Author(s): Samuel Tabot Enow
Capital structure represents an essential managerial decision task because of its relative importance in assessing the risk of a firm. Large and multi-national business is constantly faced with the decision of analysing the appropriate mix of debt and equity/assets. This study aimed at investigating the effect of capital structure on profitability using a meta-analysis to ascertain what has been documented in prior literature. Using a Lilliefors test, a Kolmogorov Smirnov test, a Chi square test and a sample of 23 published journal articles, the results shows that profitability is independent of capital structure. Also, capital structure is not a good fit in explaining variations in profitability. The implication of this study is that policy makers, business support organisations, banks and academic institutions should not consider the effect of their capital structure decisions when analyzing their profitability. Although there might have been a positive or negative relationship between the two concepts, it is purely by chance. Also, articles that are titled “the effect of capital structure on profitability” should first establish the direction of impact, the effect size, a dependency relationship and a detailed coefficient of determination analysis.