Reconsidering the Profitability–Capital Structure Relation: Findings from Poland

The aim of the study is to verify whether and how the relation between profitability and corporate financing policy depends on the firm size and its industrial classification. The relationship between return on equity and selected measures of capital structure for Polish private firms in the period 2005–2015 is explored in two cross-sections: across size groups of firms and across industrial sections. The issue is addressed by estimating panel data models with interactions between variables so as to identify the factors responsible for the variability of the considered relationship. The study contributes to the existing literature by capturing the indirect size effect and industry effect in the profitability–capital structure relation. It also takes into account the issue of debt maturity by considering the relationship in question for different debt measures. Findings provide evidence that this relation is more industry- than size-dependent for long-term debt, but that the size effect prevails when short-term debt is considered. The results also suggest greater relevance of the pecking order theory for long-term debt, whilst the trade-off predictions seem more adequate for explaining short-term financing decisions.