CAPITAL STRUCTURE AND ITS EFFECT ON FIRM PERFORMANCE: AN EMPIRICAL STUDY ON THE LISTED CONSUMER SERVICES SECTOR ORGANIZATIONS IN BOTSWANA
Abstract
Discussions on an organizations optimum capital structure that would enhance organizational performance has been a topic of continued academic research. Such studies focused on the choice of debt/equity financing as well as the maintenance of an ideal debt ratio that will support improved firm performance. This paper examines the effect of capital structure on the financial performance of listed organizations in the Botswana Consumer Services Sector. Descriptive research design was used in the study. The research population included all the listed organizations in the consumer services sector in Botswana. The study covered the seven-year period of 2012-2018 and adopted a purposing sampling approach. Dependent variables were Return on Assets (ROA), Return on Equity (ROE), Tobin’s Q and Earnings per Share (EPS). The capital structure was measured by short-term debt to total assets, long-term debt to total assets, total debt to total assets and total debt to total equity. Control variables were liquidity and firm growth. The data was analyzed using descriptive statistics, correlation analysis and regression analysis. Findings indicate that high-debt financing has a negative and significant effect on the financial performance of consumer services sector firms in Botswana. Total debt to total equity had a negative and significant effect on firms’ financial performance measures; ROA, ROE and Tobin’s Q. Long term debt to total assets also had a negative and significant effect on EPS. This may be the first study in Botswana on the topic and is expected to benefit the industry, managers, shareholders, investors and future researchers.
JEL: D21; D22; G32
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DOI: http://dx.doi.org/10.46827/ejefr.v0i0.648
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