Organizational Determinants, Capital Structure and Financial Performance of Firms Registered in Rwanda Development Board

Abstract

The trade-off theory suggests an optimal mix of debt and equity for a firm to achieve the minimum cost of capital structure. There are reasonable empirical researches on the capital structure. The studies implied that certain organization factors influence the capital structure that leaded to the minimum cost of capital. Clearly, financial managers should devote their time and effort to those determinants. However, there are no researches to show whether the expected minimum cost of capital reflects the maximum financial performance and maximum welfare of shareholders. As a result, there is lack of empirical research to investigate whether the organizational determinants directly affect the capital structure and capital structure affect the financial performance and shareholders' wealth. This is important for financial management in that, if the organizational determinants do not lead to the increase of a firm's performance and consequently the shareholders' welfare, there is no need for financial managers to search for those determinants. This research attempted to investigate the link between the organizational determinants and firm's financial performance in the Rwandan context, and whether capital structure plays a mediating role in such a relationship. The study was based on capital structure theory. Asset Assets tangibility, profitability, firm risk, growth opportunities, firm age, firm size, firm liquidity and non-debt tax shield were found to be the key organizational determinants of firms in Rwanda. The study used an explanatory survey research design. Data were collected from the Rwanda Development Board's website from which all audited financial statements of firms in Rwanda were published. The target population of the study was 2,000 representing all firms registered in Rwanda Development Board by the time of research. During the research size determination 500 firms were selected as best performers firms from 2005-2013 in RDB and their financial statements were published. The sample size of the study was 51 firms selected using the stratified sampling technique. The time scope of the study is 9 years covering (2005-2013).  Data were analyzed by using the E-Views 7 as statistical analysis tool. The study used multiple regression model represented by Panel Least squares (PLS) as a technique to examine the organizational determinants, capital structure and firm's financial performance. The findings showed that firm size had a negative and significant effect (β=-1.854, p=0.0000) on firm financial performance, while growth opportunities (β=0.348, p=0.001), firm Assets tangibility (β= -0.661, p=0.0405), profitability (β= 2.120, p=0.0000) and firm liquidity (β= -0.499, p=0.0000) and Capital structure was positively and significant effect on firm financial performance (β= -0.498, p=0.025). The research showed a partial mediation of capital structure on the relationship between organizational determinants and firm's financial performance.  This study recommends government to encourage firms to be listed in order to be externally financed at lower cost of capital.