WELL COME

THE EFFECT OF CAPITAL

STRUCTURE ON FINANCIAL
PERFORMANCE OF FIRMS:
EVIDENCE FROM
IMPORT/EXPORT COMPANIES
IN ADDIS ABABA
 Background of the Study

 Capital structure was defined firstly by MM as the mix between

debt and equity that the company uses in its operation.
 It is a combination of "internal financial resources" (equity) and
"external financial resources " (debt) that make up the sources of
corporate assets.
 The main objective of this thesis is to examine the effect of
capital structure on financial performance of imp/exp co.
 capital structure measured by long-term debt (LTD) and short-
term debt (STD) whereas financial performance measured by
return on equity (ROE) and return on assets (ROA)
 Statement of the Problem

 Different scholars in Ethiopia & other countries have different results: some

have a positive others negative relation of capital structure & financial

performance.

 the researcher understands that there is a variation among all empirical

studies and the finding on this topic is still inconclusive.

 there is luck of empirical study seeking a relationship between capital

structure and the financial performance of import and export sector in

Ethiopia.
 Knowledge Gap
 From the theoretical and empirical studies point of view, there
are contradicting conclusions existed between empirical
studies about the effect of capital structure on financial
performance of companies
 The existing theory were concentrated on determinates of
capital structure and financial performance of manufacturing
companies, commercial banks, insurance company,
construction, and other listed firms.
 There is no empirical study on import/export companies
 Research Objectives
 General Objective
 to understand the effect of capital structure on financial performance of import &
export companies. There by test for capital structure theories explained by the data
from the companies which are found at Addis Ababa.
 Specific Objectives

To examine effect of capital structure variables (short term debt and long-term debt)
on the financial performance (ROA & ROE) of import and export companies.

To examine effect of control variables (growth, firm size, asset and tangibility) on the
financial performance (ROA & ROE) of import and export companies.
 Significance of the Study & Scope of the Study

 The findings of this study were:

 to guide finance managers in import/export companies as well as other sectors to make
investment decisions
 beneficial to the students of finance in terms of empirical review
 to those who wish to carry out further research
 To contribute some recommended ideas to overcome the trade imbalance in the country by
focusing the capital structure concepts
 The scope of the thesis was limited:
 To use only capital structure measured by LTD and STD and firm’s financial performance
which is measured by ROA and ROE
 also be restricted to companies of import and export sector
 Bound those companies found in A.A and around
 The period restricted on 5 years i. e 2015 to 2019
Limitation of the study

 The main limitation of these paper was

 Use only secondary data
 Fear of companies subject to tax to give reliable information to ERCA
 Due to Covid-19 epidemic there was time constraint & unable to reach to the
companies office
 2. LITERATURE REVIEW
Theoretical Framework and Literature Review
the theories which directly focus on capital structure and firms’ performance were
 Modigliani and Miller Theory- the assumption was “there is a perfectly competitive
capital market condition, all firms are in the same class of risk, no taxes on corporate
income, information is symmetric across insider and outsider investors”
 Trade-off Theory- assumes that there are benefits and costs associated with the use of
debt as against
equity and firms thus chose an optimal capital structure that trades off the
marginal benefits and costs of debt. following two sections
- Static Trade-off Theory
- Agency Cost Theory
 Pecking Order Theory- This theory states that due to asymmetric information occur
in between managements (insiders) and investors (outsiders) in which there are
situations management would have more information about companies’ value and
investment opportunities .
Conceptual framework

LTD SZ
ROE

G
R
ROA
STD
AT
Independent Dependent
Variable Variable
control variable
 3. RESEARCH DESIGN AND METHODOLOGY
 Study Area of the research is the import/export companies located at
Addis Ababa and around the city.
 The secondary data are audited financial statement during the years
2015 to 2019
 The study is examining the impact of long-term and short-term debt

parameters have on financial performance

 A quantitative research approach under which explanatory research
method is used as a need for investigation of a cause-and-effect
relation between variables has been taken place.
 Continued…
 The population of this study is estimated to fifty six higher tax payers of the import and export companies located
at Addis Ababa.
 Through cluster sampling selection procedure ten companies were selected.

 These sampled companies include:

 Alfoz Imp/Exp plc

 Abahawa trading PLC
 Sachem imp/exp company
 Womberta imp/exp PLC
 Tracon trading PLC
 El-Siwidy trading
 Bea’aka trading PLC
 Get-As International PLC
 Hadid Trading Company
 Coma Imp/Exp PLC
 Continued…
 Dependent variable
Return on asset (ROA) and return on equity (ROE) as a proxy of financial performance

ROA = Earning before tax ROE = Net Income

Total Asset Total Equity
 Continued…

 The independent variables were STD & LTD as a proxy of capital structure
STD= Total short term debt LTD= Total long term debt
Total asset Total Asset
 The control variables were
 Size of the company SZ= log(total asset)
 Growth of sales GR= current year sales-prior year sales
Current year sales
 Asset tangibility AT=total fixed asset
total asset
 Model specification

 The model for this research was

Model 1
ROA = β0 + β1*STD + β2*LTD + β3*AT + β4*SZ + β5*GR + εi
Model 2
ROE = βo + β1*STD + β2*LTD + β3*AT + β4*SZ + β5*GR + εi
 the researcher used five years data for ten companies a total of fifty
observations using EViews 10 software package provides the following
results
 4. DATA PRESENTATION, ANALYSIS AND INTERPRETATION

