The Effect of Capital Structure on Investment Performance: A Study of Listed Companies in the Financial Sector

Abstract: Capital structure and investment performance have remained at the center of corporate finance, particularly in the financial industry where funding strategies directly influence organizational performance. This study analyzes the effect of capital structure on investment performance of listed companies in the financial industry. On the basis of Modigliani–Miller theory, trade-off theory, and pecking order theory, the research examines how financing choices influence key performance metrics like Return on Assets (ROA), Return on Equity (ROE), Earnings per Share (EPS), and Tobin's Q. The research employs the quantitative approach on the basis of secondary data from selected listed financial institutions' financial reports and filings. Regression analysis and correlation methods are used to test the association between debt–equity structures and returns on investment, while adjusting for firm-specific factors like size, growth, and liquidity. Evidence suggests that a balance between debt and equity maximizes investment performance, yet overdependence on debt funding worsens profitability and long-term viability. The results are similar to some degree with previous empirical findings, concluding that capital structure decisions are context-dependent and influenced by market and regulatory frameworks. The current research adds to the field of financial management by offering industry-specific findings and offering practical recommendations to managers and policymakers looking to optimize funding practices.

Keywords: Capital structure; Financial performance; Investment; Listed companies; Risk management