Capital Structure and Economic Performance of the firm: evidence from Italy

Financing choices are one of the most critical decision for management by influencing the firm’s behaviour as well as its economic performance and value. Based on the researches of Abor (2005) and Gill, Biger and Mathur (2011) the paper is a moderate attempt to understand the relationship between capital structure and economic performance of Italian large, medium and small firms in manufacturing and service industry listed in Italian Stock Exchange in a period of 5 years (from 2007 to 2011). The analysis found a significant relationship between economic performance of the firm and its financial debt but with non-unique direction. A positive correlation was found in the medium manufacturing firms (between i) ROE and total, long-term and short-term financial debt to total assets; ii) ROA and total and short-term financial debt to total assets; iii) ROI and short-term financial debt to total assets), in the large service firms (between i) ROA and total financial debt to total assets; ii) ROI and long-term financial debt to total assets) and in the small service firms (between ROE and total and short-term financial deb t to total assets). Differently a negative correlation was found in the large manufacturing firms (between i) ROE, ROA and short-term financial debt to total assets; ii) ROI and total and long-term financial debt to total assets), in the small manufacturing firms (between ROE and total and short-term financial debt to total assets) and in the large and small service firms (between ROI and short-term financial debt to total assets). In medium service firms were not found correlations.