Effect of Capital Structure on Financial Performance: Evidence from Companies Listed on the Lusaka Securities Exchange (Luse)

Effect of Capital Structure on Financial Performance: Evidence from Companies Listed on the Lusaka Securities Exchange (Luse)

Chiluwa Hannyama¹, Martin Kabwe², Temwani Zulu³

¹Graduate School of Business, University of Zambia.

²University of Zambia, Directorate of Research and Graduate Studies, Great East Road Campus, P.O Box 32379, Lusaka, Zambia.

³Ministry of Education, Zimba. Zambia

DOI: https://dx.doi.org/10.47772/IJRISS.2025.90500042

Received: 16 April 2025; Accepted: 23 April 2025; Published: 29 May 2025

ABSTRACT

This study investigates the impact of capital structure on the financial performance of firms listed on the Lusaka Stock Exchange (LuSE). The study sample comprised 16 non-financial firms listed on the LuSE. Secondary data were collected from the audited financial statements available on the company websites and the LuSE, covering the period from 2014 to 2022. Statistical analysis was conducted using correlation and regression analysis with the aid of Statistical Package for Social Sciences (SPSS) and STATA. The study found a positive correlation of 0.0965 between capital structure and financial performance. Regression analysis revealed a right-skewed distribution of debt and assets, and a normal distribution for the debt-asset ratio. In terms of financial performance, net and operating profit showed normal distribution, while return on assets (ROA) was fairly uniform across the listed companies. Return on Capital Employed (ROCE) exhibited an outlier and a positively skewed distribution, indicating a lower ROCE. The study also observed that the capital structure of non-financial companies listed on the LuSE was more inclined towards assets than debt. Negative correlations were found between equity and the debt-asset ratio, as well as between the debt-asset ratio and ROCE. Descriptive statistics, correlation, and regression methods revealed that both short-term and long-term debt had no significant impact on the financial performance of the firms. The study recommends that firms should aim to find an optimal balance in their capital structure to ensure sustained performance.

Keywords: Capital structure, financial statements, financial performance, non-financial listed companies, LuSE, profitability.

INTRODUCTION

Capital structure is a critical component in determining a company’s mix of capital. It essentially outlines the combination of securities and financing sources that companies use to fund their investments, which are often expected to generate returns over time. Capital structure focuses on the ratio of debt to equity, which is typically reflected in a company’s balance sheet (Myers, 2013). According to Investopedia, financial performance refers to how effectively a firm utilizes its assets to generate revenue from its core business activities. It is a key indicator of a firm’s overall financial health during a specific period, with five primary indicators: revenue growth, revenue per client, profit margin, client retention, and customer satisfaction. This study aims to thoroughly analyse the capital structure and financial performance of non-financial companies listed on the Lusaka Securities Exchange.

Many studies on the impact of capital structure on financial performance have been conducted both in developed and developing countries, some of which includes  (Mudany, et al., 2020) a systematic literature review found that  financial leverage has a positive and significant effect on firm performance, it also found that there is a positive relationship between capital structure and financial performance. The study also found that capital structure has a significant effect on financial performance of the firms (Sudharika, et al., 2020), in Colombia; found that capital structure has a statistically significant negative impact over financial performance in the hotel and travels sector, (Prekazi, et al., 2023) in Kosovo, a study found  a strong relationship between assets on one hand and total capital and total liabilities on the other.  Regional studies by, (Amani, 2020), in Egypt found that long-term debt to assets affects significantly negative return on assets but positively affects the return on equity.  (Adeoye & Olojede, 2019) in Nigeria; found that capital structure is negatively correlated with financial performance (ROA and ROE). (Jeannine Mauwa, et al., 2016) in Rwanda equally found capital structure is negatively associated with ROA. Furthermore, capital structure is negatively associated with ROE. Locally, studies by (Chisenga, 2023),who researched on the effectiveness of the Lusaka stock exchange alternative market in capital finance for small and medium enterprises (SMES) in Zambia, found that stock exchange market alternative markets have a significant influence on stock exchange markets  (Patson, 2019)  studied how macro-economic factors affects stock markets found that individual interest rates have a strong negative association with stock market performance, money supply, exchange rates and Index of Industrial Production have a positive association with stock markets and, GPD growth rates have a positive association with stock market performance  (Warren, 2018), who studied the management of capital structure and profitability found that, firm performance measured by Return on Assets (ROA) and Return on Equity (ROE) has negative relationships with Short term debt, long term debt, and total debt as Independent variables. (Mankishi, et al., 2025) explored the Relationship Between Capital Structure and SME Profitability: A Case Study of Lusaka’s Electronic Device Market who found that while factors such as financial risk, market conditions, and access to financing options may influence SME profitability, the effects are not statistically significant. To the knowledge of the researchers, no study in Zambia has been identified that investigates the effect of capital structure on financial performances of non-financial listed companies as such little is known on how capital structure influence financial performance of listed companies in the context of Zambia. Consequently, the present study will attempt to the seal this potential gap.

The statement of the problem is that, despite the studies that have been carried out in Zambia, no study has directly addressed the effect of capital structure on financial performance of listed companies listed on the Lusaka securities exchange (LuSE), a clear indication that listed companies in Zambia are unaware of how capital structure impacts their profitability thus creating a conceptual research gap. The present study thus attempted to validate the effect of capital structure on profitability of listed companies in Zambia, together with the perception of  investors risk apatite on companys’ capital structure in a Zambian context, using the following questions: What capital structures are currently utilized by non-financial companies listed on the Lusaka Securities Exchange?; Why does the capital structure influence the financial performance of non-financial companies on the Lusaka Securities Exchange?; How does capital structure impact financial performance, and what strategies can companies implement to optimize their capital structure for better financial outcomes?.

The parts of the study comprise of the following: Section One comprises of the introduction, section two contains review of literature, section three discusses the theoretical and conceptual framework, whereas section four details the research methods, with section Five and Six presenting the results and discussion of the research findings. Lastly section eight concludes and suggests recommendations based on the discussions.

LITERATURE REVIEW

Overview of Capital Structure of Companies

There are several key factors that significantly influence a firm’s capital structure. One of the most critical factors is the company’s current profitability. Typically, as business profits increase, the proportion of debt in the capital structure also rises, leading to a higher debt-to-equity ratio. Another crucial factor is current liquidity and expected cash flows. If substantial cash inflows are anticipated, the increase in debt will be slower, or the proportion of capital may decrease. Thus, profitability, liquidity, and expected cash flows are important determinants of a firm’s capital structure. However, according to (Ali, 2024) profit is not the only factor that determines a firm’s capital structure. Managers’ expansion plans also play a significant role. When a firm plans to expand its operations, it often requires a substantial amount of capital, which may be raised by issuing equity in the primary market. Therefore, a company’s expansion strategy is another key determinant of its capital structure.

