The Impact of Capital Structure Choice on Firms’ Financial Performance: Evidence from Manufacturing PLCs in Tigrai Region, Ethiopia

Abstract

The purpose of this study is to examine the impact of capital structure choice on firm’s financial performance using seven years data from year 2006 to 2012 by taking evidence from 15 manufacturing PLCs in Tigray Region, Ethiopia. The study used two financial performance measures (Return on equity and return on assets). capital structure of companies were measured by leverage ratios of short term debt to total asset ratio, long term debt to total asset ratio, total debt to total asset ratio and also firm growth, firm size, tangibility, and liquidity were used as control variables. Two accounting-based measures of financial performance i.e, return on asset and return on equity were used as the dependent variables. Purposive sampling method was employed in order to collect data.. For the analysis of the collected data descriptive statistics and Random Effect panel data regression model have been employed. The study result revealed a significantly negative relationship between capital structure ratios (short term debt, long term debt, and total debt ratios) financial performance measured by Return on Assets and Return on Equity.

Keywords: Manufacturing Companies, Capital structure, financial performance