Corporate Profitability and Capital Structure: The Case of the Machinery Industry Firms of the Tokyo Stock Exchange

Abstract

This paper examines the relations between corporate profitability and capital structures of the machinery industry firms listed on the Tokyo Stock Exchange. Some theories and models predict different relations between corporate profitability and firms’ capital structures. In this paper, we find that in the Japanese machinery industry, the relations between firm profitability and leverage ratio are generally negative. In addition, we also find that about 60% of the total debt to total asset ratio can be explained by our firm profitability variables in the previous year.