Effects of Capital Structure on the Profitability on Top 5 Banks in Canada

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ACKNOWLEDGEMENT

My thanks go out to all who have helped me complete this study and with whom this project may have not been possible. In particular, my gratitude goes out to friends, facilitator and family for extensive and helpful comments on early drafts. I am also deeply indebted to the authors who have shared my interest and preceded me. Their works provided me with a host of information to learn from and build upon, also served as examples to emulate.

DECLARATION

I, (Your name), would like to declare that all contents included in this thesis/dissertation stand for my individual work without any aid, and this thesis/dissertation has not been submitted for any examination at academic as well as professional level previously. It is also representing my very own views and not essentially which are associated with university.

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ABSTRACT

This research study is an attempt to study the effects that capital structure has on the profitability of top five banks in Canada. Capital structure generally refers to the balance sheet composition of the capital of an organisation; the proportion of debt and equity to total capital (compared to the asset structure). It is the way an organisation finances its assets through a combination of equity, debt or hybrid securities. In reality, capital structure may be very complex and it includes dozens of sources (Ross, 2003, p. 23-40). This research study has adopted a secondary quantitative research method in order to meet the aim and objectives of this dissertation. The data has been collected from the top five banks of Canada. These banks are TD bank, Royal Bank of Canada, Bank of Montreal and CIBC Bank. The capital structure of these banks have been analysed for a period of ten years. The data for both capital structures has been collected for ten years. The results of this research have shown the effects that the capital structure on the profitability. ROA has a negative relationship with the profitability of the top five banks, whereas, the ROE has positive relationship with the profitability of the Big Five Banks.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 01: INTRODUCTION1

1.1 Background of the Study1

1.2 Research Problem4

1.3 Overview of the Top five Banks in Canada5

1.4 Rationale of the Study7

1.4 Aim and Objectives8

1.5 Research Questions9

1.6 Significance of the Study9

1.7 Layout of the Study9

CHAPTER 02: LITERATURE REVIEW11

2.1 Introduction11

2.2 Theoretical Framework11

2.3 Capital Structure13

2.4 Relationship between Capital Structure and Profitability15

2.5 Agency Theory and Capital Structure18

2.6 Tax Based Theory and Disruption Cost22

2.7 Theories of Capital Structure and their Application to the Banking Firm26

2.8 Empirical Studies on Capital Structure and Profitability28

2.9 Debt and Value Maximisation29

CHAPTER 03: RESEARCH METHODS31

3.1 Introduction31

3.2 Research Method31

3.3 Overview of the Secondary Research32

3.5 Regression Analysis33

3.6 Variables of the Study33

3.6 Data Sources35

3.7 Sample Size35

3.8 Reliability36

3.9 Validity36

3.10 Limitation of the Dissertation36

CHAPTER 04: DISCUSSION AND ANALYSIS38

4.1 Introduction38

4.2 Regression Analysis38

4.3 Discussion39

4.4 Comprehensive Overview of the Big Five Banks in Canada46

4.4.1 Bank of Montreal (BMO)46

4.4.2 Bank of Nova Scotia (BNS)47

4.4.3 Canadian Imperial Bank of Commerce (CIBC)48

4.4.4 Royal Bank of Canada ...