Firm's capital structure decisions, asset structure, and firm's performance: application of the generalized method of moments approach

Abstract

PurposeThe study aims to evaluate the influence of capital structure decisions and asset structure on firms' performance for East African listed nonfinancial firms.Design/methodology/approachThe research is descriptive and employs secondary data from the East African capital markets' websites. The generalized method of moments approach is used to estimate the relationship due to its ability to account for endogeneity problems.FindingsThe result shows that capital structure decisions and asset structure strongly influence the firms' performance. When long-term debts, short-term debts and tangible fixed assets increase, the return on total assets increases. An increase in the total debt ratio raises the return on equity (ROE). However, the increase in long-term debt lowers the ROE.Practical implicationsThe results will help investors and potential investors decide on a financing policy that maximizes performance. Likewise, governments and other policymakers review the capital markets' frameworks to attract institutional and individual investors to the markets for financial availability and to increase profitability.Originality/valueThe research provides evidence on the influence of capital structure decisions and asset structure on firms' performance. Furthermore, its results contribute to firms' financing policy formulation and the corporate finance literature.