The current capital structures of non-financial companies listed on the Lusaka Securities Exchange.

Listed companies have over the years developed more than private equity companies in Zambia. This can be attributed to the magnitude of equity financing which involves issuance of shares to investors, additionally listed companies in Zambia have largely benefited because of debt financing which comprises of instruments such as corporate bonds. (LuSE, 2021). Many companies in Zambia have raised capital by issuance of shares on the LuSE’s Main Board or Alternative Market. The main board is appropriate for reputable companies, which has a minimum of contributed capital of ZMW 5,000,000, with basically a minimum of three years of audited profit history, and a minimum of 25% of shares issued to the public (Mankishi, et al., 2025). On the other hand, Alternative Market (Alt-M) are intended for MSEMs who have a high-quality, growth-oriented but with reduced listing requirements, together with a minimum trading turnover of ZMW 250,000 and at least 10% of issued shares held by the public (Chisenga, 2023).

Characteristically, companies in Zambia may as well issue corporate bonds with a view of raising funds for strategic objectives, according to (LuSE, 2021) the following are the corporate bonds that were active as at November 2024: Real Estate Investments Zambia (REIZ): Bond valued at $4,190,537.09 with a yield of 5.5%, maturing on 26-11-2027.  IZWE-MTN 22A: Bond valued at ZMW 69,141,000 with a yield of 23.5%, maturing on 31-07-2027. ​Below is the current current capital structures of selected non-financial companies listed on the Lusaka Securities Exchange.

Chilanga Cement Plc, the audited financial report for Chilanga Cement PLC (Chilanga Cement PLC, 2021)  reported total assets of ZMW 1,760,344,000 and equity of ZMW 1,525,860,000. This shows that Chilanga Cement as a capital structure, predominantly composed of equity with minimal reliance on debt.

ZCCM Investments Holdings Plc, a mining consortium as of 2021, the Zambian government held a 77.7% stake in ZCCM Investments Holdings, whereas the remaining 22.3% was retained by minority shareholders (ZCCM Investments Holdings Plc, 2021). This reflects that, the significant government ownership reflects a capital structure which profoundly weighted towards equity.

Zambian Breweries Plc as in 2021, Zambian Breweries reported annual revenue of ZMW 3,068,959,000 and a net income of ZMW 147,952,000, (Zambian Breweries Plc, 2021). Despite the debt figures not been shown, its financial performance suggests a balanced approach to equity financing.

​Airtel Networks Zambia Plc (ATEL) as at December 2024, had on book assets which amounted to ZMW 5,638 million, and the total liabilities amount to ZMW 5,074 million  (Airtel Networks Zambia Plc (ATEL), 2024).​ The debt -to Equity ratio is particularly stands at 8:1 suggestive of the company having a high reliance on debt financing.​

First Quantum Minerals Ltd. (FQM) as at 2024 the company’s capital structure ratios were:​ Total Debt to Total Equity: 85.42% Total Debt to Total Capital: 46.07%​; Total Debt to Total Assets: 36.84%; Long-Term Debt to Equity: 75.91%​; Long-Term Debt to Total Capital: 40.94%​ (LuSE, 2021), The figures imply that FQM has moderate reliance on debt financing within the company’s capital structure.

Zambeef Products Plc, as at 2024 had total capital of 7.362 billion, with a Net Debt of ZMW 2.070 billion​ Total Equity Attributable to Parent: ZMW 4.973 billion (Zambeef Products Plc, 2024), these figures indicate that the company depends more on equity than debt, thus it has a stable capital structure.

From the discussed capital structure of listed companies, it can be noted that most companies on LUSE have Equity Dominance, this is so because many non-financial companies on the LuSE have shown capital structures with a strong emphasis on equity financing, as a result many companies have stable financial risk, and stable shareholder control (Ali, 2024).

Another trend that has been noticed is Selective Debt Utilization: this is because some listed companies on the stock exchange opt for debt financing to fund strategic initiatives. It has been observed that the moderately limited number of corporate bonds, imply that most listed companies have a cautious approach to debt, perhaps due to high-interest rates or rigorous borrowing conditions.​

Lastly, there is massive Market Capitalization Growth, this is evident with the growth that has been experienced by LuSE this has caused a significant increase in market capitalization, reaching over K216 billion by the end of 2024 (LuSE, 2021), indictive of 144% rise from K88 billion at the start of the year. This accentuates the growing investor confidence and the potential for companies to raise capital through equity markets.

The relationship between capital structure and the financial performance of Listed companies in Zambia.

The relationship between capital structure and the financial performance of non-financial companies listed on the Lusaka Securities Exchange (LuSE) has been analyzed using key metrics such as profitability, return on equity (ROE), return on assets (ROA), and leverage ratios.

It can be noted that the selected listed companies have a higher proportion of debt in the capital structure, which shows that listed companies have reduced cost of capital due to tax advantages, interest payments are tax-deductible (Jeannine Mauwa, et al., 2016). Again, the use of impulse excessive debt has a huge capability of increasing financial risks of listed companies. Listed companies also face Leverage Effect, this is so because properly managed debt can intensify ROE, but too much leverage can lead to financial distress (Ali, 2024). Most of the companies listed have high debt ratios, which increase interest payment obligations, this has the capability of reducing cash flow stability consequently profitability (Chisenga, 2023).

A financial analysis of selected companies show a mixed results about the impact of capital structure on financial performance, it shows that some companies have High Equity Financing (Low Debt), a case of Chilanga Cement Plc, where  their Capital Structure is largely equity-based (Equity: ZMW 1,525,860,000; Total Assets: ZMW 1,760,344,000 (Chilanga Cement PLC, 2021), which shows that the company has a Strong financial stability with hypothetically slower growth due to limited leverage.

A case of   ZCCM Investments Holdings Plc, shows that the company’s Capital Structure: Majority government-owned (77.7% equity) (ZCCM Investments Holdings Plc, 2021). This implies that the company’s Performance is largely stable owing to the fact that there is government backing, but with lower returns in comparison to highly leveraged firms.

