What is Irrelevance Theorem

The main objective of this chapter is to understand the trade-off between using debt and equity in the financing decisions of investments and investigate whether capital structure affects profitability of corporate firms in Turkey. This relationship is tested through using observations of 235 firms for 4 years with the inclusion of Correlation Analysis, Independent Sample t-test, and Regression Analysis with random/fixed effect estimation. Results show that in the manufacturing sector, size, growth, GDP, market to book value, short-term debt to total assets, and total debt to total assets came out to be significant factors in determining profitability (i.e. ROA). Findings indicate that the relationship between independent variables (i.e. debt/total assets and profitability) is positive, since firms can benefit from the tax advantages brought through receiving additional debt. For the service firms, contradictory results are obtained, such that the relationship between leverage and profitability is negative.