Descriptive statistics   ROA ROE LTD STD SZ AT GR

 Every 1 br on asset
0.11642 0.91173 0.14520
Investment earn 0.12 cents return Mean 0.18370 0.74990 8.83766 0.28061
 Every 1 br investment on
equity will earn 0.91 cents 0.06466 1.09222 0.13107
Median 0.12529 0.61816 8.83063 0.22889
 On capital structure
75% of imp/exp co.’s capital structure 1.59584 2.99453 0.98507
Max 0.83561 9.55916 9.55916 0.61961
is on STD than investing their equity
 Imp/exp co. have huge size 8.84 (1.09368) (1.00000) (1.06845)
 - 0.00510 7.31281 0.01518
Their asset mostly current asset Min
only 28% are fixed assets
Standard 0.35382 0.86898 0.40304
 The growth of sales was small 0.18938 1.27961 0.44837 0.19141
Deviation
during Years 2015 to 2019 Observation 50 50 50 50 50 50 50
 Continued…
 The volatility of ROA & ROE from the mean was 35% & 87% resp.
 The minimum & maximum ROA & ROE respectively was
-1.09368 & 1.59584 and -1.0000 & 2.99453 there is losses & gains
on investing on asset & equity
 There is high range of sales growth from -1.06845 to 0.98507,
within these five years the sales of import and export sectors
fluctuated.
 STD also shows a fluctuation during this five years maximum of
9.55916 and a minimum 0.00510
 Diagnostic test

 F- stat & chi-square are significant at more than 5% ,There is

evidence on the presence of heteroscedasticity (variance of errors
are not constant)
 the P value of F-statistic of model 1 & 2 are 0.000 and 0.0065
respectively and which is less than 1% of significance of both
models support the presence of autocorrelation (errors are not
uncorrelated with one another).
 The Jarque-Bera probability statistics of model 1 and 2 are
1.399859 and 2.440368 respectively at more than 10% level of
significant, we don’t reject the null hypothesis of normality of
residuals.
 Dependent Variable: ROA    
Method: Panel EGLS (Cross-section weights)  
Date: 06/01/21 Time: 15:01    
Sample: 2015 2019    
Periods included: 5    

Regression Cross-sections included: 10

Total panel (balanced) observations: 50
Linear estimation after one-step weighting matrix
   
 

analysis  
 
 
 
 
 
 
 
 
 

results
Variable Coefficient Std. Error t-Statistic Prob.  
         
         

Model 1 C
STD
LTD
0.414448
-0.144534
-0.277346
0.212195
0.054144
0.098750
1.953147
-2.669441
-2.808551
0.0588
0.0114
0.0081
AT 0.151218 0.084085 1.798391 0.0807
SZ -0.021233 0.023334 -0.909935 0.3691
GR 0.044897 0.024906 1.802664 0.0801
         
         
  Effects Specification    
         
         
Cross-section fixed (dummy variables)  
         
         
  Weighted Statistics    
         
         
R-squared 0.808381     Mean dependent var 0.333022
Adjusted R-squared 0.731733     S.D. dependent var 0.428277
S.E. of regression 0.203480     Sum squared residual 1.449147
F-statistic 10.54672     Durbin-Watson stat 2.088694
Prob(F-statistic) 0.000000      
         
         
 ROA
 Adjusted R2 is 73.2% of explanatory variables express the dependent
variable
 ROA = 0.414448 - 0.144534*STD - 0.27735*LTD + 0.151218*AT +
0.044897*GR from the model 1,
* STD & LTD are significant but negatively relate with ROA
* where as AT & GR have positive & significant relationship with
ROA
* if all explanatory variables goes to null imp/exp co.s’ return their
asset could be 0.4144
 Dependent Variable: ROE    
Method: Panel EGLS (Cross-section weights)  

Regression
Date: 06/01/21 Time: 15:11    
Sample: 2015 2019    
Periods included: 5    
Cross-sections included: 10    

analysis Total panel (balanced) observations: 50

Linear estimation after one-step weighting matrix
       
 

results
         
Variable Coefficient Std. Error t-Statistic Prob.  
         

Model 2
         
C 3.090553 1.490851 2.073013 0.0456
STD -0.029404 0.061886 -0.475123 0.6377
LTD -0.381681 0.718623 -0.531129 0.5987
AT -0.329562 0.696666 -0.473055 0.6391
SZ -0.229904 0.156350 -1.470443 0.1504
GR 0.259181 0.141817 1.827577 0.0761
         
         
  Effects Specification    
         
         
Cross-section fixed (dummy variables)  
         
         
  Weighted Statistics    
         
         
R-squared 0.792027     Mean dependent var 2.930434
Adjusted R-squared 0.708837     S.D. dependent var 5.761179
S.E. of regression 0.563929     Sum squared resid 11.13056
F-statistic 9.520769     Durbin-Watson stat 1.947030
Prob(F-statistic) 0.000000      
         
 ROE
 ROE = 3.09055 + 0.25918*GR
from the regression model only growth of sales is positively
significant relationship with ROE.
* with no sales growth, imp/exp co. have a return on their
equity investment of 3.091
 5. CONCLUSION AND RECOMMENDATION

Conclusion
 The empirical test result shows that capital structure of STD and LTD has a
negative influence on the financial performance denoted by ROA of
sampled import/export companies in Ethiopia during the year 2015 to 2019.
 ROE in this research has insignificant relationship with LTD or STD of
selected import/export companied in Ethiopia during the period of 2015 to
2019.
 AT,SZ & Gr are positive & significant influence on ROA, but GZ is the only
explanatory variable positive & significant influence on ROE of sampled
import/export companies in Ethiopia during the year 2015 to 2019
 RECOMMENDATION

 The result from the study the import and export companies
should relay mainly on their internal investment source
which is equity than using either STD or LTD.
 Import/Export companies increase their internal fund
source by selling stocks to the public
 The Ethiopian government will announce the stock market
and its proclamation in Ethiopia
Thank you