Examining the influence of capital structure on firm performance: case study of Dar es Salaam Stock Exchange

The study was based on examining the influences of capital structure on the firm’s performance of the listed firms in stock exchange of Dar es Salaam. The study targeted to meet four objectives. These objectives are evaluate linkage between the value of the total debt and firm’s performance in Tanzania, to examine the linkage between long term debts and firm’s performance in Tanzania, to examine the linkage between short term debts and firm’s performance in Tanzania and determining the association between financial leverage and firm’s performance in Tanzania. The study applied descriptive statistic on nine non financial listed firms at Dar es Salaam Stock exchange (DSE) which had full financial statement from 2010 - 2014. Secondary data were collected through website survey and documentary analysis. Correlation analysis used to find out the relationship between dependent variables and independent variables and multiple linear regression analysis used to investigated the impact of capital structure on firm performance. In this study Capital structure was independent variable measured by the ratio of total debt to total equity, ratio of short-term debt to capital employed, ratio of long-term debt to capital employed and the ratio of total debt to capital employed. Return on Equity (ROE) and return on asset (ROA) used as a measure performance which is a dependent variable. Findings of the study using correlation analysis conclude Total debt (TD), Long term debt (LTD), Short term Debt ( STD) and Debt to equity (DE) have strong negatively significant with ROA. On the other hand, there is no statistically significant relation exists between firm’s performance as measured by ROE and capital of the listed firms. This study therefore concludes that capital structure has negative relationship with firm’s performance which is consistent with the proposition of Pecking Order theory. Regression analysis used to test the impact of capital structure on firm’s performance and the result found that47.1% and 23.0% of the variance in ROA and ROE respectively can be predicted from independent variables (TD, LTD, STD and DE), whereas the remaining 52.9% and 77% of ROA and ROE respectively influenced by others variable which are not considered in this study. The study recommended that Companies should take debts in their capital structure as their last alternative. Secondly policy maker, banks and Government should find a way to set and amend their policy specifically on loan to suite all firms.