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Key Words
Capital Structure, Firm Performance, Panel Data, SEM
Abstract
This paper seeks to empirically assess the impact of capital structure on performance of Mauritian firms listed on the Official Market of the Stock Exchange of Mauritius (SEM) for the period 2005-2011. The study employs both static and dynamic panel data techniques to identify the determinants of firm performance. Robust static panel data techniques are employed to account for the effect of heteroskedasticity and to improve the accuracy of the regression coefficients. Dynamic panel analysis is adopted to capture any effect of endogeneity and to check the robustness of the results obtained using the static panel models. The results indicate that the main determinants of firm performance are capital structure, firm size, business risk, MUR/EUR exchange rate and MUR/USD exchange rate. Growth opportunities, free cash flow, age of the firm and price of oil are found to have insignificant influence on firm performance. Firm performance is observed to be negatively related to capital structure indicating that firms with lower leverage have better performance thereby supporting the pecking order theory.
Introduction
Capital structure decision is one of the three decisions, alongside investment and dividend policy, which financial managers have to make with the objective of maximizing the value of the firm (Karadeniz et al., 2009). The capital structure decision is not easy because it requires selecting between debt and equity securities while taking into consideration the different costs and benefits that are associated with these securities. A wrong decision in the portioning of the securities may lead the firm to financial distress and eventually to bankruptcy (Sheikh and Wang, 2011).
Although there are several empirical studies investigating the determinants of capital structure, however only a few empirical works have focused on the extent to which capital structure affects firm performance. Moreover, these few studies were mainly based on developed countries with scant evidences from less developed and emerging economies. Indeed, given that the stock markets in the emerging countries are less efficient and incomplete due to higher information asymmetry, it is believed that investigation of the capital- firm performance hypothesis, for the emerging countries will be of value added to the literature.
The aim of this study is thus to determine the impact of capital...