earnings, this might portray special dividends in which performance exceeds targets. Average
firm size is around $9 million with max size being $12 million and minimum size around $6
million. Average firm growth 5.25% which shows that on average over 5-year period the firms
grow around 5.25%. Maximum firm growth in a specific year is 114% with minimum being
around -73%. ESG is the only variable that is slightly negatively skewed while all other variables
are slightly positively skewed. ESG is the only variable that has kurtosis of less than 3 which
tells us that it doesn’t follow a normal distribution and has lower probability in its tails, while
DR, DY and FS follow an approximate normal distribution. All the remaining variables have
kurtosis greater than 3 which tells us that they have fatter tails.

4.3. CORRELATION ANALYSIS

Table 2 Correlation Matrix

MEASUR
E ROA ESG DR D-E DPO DY FS FG
0.33 0.0560
ROA 1 -0.0832 -0.2831 -0.244 7 7 -0.1 0.2772
ESG -0.0832 1 -0.191 -0.017 0.02 -0.1596 0.34 -0.0119
0.092
DR -0.2831 -0.191 1 8 -0.31 -0.073 -0.2 -0.1629
0.08
D-E -0.2444 -0.0171 0.0928 1 -0.06 -0.028 1 -0.0541
0.4589 0.01
DPO 0.3372 0.0204 -0.3115 -0.061 1 3 7 0.1248
0.0560 0.45
DY 7 -0.1596 -0.073 -0.028 9 1 -0.11 -0.0323
0.080 0.01
FS -0.0983 0.3403 -0.204 6 7 -0.1058 1 0.048
0.2771 0.12 0.04
FG 8 -0.0119 -0.1629 -0.054 5 -0.0323 8 1

Table 2 shows the strength of relation between dependent and independent variables.
Correlation matrix values lie between -1 and +1. Coefficient value -1 shows that variables

47
have a perfect negative relation to one another, which implies that both have perfect opposite
directional association to one another. Correlation matrix value +1 shows that variables have
a perfect positive relation to one another. The correlation matrix shows that DR, ESG, D-E
and FS have a negative correlation to ROA which tells us that as performance rises, the
capital structure, ESG scores and firm size falls. On the other hand, DPO, DY and FG have
positive correlation to ROA which indicates that improvement in firm performance improves
sales growth, and dividend policy. However, in no case the correlation between independent
variables exceeds the 45%, which shows no presence of multicollinearity.

4.4. PANEL COINTEGRATION TEST

Table 3 Panel Cointegration test

Kao Residual Cointegration Test

Sample: 2016 2020
Included observations: 325
Null Hypothesis: No cointegration
Trend assumption: No deterministic trend
Automatic lag length selection based on SIC with a max lag of
0
Prob
t-Statistic .
ADF -8.00596 0

Residual variance 0.000661

HAC variance 0.000678

Table 3 shows the augmented dickey fuller test for cointegration. The panel cointegration test
tests for the unit root within the time series and whether data is covariance stationary. If the data
has no cointegration it means that it exhibits unit root, it will be non-stationary and cannot be
used for regression analysis and results can’t be interpreted. However, if data is cointegrated it
has a long run relation within the variables and has no unit root, which also means that it is
stationary and can be used for regression analysis. Our test shows a null hypothesis of no
cointegration and the outcome shows that the data has probability of 0.00 at 5% significance
level for augmented dickey fuller test which means that we reject the null hypothesis of no

48
cointegration and conclude that our data is cointegrated and exhibits no unit root. Long run
relation exists within our data and it exhibits stationarity due to which it can be used for
regression analysis. Our data also exhibits stochastic trend which indicates that the trend is non-
constant in each run due to a random component.

