Debt Financing and Firm Performance in Zambia’s Manufacturing Sector: Panel Evidence from Listed Firms on the Lusaka Securities Exchange

Abstract

This study sought to examine the relationship between capital structure and financial performance of industrial enterprises listed at Lusaka Securities Exchange between 2011 and 2024. Basically it studies if firms that employ greater debt financing perform better or worse in terms of shareholder returns. The study employed audited annual reports of nine listed manufacturing firms. This provided a balanced panel of 126 firm-year observations. The return on equity was used to measure financial performance while the debt ratio was used to measure capital structure. Control variables such as company size, liquidity and growth were considered. The results indicate that debt is negatively and statistically significant in relation with return on equity. In other words, the more corporations finance their assets with debt, the lower the returns for shareholders. The results indicated that firm size improved performance, whereas liquidity and growth did not significantly effect performance. The Hausman test favored the random-effects model, but the fixed-effects and random-effects models yielded remarkably similar findings. The results corroborate the pecking order theory suggesting that more lucrative enterprises tend to use domestically generated money first before resorting to debt. However, the results could also reflect the high cost of borrowing, financial distress concerns and restricted access to cheap long-term lending in Zambia. The study therefore indicates that debt should not be completely shunned but utilized with prudence and only if predicted returns on projects are higher than the cost of borrowing. Also, the necessity for strategies to address the finance constraints encountered by manufacturing enterprises is suggested.