Some listed companies have a purely balanced debt equity mix,  a case of Zambian Breweries Plc, where there is a Capital Structure: Mix of debt and equity, as a result the company generates strong revenue ZMW 3,068,959,000 in 2021 with moderate debt (Zambian Breweries Plc, 2021), meaning that this balanced approach permits leveraging debt for growth although sustaining financial stability.

Another case of Real Estate Investments Zambia (REIZ), has a Capital Structure, which uses the issuance of corporate bonds to finance operations, which shows that there is a moderate return due to real estate market fluctuations (LuSE, 2021), the implication is that some level of debt financing supports expansion but increases exposure to economic cycles.

There are also some companies that have a purely high High Debt Financing a case of  IZWE-MTN 22A Bond Issuer, where their  Capital Structure exhibits heavy reliance on debt financing ZMW 69,141,000 bonds issued (LuSE, 2021), which shows that the company has a Higher financial risk but probable for higher returns if capital is efficiently deployed, showing that High leverage can improve profitability but poses default risk if earnings decline.

It can thus be concluded that, capital structure of listed companies on LuSE largely impacts profitability because Low-debt firms like Chisanga Cement, ZCCM-IH have a very stable financial management, wanting to maximize profit and conservative in nature yet because of this they may miss out on growth opportunities (Mudany, et al., 2020). Additionally, Moderate-debt firms like Zambian Breweries, REIZ have a trend of attaining optimal performance by leveraging debt for expansion while upholding manageable financial risk. Whereas, companies with high debt face high financial risk but can generate significant returns if they effectively manage their capital.

 The impact of capital structure on financial performance of listed companies.

The impacts of capital structure on financial performance can be classified into positive and negative.

The positive impact of capital structure on financial performance includes:

Leverage Effect on Profitability, capital structure which applies moderate use of debt enhances ROE and EPS as it is capable of financing growth without diluting ownership (Ali, 2024). This is so because all interest payments that are made on debt are tax-deductible, as a result they reduce the company’s tax burden and consequently increasing net profits (Chisenga, 2023).

Growth and Expansion, capital structure which enhances optimal leverages has the capability to expanding projects, acquiring assets and expanding market share, (Norren, 2013). This is so because well-managed debt financing has the capability of supporting long-term strategic objectives, leading to improved revenue and profitability (Mankishi, et al., 2025).

Additionally, a well-mixed capital structure has the capability of reducing Weighted Average Cost of Capital (WACC), which then improves the general financial efficiency of listed companies, (Jeannine Mauwa, et al., 2016). Furthermore, Debt financing is generally cheaper than equity financing since interest rates are usually lower than expected returns on equity, thus this increases the profitability level of listed companies.

Negative impacts of capital Capital Structure on Financial Performance include:

Companies that are highly over-leveraged are capable of having Excessive Debt, this is so because the high levels of debt increase interest obligations, which leads to liquidity challenges and financial distress (Horne. & Wachowic, 2008). Additionally, in economic downturns, companies that are highly leveraged face difficulties in meeting debt obligations, leading to indebtedness risks (Warren, 2018). Companies that use a capital structure that relies more on equity financing, dilutes Ownership and Control, this is so because if a company relies too much on equity financing, existing shareholders face dilution of ownership (Horne. & Wachowic, 2008). Furthermore, rising capital through share issuance has the capability of reducing EPS and thus negatively impacting investor confidence (Mankishi, et al., 2025).

Companies with a capital structure that has excessive debt, have an impacted Credit Ratings and Investor Perception, this is so because excessive debt may cause downgrades in credit ratings, therefore increasing borrowing costs, (Sudharika, et al., 2020),  this is so because normally investors prefer firms with balanced capital structures which promises financial stability.

Potential strategies for optimizing financial outcomes

The following are the strategies that can be applied so as to Optimize Capital Structure for Better Financial Outcomes.

It is important that ccompanies  analyse industry benchmarks and economic conditions to maintain, with a view of maintaining a healthy debt-to-equity (D/E) ratio, (Ali, 2024), for example listed companies that are in manufacturing and real estate, should enhance a highly moderate  debt financing, whereas Tech and service-based firms can benefit through dependance on on equity due to their lower asset base. Companies should also use a well-balanced debt level of both short- and long-term balance, this is so because the use of long-term debt for capital-intensive projects reduces the pressure of short-term obligations. Whereas Short-term debt could be used for working capital needs to maintain liquidity (Mankishi, et al., 2025).

Listed companies may also evaluate financing options to minimize WACC. WACC management is important as it can assess the best financing options. Therefore, it is recommended that there is efficient issuing of bonds instead of equity, which is apparently affordable and has a very favourable interest rate, which can consequently maximize profit (Ahmed, et al., 2013). Enhancing Earnings Stability Before Increasing Debt, which can be done by ccompanies for improving revenue streams and operational efficiency before taking on more debt, this is important because consistent cash flow generation safeguards that interest payments do not strain the company’s liquidity (Sudharika, et al., 2020). Additionally, retaining earnings rather than paying high dividends has the capability to reduce reliance on external financing of the companies. This can also enforce share buybacks, which can be used to strategically adjust equity levels without issuing new shares.

Companies should also enhance financial qualities of Reviewing Financial Structure Based on Market Conditions, which can be done through monitoring financial performance metrics (ROE, ROA, EPS) to assess whether capital structure adjustments are needed, also Economic fluctuations and interest rate changes should influence capital structure decisions (Warren, 2018).

Similar Studies in Zambia

A study by (Mankishi, et al., 2025) examines SMEs in Lusaka’s electronic device market by investigating how capital structure influences profitability. The research employed a descriptive design and panel data analysis to assess the impact of debt and equity allocation on financial performance. Findings indicated that factors such as financial risk, market conditions, and access to financing options influence SME profitability. Though the effects were not statistically significant, the study recommended that SMEs adopt comprehensive financing approaches, conduct thorough market analysis, and enhance financial risk management practices to optimize profitability. ​

A Research by (Patson, 2019)  focused on commercial banks in Zambia, through analyzing the effect of capital structure management on profitability. The study used an explanatory research design, and aimed to determine how different financing strategies impact financial performance within the banking sector. The findings contribute to understanding optimal capital structure practices for enhancing profitability in Zambian banks. ​ It was found that studies in Zambia on non-financial firms are limited, research from comparable contexts offers relevant insights., but for a study by (Chisenga, 2023) who examined the impact of capital structure on the profitability of two companies listed on the Lusaka Securities Exchange over a 20-year period (1996 to 2016). The research aimed to determine the debt-to-equity ratios of these companies and analyse their Return on Assets (ROA) and Return on Equity (ROE). The study sought to establish whether the mix of debt and equity influenced firm performance., the research highlighted the importance of sound capital structure decisions in enhancing corporate profitability and called for more empirical work in this area within the Zambian context.  These studies underscore the complexity of the relationship between capital structure and firm profitability in Zambia. They highlight the need for companies, especially SMEs to carefully consider their financing strategies, taking into account market conditions, financial risks, and access to various financing options to optimize their financial performance.

