Capital Structure and Performance of Small and Medium Enterprises: Empirical Evidence from Tanzania

Abstract

This research delves into the effects of capital structure on the performance of small- and medium-sized enterprises (SMEs) in Tanzania. The research is predicated on 276 SMEs in Tanzania. Panel data including 828 observations for the years 2017–2019 were used. To evaluate the models, an ordinary least-squares test was employed. Return on capital employed (ROCE), return on equity (ROE) and return on assets (ROA) were employed to measure the SMEs’ performance. The findings reveal that total debt, short- and long-term debts have a negative effect on ROCE, ROE and ROA. Generally, the results uphold the Pecking Order Theory, which postulates a negative correlation between debt and firm performance. The results imply that firms with large debt levels have lower performance. This study recommends that SMEs’ financial managers should choose their capital structure carefully by avoiding excessive debt, in order to increase the firm’s overall worth, thereby maximizing firms’ performance. The investigation adds to earlier research by giving another point of view in Tanzania through analysing SMEs’ capital structure and performance by utilizing manufacturing sectors in their entirety while employing a panel data analysis.