Capital structure and the financial performance of listed firms on the Zimbabwe Stock Exchange

Abstract

The main objective of this study was to investigate the impact of capital structure on financial performance of firms listed on the Zimbabwe Stock Exchange. Total leverage to asset ratio, short term leverage to asset ratio and long term leverage to asset ratio were used as proxies for capital structure while return on asset (ROA) and return on equity (ROE) were used as firm performance evaluation measures. Control variables included in the study were firm age (AGE), firm size (BVTA), asset tangibility (TANG), asset turnover (TURNO) and risk (RISK_ROA and RISK_ROE). The study made use of panel data that were gathered from annual statements of 16 firms, for the period from 2009 to 2013. Four performance equations were estimated using the pooled-OLS estimation technique. The Pearson’s correlation approach was used to test for multicollinearity while the restricted F-test or partial F-test was used to determine the model of best fit, between the unrestricted and the restricted models. Econometric estimates revealed that short term leverage to asset ratio (SLA) has a significant impact on firm performance measures ROA and ROE, while long term leverage to asset ratio (LLA) has a significant influence on ROA only. Total leverage to asset ratio (TLA) was found to have an insignificant impact on all firm performance evaluation measures while all the control variables (BVTA, AGE, GROW, RISK_ROA, RISK_ROE), save for asset tangibility (TANG), had significant impacts on ROA and ROE.