THEORETICAL AND CONCEPTUAL FRAMEWORK

 Introduction to Theoretical Framework

The notion of capital structure has many views in line with (Horne. & Wachowic, 2008) Capital structure is a correlation between long-term debt and equity. Thus, it is common that the structure of the correlation ratio is proportional between the debt and equity of a business. The study was guided by the following theories.

Modigliani – Miller Theory (M&M)

The development of modern financial theory is based on the study of the financial structure of two Nobel Prize winning economists Modigliani and Miller (M&M theory). According to the M&M theory, the choice between equity and debt is not related to the value of enterprises. The optimum capital structure is the one that equilibriums risks and profits and thus make the most of the company’s share price. Primarily, in the study in 1958, without considering the impact of corporate income tax, M&M theory said that there is no optimal capital structure for businesses. (Hirshleifer, 1965).

The Trade-Offs Theory

The trade-off theory initiated by Kraus and Litzenberger (1973) and then developed in Myers and Majluf (1984) and other studies afterward. The trade-offs theory was initially fashioned to question Modigliani and Miller (1958), as in many situations the benefits of using debt will be zero or negative. For example, when an enterprise is inefficient and becomes insolvent (or bankrupt) (Parker, 2015).

The Pecking Order Theory

Theory Myers and Majluf (1984) state that, there is no optimal capital structure for a company and explanation of the priority between internal capital and borrowed capital when enterprises raise capital. They classify funding into internal capital (retained earnings) and external capital (equity and debt issues). The decision on capital structure is not based on the optimal debt/total assets ratio but on the priority of capital use in the following order: Internal financial resources (especially using retained earnings), followed by debt and final equity capital (Myers, 2013).

Total Quality Management (TQM)

Total Quality Management (TQM) is an approach that was introduced by W. Edwards Deming. It is a complete management approach which is targeted at improving organizational performance based on the principle of customer satisfaction and continuous quality improvement (Arikkök, 2017). The approach assumes that quality is not just the obligation of a particular department but a shared responsibility in the organization. It also assumes that improving quality is a continuous process that requires commitment from all levels of the organization (Thrikawala, 2016). The approach is largely criticized as its implementation is costly, and can face resistance from employees who are familiar to existing systems, processes and practices. The approach also involves massive consistent procedures and metrics, which require bureaucracy  (Arikkök, 2017). Resource-Based Theory

The Resource-Based Theory (RBT) was primarily developed by Jay Barney in the early 1990s. The theory suggests that a firm’s long-term success is determined by its ability to develop and leverage valuable, rare, inimitable, and non-substitutable (VRIN) resources, (Khanna, et al., 2010). Resources which can include physical assets, financial capital or intangible brand reputation, knowledge, organizational culture, the theory is applicable in the Zambian set up because it analyse how firms acquire and utilize financial resources (equity and debt). Why certain firms accumulate more assets than others. The role of financial capital as a competitive advantage.

Conceptual Framework

Based on the theories highlighted in the previous section, the following conceptual framework has been developed.

Source: Author (s)

The framework postulates that capital structure, which is measured by debt and equity affects the financial performance of listed companies in Zambia. Financial performance in this case is measured by net profit margin, return on assets and return on equity.

RESEARCH METHOD

Research Design

This study adopted a quantitative research design with a causal-comparative approach to analyse the relationship between capital structure and financial performance. The study depended   on secondary data that was obtained from financial statements of companies listed on LUSE.

Population and Sample

The target population is all non-financial companies listed on the Lusaka Securities Exchange (LUSE). The inclusion criteria include Sampled Companies listed on the LUSE for at least five years of companies that have published their financial statements for at least five consecutivee years. Financial institutions were not included because of their unique capital structure requirements, which would have compromised the results.

Sampling Technique

The study used purposive sampling method as it only included companies that meet the set criteria.

Data Collection

The data was collected by the means of published annual reports, and financial statements, which are publicly available and have been selected to the sample. Being a secondary data source financial statements, were deemed to be more reliable, because they are prepared according to Zambia Accounting Standards

Source of Data

The source of data included: Lusaka Securities Exchange website, Company annual reports (from company websites or other financial databases and the Zambia Securities and Exchange Commission (SEC). Covering a time period of 5-10 years, depending on data availability.

Variables and Measurement

The study variables included:

Independent Variable: Capital Structure

Debt-to-Equity Ratio (D/E) = Total Debt / Total Equity

Debt Ratio (DR) = Total Debt / Total Assets

Dependent Variable: Financial Performance

Return on Assets (ROA) = Net Income / Total Assets

Return on Equity (ROE) = Net Income / Shareholders’ Equity

Earnings per Share (EPS) = Net Income / Outstanding Shares

Control Variables: Firm Size (log of total assets)

Liquidity (Current Ratio = Current Assets / Current Liabilities)

Growth Opportunities (Market-to-Book Ratio)

Data Analysis Techniques

The study used Descriptive Statistic; in form of Mean, standard deviation, minimum, and maximum values for all variables. Correlation Analysis, was used to   determine the relationship between capital structure and financial performance.

Regression Analysis:

Panel Data Regression Models:

Fixed Effects Model (FEM) – Controls for firm-specific factors.

Random Effects Model (REM) – If firm-specific effects are random.

Hausman Test – To choose between FEM and REM.

Regression Model Specification

FPit=β0+β1D/Eit+β2DRit+β3Sizeit+β4Liquidityit+β5Growthit+ϵitFP_{it} = \beta_0 + \beta_1 D/E_{it} + \beta_2 DR_{it} + \beta_3 Size_{it} + \beta_4 Liquidity_{it} + \beta_5 Growth_{it} + \epsilon_{it}FPit​=β0​+β1​D/Eit​+β2​DRit​+β3​Sizeit​+β4​Liquidityit​+β5​Growthit​+ϵit​

where:

FPitFP_{it}FPit​ = Financial performance of firm iii at time ttt

D/EitD/E_{it}D/Eit​ = Debt-to-equity ratio of firm iii at time ttt

DRitDR_{it}DRit​ = Debt ratio of firm iii at time ttt

SizeitSize_{it}Sizeit​ = Log of total assets of firm iii at time ttt

LiquidityitLiquidity_{it}Liquidityit​ = Current ratio of firm iii at time ttt

GrowthitGrowth_{it}Growthit​ = Market-to-book ratio of firm iii at time ttt

ϵit\epsilon_{it}ϵit​ = Error term

Source (Sudharika, et al., 2020).

