Capital structure and corporate profitability in Zimbabwe: Case of the banking sector (June-2009 to June-2015)

Abstract

The main aim of this study was to find the effects of capital structure on the profitability of the Zimbabwean banks. In so doing, panel data collected from financial statements of five listed banks for the period June-2009 to June-2015 were used. STATA version 12 was used for the estimations. As suggested by the Hausman Specification Test, the study adopted the Random Effects Model and found that capital structure is irrelevant since the positive relationship found between capital structure (as measured by total liabilities to equity) and profitability (as measured by return on assets) is insignificant as predicted by the Modigliani-Miller Proposition I. The study findings defied the predictions of the Trade-off Theory as they demonstrated that the coefficient of the square of capital structure was insignificant. Bank’s market share, inflation and economic growth are found to have positive impact on bank profitability whilst bank age and bank size negatively affect bank profitability. Capital structure irrelevance, has led this study into advising the Reserve Bank of Zimbabwe to make available as many financial instruments which banks should use in their quest to attain minimum capital requirements. Banks are also advised to lure depositors as increase in market shares increases their profitability. Banks are also advised to increase their investments in assets with positive net present value. The government of Zimbabwe is also advised to ease the costs of doing business so that national output increases as it positively affects bank profitability