Debt Capacity and Company Performance
The field of research focussing on debt capacity can be understood as a special part of the much broader capital
structure theory. Starting with the paper of Modigliani / Miller in 1958 there has been an ongoing and intensive theoretical
discussion about the – potentially – optimal capital structure of a company. One relatively new part of the related debate
analyses – among others – debt capacity figures, debt covenants and key financial – or more precisely – rating figures and
their potential relation to the capital structure of a company. Mainly these newer approaches intend to show possible effects
of key financial figures on the capital structure.
The aim of this paper is to contribute to the ongoing capital structure theory. Taking into account the real day-to-day decisions
of the finance manager of a company it intends to employ a different view compared to until today dominating research
approaches. Consequently, this paper assumes that debt capacity – rules – can be a way or means to define and manage the
capital structure of a company. Further, this paper intends to analyse empirically, if there may be a steady relation between
the – still open–debt capacity of companies and their performance. With regard to this question, a positive correlation is
shown to be evident. Hence, it could be worthwhile to go on analysing the capital structure issue employing this paper’s relatively
new view on it.
Keywords - debt capacity, capital structure, financial flexibility, strategic finance, key rating figures