Redemption of Debt as a Factor affecting the Financial Performance

The purpose of this study is to examine if there is any systematic relationship between the default risk and financial performance. From analytical results, this study develops the hypothesis by comparing the financial performance between pre－change and post－change period, using a sample of 148 Australian firms that experienced changes in their capital structures through the redemption of outstanding debt during 2003－2009 period. The empirical results indicate that the financial performance has increased for the redemption of outstanding debt from pre－change to post－change period, but the redemption of debt is negatively related to the cost of capital. These results hold up even after controlling for the differences in the financial leverage and size between pre－change and post－change period. Overall, the findings provide direct support to the hypothesis that the redemption of debt is a positive function of the firm's financial performance as measured by the firm’s profitability(ROA).