Capital Structure, Debt Financing, and Firm Performance in the Textile Industry

Abstract

Capital structure decisions are basic to the financial management of a firm and have an enormous impact on firm performance and especially in companies like textiles which are capital intensive. The textile industry is an extremely competitive and volatile industry with high working capital needs, changing input prices, and is susceptible to worldwide market fluctuations. As a result, companies operating in this sector often use debt financing to continue their operation and support their growth. This study focuses on the study of capital structure, debt financing and firm performance relationship in textile industry by synthesizing the theoretical perspectives and empirical forecast of the existing literature. Drawing from capital structure theory such as Modigliani-Miller proposition, trade-off theory, pecking order theory, agency theory, the study examines the effect of various forms of debt on profitability and operational results. Prior empirical results show mixed findings, suggesting that although moderate leverage can foster firm performance via tax benefits and financial discipline, excessive amounts of debt can negatively impact firm profitability because of higher levels of financial risk and agency costs. This study emphasizes the importance of the optimal capital structure in terms of risk and the return, especially when it comes to the textile industry in developing economies. The results are hoped to be valuable in terms of making financial managers, financial investors and financial policymakers more aware of ways to improve the performance of the companies and ensure sustainable growth of the industries.