The Impact of Capital Structure on the Profitability Efficiency of ICT firms

Abstract

ICT industry is the fastest growing and most volatile industry, and firms must continue to innovate and improve technology. At the same time, they also need to increase shareholders wealth by efficiently creating firm value with given resources. Thus, in corporate finance, many studies have assessed the impact of capital structures and their determinants on the value or performance of a firm. But the results have yet to be agreed upon by the country and industry. Existing studies have also used Tobin s Q as a measure of firm value, but Tobin Q has limitations that it cannot effectively reflect firm value, a multi-dimensional and complex concept. Therefore, this study measures the value of Korean ICT manufacturing and service businesses using DEA, and uses Tobit regression to evaluate the impact of capital structure on its profitability efficiency. The analysis results showed that 1. The profitability efficiency of SMEs was the best in both industries, 2. The liquidity ratio had a positive effect on the profitability efficiency of small and medium-sized manufacturing enterprises, and 3. The debt ratio had a positive impact on the efficiency of medium-sized firms in the service industry. Accordingly, this research suggests implications for enhancing the value creation of Korean ICT firms. This study is expected to contribute not only to the study of insufficient capital structure for Korean ICT firms, but also to enrich the study of capital structures whose impact on firm value is not agreed upon.