The Impact of Capital Structure on Firm Performance: Empirical Evidence from Egypt

Abstract

The potential impact of capital structure on firm performance has gained con-siderable interest from many researchers and practitioners in the corporate finance field. The interest in capital structure decision stems from its critical impact on firm performance and shareholder wealth. The aim of this study is to examine the impact of capital structure on firm performance in Egypt. For this purpose, this study uses a sample of 40 companies listed on the Egyptian stock exchange during the period from 2019 to 2023. Return on assts (ROA), return on equity (ROE) and Tobin’s Q (TQ) are used as performance measures, while short-term debt ratio (STD), long-term debt ratio (LTD), and debt to equity ratio (DE) are represented as capital structure variables. Fixed effects regression model is applied to assess the impact of capital structure on firm performance variables. The results show that there is a significant nega-tive impact of STD and LTD on ROA and a significant positive impact of DE on ROA. Moreover, there is a significant positive impact of LTD on ROE and a significant negative impact of DE on ROE. When using TQ as a dependent variable, the results reveal that there is a significant negative impact of LTD and DE on TQ and there is a positive and significant impact of STD on TQ. The results suggest that capital structure theories, such as pecking order theory and trade-off theory, can be applied to explain the impact of capital structure on firm performance in Egypt. This study contributes to corporate finance lit-erature by providing empirical evidence regarding the impact of capital struc-ture on firm performance from Egypt as an emerging market.