3.0 CHAPTER THREE: METHODOLOGY

3.0 CHAPTER THREE: METHODOLOGY

3.1 Introduction

This part focuses on the method of data collection, analysis and presentation. Also, there will be a description of the data source and the sample used. There will be the use of secondary data, which will be sourced from the SMEs listed in the Chinese Growth Enterprise market. This data will be quantitative; hence the use of several analytical methods to evaluate the relationship between the performance of these SMEs and their capital structure. Also, deductive reasoning is going to be employed to achieve the main objectives of the research.

3.2 Research Approach

According to Ravitch and Riggan (2016), a research approach is the conventional beliefs and frameworks which have been used in this research. It can be either under the interpretivist or positivist approach. In positivist, only the information and data authentically obtained from the variables are considered the credible ones. In the interpretivist, on the other hand, there is an elaborate data examination and comparison with the hypotheses made in the research, to come up with conclusions. This study is mainly going to follow the interpretivist approach since the data is majorly quantitative. Detailed analysis of data and rational deductions from the information will, therefore, be made.

3.3 Research Design

While using mainly qualitative data from secondary sources, the dominant research design here is going to be longitudinal. According to Caruana et al. (2015). the longitudinal design of a study is a design that is repeatedly done over a long period. Thus, this study is solely gin to use the financial data f SMEs listed in the GEM between 2008 and 2012.the annual financial reports will be sued to get the ratio between equity and debt. The variables obtained will first be obtained from the analysis, that is going to give us the financial performance of these SMEs, there will be the use of regression analysis for the variables representing the capital structures and financial performance. Although the raw data is going to be in longitudinal, it is going to be described in time dimensions so that it becomes easily understood.

3.4 Data and Sample Description

Before hypothesis testing, there should be a logical sample. This study is going to adopt random sampling, the main method of collecting samples. Random samples of 20 SMEs in China listed in the GEM will be collected, and their financial data obtained from the Chinese Stock Market database between the years 2010 and 2019. The sample size of this study will b the ones listed in the Growth Market Industry, specifically during the Financial Year 2010. However, this study will not include large firms due to their difference in governing structure, shares, financing behaviour and their risk factors. Below is a tabular presentation of the samples of SMEs that will be used in this study.

3.5 Variable Measurement 

The performance of the firm will be measured in terms of the return on Equity, while the capital structure will be measured using the debt-equity ratio.

3.5.1 Indebtedness

While assessing the debt level of any given firm, the lenders always look at three main financial ratios; current ratio, total capitalization, and the financial leverage. The current ratio is used to measure the liquidity level that is disposable for repaying short term debts. Total capitalization is used to measure long-term indebtedness. The financial leverage ratio is used to measure a firm’s general indebtedness. The debt value can be obtained by making the liabilities of a firm as a part of their total financing. This is calculated by;

Where D represents the total liabilities, E representing the funding from the shareholder (Equity)

3.5.2 Firm Performance

A firm’s performance is gauged through the returns the shareholders get from its investment. The returns obtained by shareholders are obtained by getting the ratio of the net profits to the equity. The net profit is obtained through deducting all expenses of a firm, including the taxes and all the interests. Equity comprises of reserves, profits retained, and the share capital. Mathematically, this is expressed through;

3.6 Data Processing and Analysis

The population’s characteristics will be unveiled through the use of descriptive statistics. SPSS will be employed in calculating the variance and mean. There will be multiple linear regressions that will be used to express the equity against the debt-equity ratio and the interest rate. Mathematically, this will be represented through;

Where;

ROE_{t ­} is the Return on Equity over a period t

α is the regression coefficient

Β₃ is the regression constant (unknown parameters)

DR_t is the debt ratio

INT_t is the interest rate as a representative of a 91-day rate of Treasury bill

GR_t is the Gearing ratio

e_{t­ ­}is the error term

3.7 Limitations of the Method

This study was done from the perspective of the SMEs to assess the impact of financial institutions on their financial performance.

• Secondary data was hard to get since most of the sources had limited information regarding the impacts of financial institutions on the performance of the SMEs in China.
• The information from the secondary sources might not have been accurate
• Because most of the data used in this study was obtained from previously researched work, getting some variables like the earning of the employees in the SMEs could not be found due to limited data on the same.

References

Caruana, E.J., Roman, M., Hernández-Sánchez, J. and Solli, P., 2015. Longitudinal studies. Journal of thoracic disease, 7(11), p.E537.

Ravitch, S.M. and Riggan, M., 2016. Reason & rigor: How conceptual frameworks guide research. Sage Publications.