The determinants of capital structure for large firms in Tanzania: a panel data analysis

Abstract

This study sought to analyze some of the supposed determinants of capital structure of large firms in Tanzania. The study examined the capital structure of selected 85 unlisted firms in Tanzania by using a firm-level panel data set from 2000 to 2009. The obtained panel data set allowed the study to construct and test more complicated behavioral models than purely cross-sectional or time series data. It also allowed the study to make inferences about dynamics of capital structure from cross-sectional evidence through use of dynamic panel data models. The regression results revealed that leverage has a positive correlation with tangibility, tax, and inflation rate, as well as negatively correlates to size, firm growth, risk, and interest rate. The study also revealed that profitability and economic growth rate have no significant impact on capital structure. In addition, industry category is also not significant. For the case of dynamic panel data model, selected unlisted firms were found to adjust more quickly to targeted capital structure. The magnitude of adjustment coefficient was high t about 67 percent when total debt ratio is used and at about 77 percent when long-debt ratio was used. This implies that selected unlisted firms adjust relatively fast towards the target leverage ratio and even long-term debt ratio is used as leverage measurement. The study contributes to the existing body of literature by providing empirical evidence in a Tanzanian setting to the capital structure debate. It also provides important policy guidelines for financial management for the firms in Tanzania. Based on these findings, it appears that firm characteristics and economic factors have an effect on capital structures of firms in Tanzania. Therefore, firms should take these factors into consideration when making their optimal capital structure decisions.