**5. Discussion**

The relationship between capital structure and firm performance can be summarized in two different ways: leverage and firm performance, and long-term debt and firm performance. These themes are discussed in the following section.

In the Table 8 above, leverage is significantly associated with operating margin but has significant negative association with two measures of firm performance: return on assets and return on invested capital. In Table 9, other control variables have influenced profitability in positive and negative ways. Tangibility has affected operating margin, return on vested capital and return on equity negatively, suggesting that Australian firms are overinvesting on fixed assets. Revenue growth has also affected operating margin and return on assets significantly. Depreciation tax shield is observed to have affected operating margin negatively and liquidity has affected return on equity positively. The constant is significant in both operating margin and return on invested capital, suggesting a guaranteed minimum return from the presence of service sector firms in the economy. However, return on assets and return on equity, not assumed as constants, are not significant at any level of confidence.

In the table below, all relevant regression models are summarized to demonstrate the effect of long-term debt being used to finance total assets in order to improve firms' performance in the Australian services sectors.


**Table 8.** Leverage and its effect of firm performance.

 \*\* and \*\*\* are measured for 1%, 5% and 10% level of significance.

\*,

In the Table 9 above, long-term debt to finance assets is significantly associated (positively) with all measures of firm performance, except operating margin. Depreciation tax shield significantly influenced return on invested capital negatively while tangibility has negatively affected, at different levels of statistical significance, all measures of firm performance except return on assets. Liquidity has affected firm performance in all instances, natively in operating profit, and positively (at different levels of statistical significance) in improving return on assets and return on invested capital. Operating revenue positively influenced all measures of firm performance except return on assets. Finally, revenue growth for three years was a significantly influential negative factor in affecting operating margin but a positive factor in improving return on assets.

In light of the discussions above, we can say, 'capital structure matters.' It enhances the performance of the service sectors in Australia not only through improved operating margin and higher return on invested capital; it also increases shareholder value by improving return on equity and return on assets. As observed in our data analysis, we have used four different measures of firm performance. Three of these measures relate to balance sheets and the other one relates to profit and loss in the short-term. Leverage in all measures of performance was significant at the 1% level except when return on invested capital was used to measure firm performance. Even in the presence of other variables (used in the literature as explanatory variables) that showed significant influence in firm performance, leverage remains significant in shaping the performance of service sector firms in Australia. The positive and significant relationship between leverage and operating margin implies that the service sectors in Australia can greatly benefit by increasing the debt level in its capital structure. The negative and significant relationship with tangibility also makes economic sense and implies that tying funds in fixed assets can be detrimental to operating profits as the company will have lees funds available for generating revenues.


**Table 9.** Long-term debt and its effect on firm performance.

\*, \*\* and \*\*\* are measured for 1%, 5% and 10% level of significance.

Long-term debt to total assets does not play any role in operating margin as the service sectors can generate frequent cash flows and turnover rate is very high. As such, need for long-term debt is irrelevant. The economic impact is different for return on assets where our analysis shows that both leverage and long-term debt to total assets are positively significant in impacting return on assets under both REM and FEM. It further strengthens our earlier arguments that service sectors greatly benefit from increased debt level in its capital structure. Revenue growth for three years also shows promising impact on return on asset which also remain positively significant. When we tested our model for ROIC, we find that leverage is negatively significant whereas long-term debt to total asset remains positively significant. The negative relationship with leverage implies that firms face challenges in return on invested capital if too much of the funds are tied with short-term borrowing as they are payable quickly. In addition, just like in operating margin, tangibility remains negatively significant implying that firms are adversely affected by increased tangible assets holding. Finally, when analyzing the relationship with return on equity, just like ROA, we observe that both leverage and long-term debt to total assets remain positively significant. Unlike ROA, tangibility remains negatively significant with ROE. In conclusion, we can assert that in the case of service sector firms in Australia, a high level of leverage and a high level of long-term debt in capital structure is beneficial to increasing shareholders' wealth.