Diagnostic Tests

The study applied the following tests

Multicollinearity Test (VIF test) – To check if independent variables are highly correlated.

Heteroskedasticity Test (Breusch-Pagan test) – To check if variance is constant.

Autocorrelation Test (Durbin-Watson test) – To check if residuals are correlated.

Data Analysis Tools

The study used “Stata” statistical package which helped to perform descriptive statistical analysis, correlation analysis and regression analysis to investigate the relationship and the impact of capital structure on firms’ performance.

Descriptive analysis was performed so as to provide an overall interpretation on the data that was analysed.

Reliability of data

The data that the study used is reliable as it was collected from reliable and verified sources of Lusaka Securities Exchange (LuSE).

PRESENTATION OF FINDINGS

Validity and Reliability

In order to understand the reliability of the scale used in the study, Cronbach’s alpha was used and analysis was subdivided into two; capital structure and financial performance. The Cronbach’s alpha is a measure of the internal consistency between several items or measurements. The value of the Cronbach’s alpha ranges from 0 to 1, the closer the value is to 1, the higher the probability that the items are measuring the same dimension. On the contrary, a value closer to 0 entails that items are not measuring the same dimension.

Reliability Analysis of Capital Structure

The output from the reliability analysis of capital structure is presented in table 1. The Cronbach’s alpha value of 0.745 was obtained for capital structure. This entails that the variables used can be relied upon to measure the financial performance of listed firms.

Table 1: Reliability Statistics

Furthermore, the analysis of variance output confirms the statistical significance of the reliability output with the significance value less than 0.05.

Table 2: Reliability Output

Financial Performance

Similarly, a reliability analysis of financial performance was undertaken and a stronger (higher) correlation value was obtained. 0.0965, proving the reliability of the scale used to measure financial performance.

Table 3: Reliability statistics on Financial Performance

The reliability analysis was also confirmed by the analysis of variance. The significance value that was obtained (shown in the table below as Sig.) was less than 0.05. Thus, the scale is statistically significant.

Table 4: Reliability Output on Financial Performance

Findings on the Key Variables

The key variables of the study were capital structure and financial performance. Capital structure was measured by Equity and Debt-Asset Ratio.

Capital Structure

The following figures presents the statistical distribution of capital structure measures. The three primary measures were equity, liabilities and assets, which according to the findings are interpretated as follows:

Equity Distribution

The normal distribution of equity suggests that most listed companies have a similar equity level and very few companies have shown evidence of deviating significantly from the average. Additionally, the limited number of outliers shows that many listed companies fall within a predictable range, with very few having significantly higher or lower equity.

 Debt Distribution

The right-skewed (positively skewed) distribution of debt suggests that most companies have lower debt levels, with a few companies showing significantly higher debt, a clear indication that a small number of firms rely profoundly on borrowing in comparison to others.

Assets Distribution:

The right-skewed distribution of assets, similar to debt, suggests that while most companies have relatively lower asset values, a few possess substantially larger asset bases, an implication that some companies dominate the market in terms of asset accumulation.

Debt-Asset Ratio:

A normal distribution for the debt-asset ratio suggests that companies generally have a predictable and consistent level of debt relative to assets. The findings indicate that despite the skewness in debt and asset values individually, their relationship remains stable across companies.

Figure 1: Capital Structure Measures

Financial Performance

The primary measures under financial performance were net profit and operating profit which were supplemented by the following ratios.:

Net Profit and Operating Profit;

The findings show that both measures are normally distributed, suggesting that most companies have similar financial performance in terms of profitability, with fewer extreme values on either end, a precise indication that most listed companies are relatively in stable industry without significant deviations in profit levels among the companies.

Return on Assets (ROA);

A normal in ROA suggests that asset efficiency is fairly uniform across the listed companies, an implication that companies, on average, generate a similar level of earnings from their assets, without significant skewness or major outliers.

Return on Capital Employed (ROCE);

The presence of an outlier suggests that at least one company has an exceptionally high or low ROCE compared to others, implying that a particular company is either extremely efficient or inefficient in using its capital.

Skewness in ROCE Distribution;

A right-skewed (positively skewed) distribution means that most companies have lower ROCE values, while a few have significantly higher returns, suggesting that a small number of companies are generating exceptionally high returns on capital, pulling the average upwards.

Figure 2: Financial Performance Measures

Data Analysis

The following section presents data analysis of the secondary data obtained from the reports. The findings are then supported by studies that were undertaken in other contexts in the discussion of findings.

Correlation Analysis

A bivariate correlation of the variables under investigation in order to identify the types of correlations and their strengths using the Pearson correlation value. A Pearson Correlation value of 1 entails a total positive correlation between two variables, a Pearson correlation value of -1 shows total negative correlation between variables and a Pearson correlation value of 0 shows no correlation between two variables. Thus, the closer the value is to 1 the stronger the correlation and the closer the value is to 0 the weaker the relationship. A positive correlation signifies that if variable A increases, then variable B also increases, whereas a negative correlation entails that if variable A increases, then variable B decreases.

Table 5: Correlation Coefficient

At 99% confidence level, statistically significant strong positive correlations where observed (highlighted in green) between assets and equity, equity and net profit, equity and return on capital employed, net profit and operating profit, net profit and capital employed, net profit and return on assets, operating profit and return on capital employed, operating profit and return on assets.

At 99% confidence level, statistically significant moderate positive correlations were observed (highlighted in yellow) between assets and Net Profit, Assets and Operational Profit, Assets and ROCE, Equity and Operational Profit. Negative correlations were observed between equity and debt-asset ratio as well as debt-asset ratio and return on capital employed.

Regression Analysis

Debt-Asset Ratio and Financial Performance

In order to understand the relationship between capital structure and financial performance, the first regression model was built using debt-asset ratio as a dependent variable and return on equity, return on capital employed, return on assets, operating profit and net profit as independent variables. The model summary and ANOVA outputs are presented in the tables below.

