The effect of capital structure on performance: empirical evidence from manufacturing companies in Ethiopia

Abstract

AbstractThe aim of the study was to investigate the effect of capital structure as measured by total debt ratio (TOD) and long term debt ratio (LTD), on operating performance and financial performance as measured by Net Operating Profitability (NOP) and Return on Assets (ROA), respectively. Four hundred and twenty-five panel observations were obtained using the financial statements of a sample of 85 manufacturing enterprises for the years 2017 to 2021. In addition to descriptive statistics of mean, standard deviation, minimum, and maximum value, Pearson’s correlation analysis, robusted random effect, and two step system Generalized Moment Method (GMM) model were employed to analyse the data. The result revealed that each of TOD and LTD have negative and significant effects on NOP and ROA which supports the pecking order theory, whereas control variables of FATR and FS have positive and significant effect on NOP and ROA at conventional significance level. To improve performance and maintain profitability, financial managers are advised to implement sound capital structure policies and lower the level of debt.

Keywords

• Capital structure
• long term debt ratio
• total debt ratio
• performance
• Ethiopian manufacturing companies random effect
• two stem system GMM