Factors Influencing Capital Structure: Insights from Dar es Salaam Stock Exchange (DSE) Non-Financial Companies

Abstract

This study examined the factors influencing the capital structure of non-financial companies listed on the Dar es Salaam Stock Exchange (DSE). Using the pecking order theory and the trade-off theory, it specifically examined how firms' liquidity, tangible assets, and profitability affect leverage. Using a cross-sectional research approach, data from 11 purposefully chosen DSE-listed non-financial companies over a 20-year period (2000–2020) were analysed using a fixed-effect panel data regression model.  The findings show that leverage is significantly impacted negatively by profitability (-0.049, p <0.01). Leverage is also observed to be negatively impacted by liquidity (-0.15, P<0.05). Conversely, leverage is strongly and favourably impacted by asset tangibility (coefficient = 0.116, p<0.01). These findings indicate that the non-financial companies listed in DSE mainly use internal financing, as it fits the pecking order theory, and tangible assets allow the companies to take on more debt, as it fits the theory of trade-offs. The paper concludes that profitability is an important determinant of leverage, which contributes to firms giving preference to internal funds. Managers have been encouraged to concentrate on generating profits and to manage concrete resources strategically to maximise their capital structure.