Abstract 

This study attempts to analyze the impact of capital structure on the financial performance of firms listed on the Namibian Stock Exchange. The numerous capital structure theories and inconclusive empirical evidence on the relationship between capital structure and profitability motivated the researcher to carry out this study. A quantitative study using secondary data from financial statements published on the websites of 21 of the 32 firms listed on the Namibian Stock Exchange using data for the period 2010 to 2013 (4 year period) resulting in 84 observations was conducted. These firms were selected on the basis of availability of information necessary for conducting the study and the readiness of Annual Financial Statements of the financial years starting from 2010 to 2013. The variables used in the study are Return on Assets (ROA), Return on Equity (ROE) and Net profit margin (NP) as proxies for the dependent variable which is profitability whereas short-term debt, long-term debt and total debt were used as proxies for the independent variable namely capital structure. Three models were produced for each profitability variable (Y). The study employed panel data regression with pooled, fixed effect and random effect regression. Among the three methodologies, this study found that random effect regression is more appropriate to understand the proposed relationships in model 1 (return on equity) and model 2 (return on assets) in relation to firms listed on the Namibian Stock Exchange over the sample period. However, the fixed effect model was found to be more appropriate in model 3 in which Net profit margin (PM) is the dependent variable. A combination of descriptive and multivariate analysis were conducted. The results of the study can be of great interest to investors, academia as well as firms especially during periods of financial crises. It raises again the question as to whether there is any relationship between capital structure and profitability. The results indicate that the firm’s performance is significantly and negatively influenced by its capital structure.