Table 6: Regression Analysis

The model summary table above shows some important findings with regard to the relationships that the study seeks to establish among listed non-financial companies. In the table above the value of “R” represents the coefficient of correlation, the value of “R Square” represents the coefficient of determination. The coefficient of correlation (R) shows the quality of the predictive quality of the model while coefficient of determination (R Square) shows the proportion of variance in the dependent variable that can be explained by the independent variable (predictors), the closer the value is to 1 the better the model. The table above shows an R square value of 0.523 or 52.3%, this entails that the predictors used i.e. return on equity, return on capital employed, return on assets, operating profit and net profit can predict up to 52.3% of the variation in Debt Asset ratio. Consequently, it can be concluded that the capital structure as explained by the Debt-Asset ratio affects the financial performance of listed non-financial companies. However, in order to understand the significance of the said model, an analysis of variance is undertaken and the findings are shown in the table below.

Table 7: Regression analysis

The regression model is only considered to be statistically significant if the significance value (Sig) is less than 0.05. The ANOVA table above shows a Sig. value of 0.000, therefore the model is statistically significant and can be used to capital structure (debt-asset ratio) can affect the financial performance of listed non-financial companies.

Research on 100 corporations listed on the Tehran Stock Exchange (2008-2013) using Tobin’s Q also supported a positive relationship between capital structure and firm performance. Twairesh (2014) used fixed-effect regression to study the impact of capital structure on non-financial firms in Saudi Arabia, finding significant effects of short-term debt, long-term debt, and total debt on ROA and ROE. Fosu (2020) similarly found a significant positive relationship between financial leverage and firm performance in a study of 257 companies listed on the South Africa Stock Exchange from 2009 to 2016.

Assets and Financial Performance

To further investigate the relationship between capital structure and financial performance, the second regression model was built using assets as a dependent variable and return on equity, return on capital employed, return on assets, operating profit and net profit as independent variables. The model summary and ANOVA outputs are presented in the tables below.

Table 8: Regression Model: Assets and Financial Performance

The model summary table above shows some important findings with regard to the relationships that the study seeks to establish among listed non-financial companies. In the table above, the value of “R” represents the coefficient of correlation, the value of “R Square” represents the coefficient of determination. The coefficient of correlation (R) shows the quality of the predictive quality of the model while coefficient of determination (R Square) shows the proportion of variance in the dependent variable that can be explained by the independent variable (predictors), the closer the value is to 1 the better the model. The coefficient of correlation shows dependent variable correlates to the independent variables by 70.9%, the table further shows an R square value of 0.502 or 50.2%, this entails that the predictors used i.e. return on equity, return on capital employed, return on assets, operating profit and net profit can predict up to 50.2% of the variation in Assets. Consequently, it can be concluded that the capital structure as explained by Assets affects the financial performance of listed non-financial companies. However, in order to understand the significance of the said model, an analysis of variance is undertaken and the findings are shown in the ANOVA table below.

Table 9:  Regression: Assets and Financial Performance

The regression model is only considered to be statistically significant if the significance value (Sig) is less than 0.05. The ANOVA table above shows a Sig. value of 0.000. Therefore, the model is statistically significant and can be used to define how capital structure through (Assets) can affect the financial performance of listed non-financial companies.

Debt and Financial performance

The third regression model used debt as a dependent variable and return on equity, return on capital employed, return on assets, operating profit and net profit as independent variables. The model summary and ANOVA outputs are presented in the tables below.

Table 10: Regression: Debt and Financial performance

The model summary table above shows the findings with regard to the relationships that the study seeks to establish among listed non-financial companies i.e. the relationship between assets and financial performance. In the table above, the value of “R” represents the coefficient of correlation, the value of “R Square” represents the coefficient of determination. The coefficient of correlation (R) shows the quality of the predictive quality of the model while coefficient of determination (R Square) shows the proportion of variance in the dependent variable that can be explained by the independent variable (predictors), the closer the value is to 1 the better the model. The coefficient of correlation shows dependent variable correlates to the independent variables by only 39.4%, the table further shows an R square value of 0.155 or 15.5%, this entails that the predictors used i.e. return on equity, return on capital employed, return on assets, operating profit and net profit used

 only up to 15.5% of the variation in debt. Consequently, it can be concluded that the capital structure as explained by the model above, debt affects the financial performance of listed non-financial companies to a smaller extent. However, in order to further understand the significance of the said model, an analysis of variance is undertaken and the findings are shown in the ANOVA table below.

Table 11: Debt and Financial performance

The regression model is only considered to be statistically significant if the significance value (Sig) is less than 0.05. The ANOVA table above shows a Sig. value of 0.032. Therefore, the model is statistically significant and can be used to explain how capital structure (Debt) can affect the financial performance of listed non-financial companies to a smaller extent.

DISCUSSION OF FINDINGS

Capital Structure

Equity Distribution

The study found that equity among listed companies in Zambia follows a normal distribution, with a few outliers. This implies a general consistency in equity performance and predictable future returns, corroborating (Jeannine Mauwa, et al., 2016). However, the presence of outliers suggests that while most companies exhibit financial stability, some have undergone significant restructuring such as equity injections, buybacks, or losses which may indicate elevated risk profiles. These findings highlight the importance of evaluating companies individually rather than assuming uniform performance.

Debt Distribution

Debt levels were found to be right-skewed, indicating that while most listed companies carry low levels of debt, a minority maintain exceptionally high debt levels. This aligns with (Sudharika, et al., 2020) and suggests varied risk appetites and financial strategies. Most firms appear to adopt conservative leverage policies, echoing findings by  (Chisenga, 2023)  which is favourable for financial stability. However, companies with high leverage may face refinancing risks, liquidity issues, or heightened vulnerability during economic downturns, as noted by (Ali, 2024) . This disparity emphasizes the need for firm-specific debt management strategies.

Preference for Equity Financing

The preference for equity financing among many firms suggests limited growth strategies, especially among indigenous firms. This financing approach could partly explain why local firms often grow slowly and rarely expand globally, unlike capital-intensive sectors such as telecommunications, banking, and mining. These findings echo (Heng, 2012), who notes that strong credit ratings and low borrowing costs may reduce incentives for acquisitions, further reinforcing a need to reconsider capital structures for expansion.

Asset Distribution

The distribution of assets was positively skewed, indicating that a small number of companies control a disproportionate share of the total assets. This aligns with  (Doan, 2014) and (Adeoye & Olojede, 2019) and reflects structural inequality within the corporate landscape. Asset concentration contributes to market dominance by larger firms, mirroring trends in Zambia’s electronics market (Mankishi, et al., 2025), and can weaken the competitive positioning of smaller firms.

