The Impact of Debt Financing on Financial Performance: Evidence from Retail Firms Listed on Jse

  • Lenny Phulong Mamaro School of Economics and Financial Sciences
  • Tsholofelo Gladys Legotlo
Keywords: Debt financing; Retail firms; financial performance

Abstract

The study investigates the debt financing on financial performance, focusing on Retail firms listed on the Johannesburg Stock Exchange for a period of ten 10 years from 2010 to 2019. The fixed effects (FE), random effects (RE), pooled effect and the Generalized Least Square (GLS) panel data regression analysis models was applied using the financial performance ratios, Return on Equity (ROE) is used as the profitability measure and is the dependent variable, whereas; lagged ROE (LROE), Long Term Debt to Total Asset (LTDA), Total Debt to Total Asset (TDA) are used as independent variables, while Size, Sales Growth are used as control variables. The study found that LROE, TDA and GRS strongly influence financial performance (ROE) with high statistically significant of 1% level where as LTDA and SZ negatively influence financial performance with a statistically significant of 1% and 5% respectively. The study will assist retail firms to make a good decision when financing their assets to increase profit. The study contributes to literature and inform all stakeholders in the retail sector to make a profitable form of financing.

Author Biography

Lenny Phulong Mamaro, School of Economics and Financial Sciences

Programme leader (Banking) CBM

Lecturer: Investments & Risk Management

Department: Finance, Risk Management & Banking

References

Onchong’a, E.A., Muturi, W. & Atambo, W. (2016). Effects of debt financing on businesses firm’s financial performance. International Journal of Social Science and Information Technology, Vol 2, No.5, pp 723-737.

Nimalathasan, B. (2010). Working capital management and its impact on profitability: A study of selected listed manufacturing companies in Sri Lanka. Manager, No.12, pp.76-82.

Udeh, S.N., Nwude, E., Itiri, I. & Agbadua, B. (2016). The impact of debt structure on firm performance: Empirical evidence from Nigerian quoted firms. Asian Economic and Financial Review, vol. 6, No. 11, pp 647-660.

Ebaid, I.E.S. (2009). The impact of capital‐structure choice on firm performance: empirical evidence from Egypt. The journal of risk Finance, Vol. 10, No. 5, pp.477-487.

Modigliani, F. & Miller, M.H. (1958). The cost of capital, corporation finance and the theory of investment. The American economic review, Vol.48, No. 3, pp. 291-297.

Modigliani, F., & Miller, M.H., 1963. Corporate income taxes and the cost of capital: a correction. The American economic review, pp.433-443.

Githaiga, P.N., & Kabiru, C.G. (2015). Debt financing and financial performance of small and medium size enterprises: evidence from Kenya. Journal of Economics, Finance and Accounting, Vol. 2, No. 3, pp.473-481.

Gujarati, D., (2009), Basic econometrics, Tata McGraw-Hill Education.

Harelimana, J.B., (2017). Effect of debt financing on business performance: A comparative study between I&M Bank and Bank of Kigali, Rwanda. Global Journal of Management and Business Research., Vol 17, No. 2, pp.36-45.

Iorpev, L. & Kwanum, I.M., (2012). Capital structure and firm performance: Evidence from manufacturing companies in Nigeria. International Journal of Business and Management Tomorrow, Vol. 2, No. 5, pp1-17.

Irby, D.M., Cooke, M. & O'Brien, B.C. (2010). Calls for reform of medical education by the Carnegie Foundation for the Advancement of Teaching: 1910 and 2010. Academic Medicine, Vol. 85, No.2, pp.220-227.

Du, J., Wu, H. & Zhao, X., (2018). Critical factors on the capital structure of public–private partnership projects: A sustainability perspective. Sustainability, Vol.10, No.6, pp.20-66.

Ukko, J.K., (2009). Managing through measurement: A framework for successful operative level performance measurement. Lappeenranta University of Technology.

Kajananthan, R., (2012). Effect of corporate governance on capital structure: case of the Srilankan listed manufacturing companies. Researchers World, Vol. 3, No.4, pp.63-71.

Kajirwa, H.I., (2015). Effects of debt on firm performance: A survey of commercial banks listed on Nairobi Securities Exchange. Global Journal of Advanced Research, Vol. 2, No.6, pp.1025-1029.

Magoro, K. & Abeywardhana, D. (2017). Debt capital and financial performance: A study of South African companies. International Journal of Scientific Research and Innovative Technology, Vol. 4, No.4, pp.71-84.

Chen, L.J. & Chen, S.Y., (2011). How the pecking-order theory explain capital structure. Journal of International Management Studies, Vol,6, No.3, pp.92-100.

Magoro, K. & Abeywardhana, D., (2017). Debt capital and financial performance: A study of South African companies. International Journal of Scientific Research and Innovative Technology, Vol4, No.4, pp.71-84.

Mansi, S., Nguyen, A. & Wald, J.K., (2013). Severance agreements, incentives, and the cost of debt. Virginia Tech University working paper, available at http://ssrn. com/abstract= 2228300.

Margaritis, D. & Psillaki, M., 2010. Capital structure, equity ownership and firm performance. Journal of banking & finance, Vol, 34, No.3, pp.621-632.

Nyamita, M.O., Dorasamy, N. & Garbharran, H.L., 2015. How Debt Financing Decisions Relate with Financial Performance of State-Owned Corporations In Kenya. International Business & Economics Research Journal (IBER), Vol 14, No. 4, pp.701-726.

Wahome, M.N., Memba, F. & Muturi, W., (2015). The effects of firm size and risk on Capital Structure decisions of Insurance Industry in Kenya. International Journal of Scientific and Research Publications, Vol. 5, No.8, pp.1-12.

Sadeghian, N. S., Latifi, M. M., Soroush, S., & Aghabagher, Z. T. (2012). Debt policy and corporate performance: empirical evidence from Tehran Stock Exchange companies. International Journal of Economics and Finance, Vol 4, No. 11, pp 217-224.

Nuri B., & Hasan A. (2014). Firm, Country and Macroeconomic Determinants of Capital Structure: Evidence from Turkish Banking Sector. EMAJ: Emerging Markets Journal, Vol, 3 No.3, pp 47-58.

Nguyen M, H, H. (2013). The impact of capital structure on firm performance A case of manufacturing firms on Hose.

Onaolapo, A, K, S., & Nwidobie, M. (2015). Determinants of capital structure: A study of Nigerian quoted companies. European Journal of Business and Management, Vol.7, No. 23, pp 170-183.

Tauseef, S., Lohano, H. D., & Khan, S. A., (2015). Effect of debt financing on corporate financial performance: evidence from textile firms in Pakistan. Pakistan business review, pp, 904-914.

Myers, S.C. (1989). Still searching for optimal capital structure. Are the distinctions between debt and equity disappearing, pp.80-95?

Myers, S.C. & Majluf, N.S., (1984). Corporate financing and investment decisions when firms have information that investors do not have (No. w1396). National Bureau of Economic Research., pp. 187-221.

Tharshiga M., (2013). Effect of debt on corporate profitability (listed hotel companies Sri Lanka). European Journal of Business and Management, Vol.5, No.30, pp.13-18.

Velnampy, T. and Nimalathasan, B., (2010). Firm size on profitability: A comparative study of Bank of Ceylon and Commercial Bank of Ceylon Ltd in Srilanka. Global Journal of Management and Business Research, Vol. 10, No 2, pp. 96–100.
Published
2020-09-07
Section
Articles