4.5. SELECTION OF PANEL REGRESSION MODEL

4.5.1 Hausman Test

Table 4 Hausman Test

Correlated Random Effects - Hausman Test

Test cross-section random effects
Chi-Sq. Prob
Test Summary Statistic Chi-Sq. d.f. .
34.96840
Cross-section random 2 7 0

Hausman test tells us that which panel data model is most appropriate to use for the provided
data. It has null hypothesis: use random effect model and alternate hypothesis: use fixed effect
model. So after running the above model use obtain a p-value of 0.00, which means that we
reject the null hypothesis and use the fixed effect regression model as our final panel data
analysis.

4.6. FIXED-EFFECT REGRESSION

Table 5 Fixed effect regression

Dependent Variable: ROA

Method: Panel Least Squares
Total panel (balanced) observations:
325
Coefficien Std.
Variable t Error t-Statistic Prob.

49
 ESG_SCORE -1.83E-05 0.000237 -0.07719 0.9385
-
DEBT_RATIO -0.213233 0.029455 7.239362 0.0000
-
DEBT_EQUITY -0.000694 9.44E-05 7.349958 0.0000
DIVIDEND_PAYOUT 0.01789 0.007752 2.307773 0.0218
DIVIDEND_YIELD 0.403253 0.114574 3.519592 0.0005
-
FIRM_SIZE -0.036636 0.023288 1.573179 0.1169
FIRM_GROWTH 0.061147 0.009979 6.127307 0.0000
C 0.382387 0.201459 1.898089 0.0588
R-squared 0.839155
F-statistic 18.59081
Prob(F-statistic) 0

ROA = 0.38 - 1.83E-05(ESG) – 0.2133(DR) – 0.0007(D/E) + 0.017(DPO) + 0.403(DY) –

0.037(FS) + 0.06(FG)

According to the above Table 5 results of Fixed Effect Model shows that the value of correlation
coefficient is 83.9%, which mean that all independent variables explain approximately 84%
variation in ROA and the remaining 16% variation is explained by other factors. Dividend
payout, dividend yield and firm growth has a positive significant relation with ROA, whereas
debt ratio and debt-equity ratios have negative significant relation with ROA. The ESG and firm
size both exhibit a negative insignificant relation with ROA. The probability of f-stat has value
of 0 which means that the overall model fitness is evident.

4.7. MULTIPLE REGRESSION ANALYSIS

Table 5 results in a multiple regression equation using fixed effect regression model that is
represented by:

ROA = 0.38 - 1.83E-05(ESG) – 0.2133(DR) – 0.0007(D/E) + 0.017(DPO) + 0.403(DY) –

0.037(FS) + 0.06(FG)

Multiple regression analysis of this data shows the existence of a single dependent variable ROA
and 7 independent variables such as DR, D/E, DPO, DY, FS and FG. Panel least squares

50
provides evidence that ESG negatively and insignificantly influences firm performance and
increase in ESG by 1 point will decrease ROA by $1.83E-05. This shows that ESG impact is
almost negligible on firm performance. However, (Aggarwal, P. 2013) proposed the same
outcome and stated that the impact between sustainability and corporate financial performance is
somewhat blended and mixed. Debt ratio on the other hand shows a negative significant relation
with firm financial performance and shows that increase in DR by $1 will decrease ROA by
$0.2133. (Zahid, M. 2020) has the same argument that capital structure has significant and
negative relation to firm performance so firms should carry out an optimal mix of debt-equity so
that it doesn’t reduce financial benefits of the company and it doesn’t make high debt usage
counterproductive. Dividend policy has a positive and significant relation with firm
performance. Increase in DPO by $1 will increase ROA by $0.017. (SHIRANTHI & PERERA.
2020) also suggested that there exists a significant positive association between corporate
performance and dividend policy. So dividend policy decisions are the most productive in
managing firm profitability. Firm growth also exhibits positive significant relation with firm
performance such that increase in firm growth by 1% will increase ROA by $0.06. Firm size has
negative insignificant relation to firm performance as FS increases by $1, the ROA decreases by
$0.037.

51
 CHAPTER # 5

5.1. DISCUSSION

52
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