THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND FIRM’S PERFORMANCE: EVIDENCE FROM LISTED NON FINANCIAL CORPORATION IN DAR ES SALAAM STOCK EXCHANGE.
A DISSERTATION SUBMITTED IN PARTIAL FULLFILMENT OF REQUIREMENTS FOR MASTER OF BUSINESS ADMINISTRATION DEGREE OF THE OPEN UNIVERSITY OF TANZANIA
The undersigned certifies that has read and hereby recommends for acceptance by the Open University of Tanzania a Dissertation entitled “The relationship between capital structure and firm’s performance: Evidence from listed non financial corporations in Dar Es Salaam Stock Exchange” in partial fulfillment of the requirements for the degree of masters of Human Resources Management of the Open University of Tanzania.
Dr Proches Ngatuni
"No part of this dissertation may be reproduced, stored in any retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the author or the Open University of Tanzania in that behalf".
I, Winfred Amani, do hereby declare that this dissertation is my own original work, and that it has not been submitted for a similar degree in any other university.
DEDICATION This research work is dedicated to God and his wonderful son Jesus Christ, the strength of my life, my Alpha and Omega and my inspiration, who has been seeing me through the rigours of the academic world and to my beautiful, loving and wonderful wife Sarah Emmanuel and My son Ebenezer Winfred.
ACKNOWLEDGEMENT I thank God Almighty for His love, protection and abundance blessings showered on me during my course of study and for his help despite some challenges. I praise His Holy Name.
I’m profoundly grateful to my supervisor Dr Proches Ngatuni for his contributions, corrections, remarks, efforts and supervisory role in making this dissertation remarkable success. You always spare sometime to go through this work in spite of your very busy schedule. My God will bless your labor of love in Jesus name.
Finally my special and loving thanks go to my wife Mrs Sara Emmanuel who has been tremendous help to me and a greater source of inspiration to the completion of this dissertation, I say big thank you.
I will forever appreciate the mercy, kindness and goodness of God in my life and his constant leading: you alpha and Omega.
The aim of this study was to determine the relationship between capital structure and firm performance of listed non financial corporations in Tanzania. The study used panel data for the period of 5 years from 8 non financial firms listed on the Dar es salaam Stock Exchange. Study use mixed model repeated measure to estimate the relationship between capital structure and firm performance where, capital structure was proxied by debt ratio and debt-to equity ratio while performance was proxied by return on assets and return on equity.
The study reveals Tanzania listed non financial firms are financed more by equity capital than debt financing. Results also show that listed non financial firms perform below average. The study results indicate significant negative relationship between return on assets and debt to equity ratio, return on assets and debt ratio, and return on equity and debt ratio. However, the relationship between return on equity and debt to equity ratio was positive but insignificant. The results are consistent with previous studies conducted by Kipesha and Moshi (2014); Pastory et al. (2011); Kandongo et al. (2014); Anarfo (2015); Kajananthan et al.(2013); Hassan et al.( 2012).
Key words: Capital structure, Firm performance, Tanzania .
Firm performance has brought challenges to financial managers and shareholders in the process of maximizing owner’s wealth and investment return. Shareholders wealth maximization is manifested in the high price of firm’s outstanding ordinary shares. One way of ensuring firm performance is the ability of financial managers to choose optimal capital structure (Watson and Head, 2007). Capital structure is financing mix which includes the mixing of debt and equity in a way that not only maximizes shareholder wealth but also that of the other stakeholders of the firm and enable the firm to operate in a competitive environment (Chinaemeren & Anthony, 2012).
In past and contemporary world, financial managers are confronted with the problem of choosing a mix of equity and debt to achieve optimal capital structure that would minimize firm cost of capital and in turn improve return to owners of the business. Managers have a duty to choose sources of finance that should be used in the firm since a wrong mix of financing may affect the firm and its survival in the market. Up to date, financial managers do not have a well defined formula for taking decisions on optimal capital structure making the studies of capital structure to be continuous.
The idea of modern theory of capital structure is traced to the seminal contribution of Modigliani and Miller (1958) when they develop capital structure irrelevance theorem under the assumption of perfect capital markets. The theory concluded that the way a firm finances its assets has no impact on its value but the firm value is derived from productivity and quantity of asset in which the firm has invested. Since introduction of capital structure irrelevance theorem the existence and determination of capital structure have been controversial issues in finance (Ryne et al, 1997).
Empirical studies also lack consensus. While other report negative relationship between capital structure and firm performance (Kipesha and Moshi, 2014; Pastory et al, 2013) others report a positive relationship (Ross, 1977; Salehi & Bigler, 2009). Despite the fact that there has been substantial research about how firm improve performance by using optimal capital structure still academician and researchers have failed to give practitioners a clear guidance with regard to optimal mix of equity and debt in their firm’s financing mix.
Capital markets in developing countries are performing differently, South Africa market is developed while Nigeria, Egypt and Kenya are frontier capital markets but rest SSA capital markets including DSE are developing. Most markets are illiquid and offer vanilla products (Yousuf, 2009). Studies from capital markets in Africa on relationship between capital structure and firm’s performance shows inconsistent results. This is a signal that the way firms finance their investment may increase or decrease shareholders wealth (Pastory et al, 2013; Anarfo, 2015; Adesina, et al, 2015). This study investigates the relationship between capital structure and firm performance of listed non financial firms in Tanzania. Most studies on capital structure and firm performance in Africa and Tanzania in particular have been focused on banking sector. This study seeks to determine relationship between capital structure and firm performance of listed non financial firms in Tanzania.