Debt-to-Asset Ratio

This ratio followed a normal distribution, implying that most companies maintain similar leverage levels. This is inconsistent with (Adeoye & Olojede, 2019) but reflects stable financial discipline and supports traditional financial modelling. Companies appear to manage debt and assets proportionately, signalling financial robustness and reduced risk of distress, as supported by (Parker, 2015). For lenders and investors, this consistency implies dependable creditworthiness and moderate risk profiles.

Theoretical Integration.

These findings support several theoretical frameworks:

Trade-Off Theory: The normal distribution of equity and debt-asset ratios suggests firms aim to balance costs and benefits of debt and equity, though deviations exist due to company-specific factors (Hashemi, et al., 2013)

Pecking Order Theory: The right-skewed debt distribution reflects a preference for internal financing, with only a few firms relying heavily on debt due to limited access to equity (James, et al., 2021).

Resource-Based Theory: The skewed asset distribution indicates that larger firms accumulate resources that provide competitive advantages over smaller firms, a reason why larger listed firms have predominate growth.

Modigliani-Miller Theorem: The high-leverage outliers challenge this theory, emphasizing the impact of taxes and bankruptcy risk that listed companies faced amidst economic meltdown that were experienced.

Consistent with the Pecking Order Theory, the study found a statistically significant strong positive correlation between assets and equity. This suggests that listed companies in Zambia predominantly fund their assets using internally generated equity rather than external debt. This finding indicates a reliance on retained earnings and internally generated funds, reflecting financial prudence and reduced dependency on external financing similar to the findings of (Mankishi, et al., 2025). The increase in equity alongside asset growth implies that these companies are financially stable, not over-leveraged, and potentially benefit from strong internal management systems. Such a capital structure, with a preference for equity over debt, reduces financial risk and enhances liquidity, thus bolstering shareholder confidence (Ali, 2024). Moreover, the alignment between asset growth and equity also indicates efficient capital management, with companies balancing investment and funding strategies effectively to support long-term, sustainable expansion.

Aligned with the Trade-off Theory, the study revealed a statistically significant strong positive correlation between equity and net profit, reinforcing the findings of (Khanna, et al., 2010) . This relationship implies a virtuous cycle where increased profitability contributes to equity growth, and vice versa. Higher retained profits reinforce equity bases and reduce the need for external debt.

Financial Performance

These findings suggest that listed companies exhibit strong financial management practices, with operational efficiency driving profitability and supporting reinvestment. The positive equity-profit link indicates higher investor confidence, as shareholders benefit through dividends and are more likely to reinvest. Furthermore, the strong correlation suggests that these companies maintain sustainable business models, capable of internally funding growth while delivering consistent Return on Equity (ROE) (Gul, 2019) (Lopez, 2018). The financial structure not only promotes profitability but also positions the companies for stock appreciation and future dividend growth.

The study also found a statistically significant strong positive correlation between equity and Return on Capital Employed (ROCE), suggesting that companies utilize both equity and debt efficiently to generate profits. These findings imply that listed firms invest equity in high-performing ventures, maximizing shareholder returns (Heng, 2012). The results point to improved operational efficiency, where capital deployment supports strong returns. A growing equity base, when accompanied by rising ROCE, signals effective capital allocation and potential for value creation. This alignment further suggests that listed companies in Zambia manage their capital mix prudently, with a preference for investments that enhance business sustainability and competitive advantage (Phan, 2019) Consequently, such firms are likely to be perceived as less risky by investors and enjoy stable capital inflows.

In line with Total Quality Management (TQM) principles, which emphasize continuous improvement and customer satisfaction (Arikkök, 2017), the study found a statistically significant strong positive correlation between net profit and operating profit. This indicates that the core operations of listed companies are the main contributors to overall profitability, with minimal impact from non-operational items such as interest, taxes, and extraordinary expenses  (Jeannine Mauwa, et al., 2016). This finding implies that companies have developed effective cost management systems and maintain stable operational efficiency. The relationship also indicates that increases in operating profit lead to increases in net profit, reflecting pricing power, cost efficiency, and economies of scale, consistent with the results of (Sudharika, et al., 2020). These characteristics signal sustainable profit growth driven by sound operational strategies (Doan, 2014)

Consistent with the Modigliani and Miller (M&M) Theory, the study found a statistically significant strong positive correlation between net profit and capital employed, reaffirming the findings of (Mankishi, et al., 2025). This relationship indicates that listed companies effectively use capital to generate returns, demonstrating the profitability of investments in assets and operations. The results suggest that listed companies pursue successful expansion strategies, manage debt loads prudently, and channel capital into productive assets, thereby maintaining profitability and financial sustainability (Amani, 2020). The strong correlation between net profit and capital employed indicates that the companies’ capital structures support growth without excessive financial risk.

The study further found a strong positive correlation between net profit and Return on Assets (ROA), consistent with the findings of  (Doan, 2014) and (Sudharika, et al., 2020). This suggests that companies are efficiently utilizing their assets to generate profits. Effective asset management contributes to operational efficiency and profitability (Brealey, et al., 2004) and (Heng, 2012). The ability to convert assets into revenue and ultimately net profit implies that listed companies have implemented strategic investments and capital discipline, resulting in minimal asset waste and higher competitiveness (Norren, 2013). This efficient resource utilization enhances and companies’ market positioning and supports long-term sustainability.

In line with the Trade-off Theory, a strong positive correlation was also observed between operating profit and ROCE, in agreement with the findings of  (Prekazi, et al., 2023). This relationship demonstrates that operational effectiveness significantly influences capital returns. It further suggests that listed companies in Zambia maintain cost discipline and allocate capital efficiently, leading to higher ROCE. This outcome reinforces the assertion that companies are improving internal processes and reducing waste, thus optimizing the use of capital for revenue generation.

The study also identified a moderate positive correlation between net profit, assets, and operating profit, consistent with (Mudany, et al., 2020). Although the relationship is positive, it is not particularly strong, indicating some inefficiencies in fully translating asset investment into profitability. This implies that while companies are managing operations and assets well, there remains room for improvement in asset utilization and capital investment alignment with profitability outcomes.

Similarly, a moderate positive correlation between net profit, assets, and ROCE was found, which contradicts (Doan, 2014). While these variables are positively associated, the moderate strength suggests that some listed companies may not be fully leveraging their asset base for optimal profitability. Profitability may thus be contingent on other factors such as operational effectiveness, market dynamics, and asset productivity.

