Does Corporate Capital Structure influence Corporate Financial Performance in Developing Economies? Evidence from East African Stock Markets

Erick Lusekelo Mwambuli


This paper examines the statistically significant influence which capital structure has had on corporate financial performance of listed non-financial companies in East African stock markets. It used panel data of 272 observations including 34 East African non-financial listed firms listed in East African stock markets such as Dar Es Salaam Stock Market (DSE), Nairobi Securities Exchange (NSE) and Uganda Securities Exchange (USE) for a period of 8 years {i.e. 2006-2013}.Using the Panel Corrected Standard Errors (PCSEs) and Fixed Effect (FE),the study formulated two (2) econometric models with return on assets (ROA) and return on equity (ROE) as dependent variables and measures of corporate financial performance respectively, three (3) independent variables such as short term debt ratio (STDR),long term debt ratio (LTDR) and total debt ratio (TDR) as a measure of capital structure, furthermore the study used size of the firm (SIZ) as a control variable in order to control the differences in firm’s operating environment. The result indicate that capital structure has a negative and statistically significant influence on East African listed firm’s financial performance at 5% significance level. These results show that in average profitable listed firms in East African prefers to use internal source of financing in their capital structure as compared to external source of financing {like Debts-STDR,LTDR and TDR} and this results are supporting pecking order theory. Lastly the study recommends to corporate financial managers of East African non-financial listed firms should reduce financing their operations and growth by debt (STDR,LTDR and TDR) on their capital structure in order to enhance their corporate financial performance, regulatory authorities in East African region such as East African member states securities regulatory authority (EASRA) to formulate policies that will improving of financial markets in the region in order to reduce the cost of debt, further research could examine the influence {if any} of capital structure on sector wise (as per industry-like Manufacturing firms) for East African non-financial listed firms, take into account more control variables which are likely to influence financial performance such as macroeconomic variables (like gross domestic product - GDP) and consider other capital structure theories like ,market timing theory, agency theory which were not considered in our study.

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