Capital structure and firm performance: evidence from an emerging economy
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25 November 2022
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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.