A further finding of a moderate positive correlation between net profit, assets, equity, and operating profit implies that these variables are associated, but not strongly. This may suggest the influence of external factors or incomplete capital utilization. Such insights indicate that firms could enhance profitability through more strategic alignment of capital inputs and performance outputs.

A negative correlation between equity and the debt-asset ratio was observed, indicating that as equity increases, reliance on debt decreases. This supports the conclusion that listed companies in Zambia have stronger balance sheets, lower financial risk, and greater financial flexibility, consistent with (Patson, 2019) and (Norren, 2013). A robust equity position reduces the cost of capital, enhances resilience, and improves investor confidence.

Additionally, a negative correlation between the debt-asset ratio and ROCE implies that increased debt may reduce capital returns aligning with (Sudharika, et al., 2020) High debt levels relative to assets may suppress profitability, reinforcing the importance of optimal capital structure management.

Regression Analysis and Capital Structure

To assess the relationship between capital structure and financial performance, a regression model using the debt-asset ratio as the dependent variable found that return on equity, ROCE, ROA, operating profit, and net profit explained 52.3% of its variation. This moderate explanatory power indicates that these financial metrics are significant determinants of capital structure. The findings further confirm that listed companies primarily finance operations through retained earnings rather than debt, resulting in stable capital structures (Mankishi, et al., 2025)

Another regression model with assets as the dependent variable and ROE, ROCE, ROA, operating profit, and net profit as predictors revealed a 70.9% correlation and an R-squared of 50.2%. These results indicate a moderate to strong linear relationship, with room for other external factors to explain asset variability. This affirms that listed companies’ asset management and capital structure choices significantly impact financial performance, while also being shaped by market forces and internal financial strategies (Mudany, et al., 2020). When evaluating debt as a dependent variable, the same financial performance indicators explained 52.3% of its variation, showing that capital structure, particularly debt reliance, is moderately shaped by financial performance metrics. These results underscore that companies with effective debt management strategies maintain optimal debt levels while ensuring financial health (Heng, 2012).

Broader Economic Implications

The observed capital structure trends have significant macroeconomic implications for Zambia beyond the Lusaka Securities Exchange (LuSE). Capital structure decisions influence company financing strategies, infrastructure development, banking sector stability, foreign direct investment (FDI) patterns, and public debt sustainability. As such, the findings advocate for policy interventions that expand alternative financing avenues, strengthen domestic capital markets, and enhance debt management frameworks to support economic diversification and maintain financial stability.

CONCLUSION AND RECOMMENDATION

Conclusion

In line with the objectives of the study, the following conclusions can be made:

Listed companies in Zambia have a capital structure that favours low levels of debt, with others showing signs of high debt levels, with an average Debt to asset ratio. This shows that listed companies in Zambia operate in a stable financial environment, and that there is consistency in operational efficiency in the use of retained earnings to improve equity, but with uneven competitive landscape where some companies are dominant than the others.

The study can also conclude that listed companies in Zambia are not debt dependent, thus they have sustainable business model which sought to balance the capital structure well, it can also be concluded is that listed companies in Zambia have efficient cost management, operational stability, and low impact from non-operating expenses, improved operational efficiency, effective capital allocation, high asset productivity, and sustainable profit growth. However, the study found that some tenets of listed companies’ capital structure have been largely influenced by inefficiencies in optimization of asset management, operational efficiency, non-strategic focus, non optimization of its asset base to generate net profits and returns on capital effectively, inefficiencies, external factors, careful asset management, all have a bearing on the profitability of listed companies in Zambia.

The study has also established that despite listed companies’ stable capital structure of non-debt reliance, a minority of listed companies in Zambia face possible risks associated with financial leverage, such as increased interest expenses, operational inefficiencies, and greater vulnerability to financial distress. it can be concluded that capital structure decisions have a moderate impact on the financial performance of non-financial firms listed on the Lusaka Stock Exchange, which calls for firms to critically evaluate the cost and benefits of different capital sources before making financing decisions.

Recommendations

The following recommendations can be drawn according to the findings of the present study:

Corporate Managers

• There is need corporate managers to balance company’s capital structure, which should include high risk and high return, and the other way round.
• Because of the normal distribution of profit, corporate managers should focus on incremental improvements in areas like cost management, productivity, or operational efficiency.
• Corporate Managers should not concentrate solely on incremental operational improvement but should also consider investment in high-return projects, managing debt levels carefully, and reinvesting profits to drive long-term profitability.
• Corporate managers should prioritize effective debt management, reassess their investment policies, and focus on improving operational efficiency to enhance profitability and achieve better returns on capital.
• There is need for corporate managers in smaller companies in the industry to adopt specific strategies to compete with the larger outlier. The strategies may include concentrating on niche markets, improving operational efficiency, or establishing strategic partnerships in order to counterbalance the outlier’s capital advantage., Because of outliers which may suggest firm dominance, it is recommended that corporate managers of such companies implement dedicated strategies to compete, so that they can remain competitive in the market.
• Corporate managers should have an objective of striking a balance between capital structure of their companies, and an optimal balance in the capital structure which can assure sustained performance, which will require them to maintain a balance between debt and equity in the business.

 Investors

• There is also need for investors to closely monitor the highly-leveraged listed companies, because they may particularly face higher default risk, more so during periods of rising interest rates or economic downturns.
• It is also important that investors and regulators monitor outliers, which may be caused by highly-leveraged outliers which could pose risks to both individual companies and the broader economy.
• Investors should also balance their portfolios by including companies with both small and large asset bases, which will manage risk by not over-relying on the largest asset holders.
• Given the observed variations in capital structure, investors should diversify their portfolios across firms with different leverage levels to balance risk and return.
• Investors should closely examine highly leveraged firms those in the right tail of the debt distribution for potential default risks.

Regulators

• Regulators should consider regulations that support the broader industry, especially companies with lower ROCE, which may involve different programs to enable adequate access to capital, promote innovation, or decrease regulatory burdens that may be deterring capital competence for smaller or less competitive firms.
• Regulators should also ensure that there is Transparency in Capital Structure Reporting, given the skewed distributions of debt and assets, regulators should ensure firms disclose detailed financial risk assessments, which can be enhanced by corporate governance policies which can help prevent excessive debt accumulation consequently leading to financial crises.
• Regulators in should focus on developing equity markets to reduce over reliance on debt and encourage more balanced financing approaches.
• Regulators should implement debt-to-equity or debt-to-asset ratio thresholds for certain industries to reduce systemic financial risk.

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