16192503810000 Faculty of Commerce Department of Accounting and Finance The Impact of capital structure on bank performance

16192503810000
Faculty of Commerce
Department of Accounting and Finance

The Impact of capital structure on bank performance.
Dissertation
ByGwynneth N. Gumbo
L0140306U
Supervised by
Mr. N NcubeSubmitted in partial fulfilment of the requirements of the Bachelor of Commerce Honours Degree in Accounting and Finance programme
©May 2018
Lupane, Zimbabwe
Release FormStudent Name: Gwynneth N. Gumbo
Title of Project: The Impact of capital structure on bank performance.
Program: Bachelor of Commerce Honours Degree in Accounting and Finance.

Year of Award: 2018
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DECLARATIONI, GWYNNETH GUMBO, do hereby declare that this dissertation is the result of my own investigation and research, except to the extent indicated in the Acknowledgements and References and by acknowledged sources in the body of the report, and that it has not been submitted in part or full for any other degree to any other University or College.

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ACKNOWLEDGMENTSI would like to thank my loving husband Mqondisi Gumbo and two children, my daughter Kimberley Naledi and son, Emmanuel Bradley Gumbo for their unwavering support they showed during this project. In addition, my sincere gratitude goes to the Department of Accounting and Finance, Lupane State University for allowing me to carry out this project.

AbstractThe objective of this research is to examine the relationship between capital structure and performance of commercial banks in Zimbabwe. Panel data was collected from secondary sources mainly financial statements of banks, RBZ statements and ZIMSTATS. The study was carried out on a sample of nine (9) commercial banks which were operating in Bulawayo over five (5) years ranging from 2011 to 2016. The performance variables used in the study were Capital adequacy ratio (CAR), Return on equity (ROE) and cost to income ratio (CITR).
Data collected was then analysed using linear regression models using Eviews 8 in order to determine if there is any significant relationship between capital structure and the financial performance of these commercial banks. Long-term debt to total assets ratio (LTDTA) and short-term debt to total assets ratio (STDTA) were used as independent variables. The finding of the analysis indicated that that there is no significant relationship between the capital structure and the financial performance of Zimbabwean commercial banks.
Table of Contents
TOC o “1-3” h z u Release Form PAGEREF _Toc513493814 h iiApproval Form PAGEREF _Toc513493815 h iiiDECLARATION PAGEREF _Toc513493816 h ivACKNOWLEDGMENTS PAGEREF _Toc513493817 h vAbstract PAGEREF _Toc513493818 h viList of Tables PAGEREF _Toc513493819 h xLIST OF ABBREVIATIONS AND ACRONYMS PAGEREF _Toc513493820 h xiCHAPTER I PAGEREF _Toc513493821 h 11.1.Introduction PAGEREF _Toc513493822 h 11.1.Background of the study PAGEREF _Toc513493823 h 21.2.Statement of the problem PAGEREF _Toc513493824 h 41.4. Objective of the study PAGEREF _Toc513493825 h 41.6. Hypotheses PAGEREF _Toc513493826 h 51.7. Significance of the study PAGEREF _Toc513493827 h 51.8. Delimitation PAGEREF _Toc513493828 h 61.9. Limitations of the study PAGEREF _Toc513493829 h 61.10. Chapter Summary PAGEREF _Toc513493830 h 71.11. Definitions of terms. PAGEREF _Toc513493831 h 7CHAPTER II PAGEREF _Toc513493832 h 82.0. Introduction PAGEREF _Toc513493833 h 82.1. Theoretical Framework PAGEREF _Toc513493834 h 92.1.1. Traditional theory of capital structure PAGEREF _Toc513493835 h 92.1.2. The Modigliani and Miller (MM) Capital Structure Irrelevance Theory PAGEREF _Toc513493836 h 102.1.3. The Trade-off Theory PAGEREF _Toc513493837 h 122.1.4. The Pecking Order Theory PAGEREF _Toc513493838 h 132.1.5. Signaling Theory PAGEREF _Toc513493839 h 142.1.6. Agency Cost Theories PAGEREF _Toc513493840 h 162.1.7. Market Timing Theory PAGEREF _Toc513493841 h 162.2. Indicators of Bank Performance PAGEREF _Toc513493842 h 182.2.1. Return on Assets (ROA) PAGEREF _Toc513493843 h 182.2.2. Return on Equity (ROE) PAGEREF _Toc513493844 h 182.2.3. Return on Investment (ROI) PAGEREF _Toc513493845 h 192.2.4. Debt Ratio PAGEREF _Toc513493846 h 192.3. Empirical Literature Review PAGEREF _Toc513493847 h 202.4 Summary PAGEREF _Toc513493848 h 27CHAPTER III PAGEREF _Toc513493849 h 28RESEARCH METHODOLOGY PAGEREF _Toc513493850 h 283.1 Introduction PAGEREF _Toc513493851 h 283.2 Research Design PAGEREF _Toc513493852 h 283.3 Population PAGEREF _Toc513493853 h 293.4 Sample and Sampling Procedure PAGEREF _Toc513493854 h 293.5 Data Collection PAGEREF _Toc513493855 h 303.6 Data Analysis PAGEREF _Toc513493856 h 313.6.1 Analytical Model PAGEREF _Toc513493857 h 313.7. Variables PAGEREF _Toc513493858 h 323.7.1. The independent variables. PAGEREF _Toc513493859 h 323.8. Methods of measuring performance PAGEREF _Toc513493860 h 333.8.1. Capital Adequacy Ratio (CAR) PAGEREF _Toc513493861 h 333.8.2. Cost-to-income ratio. PAGEREF _Toc513493862 h 343.8.3. Return on Equity (ROE) PAGEREF _Toc513493863 h 343.9 Conclusion PAGEREF _Toc513493864 h 35CHAPTER IV PAGEREF _Toc513493865 h 36DATA PRESENTATION, ANALYSIS AND DISCUSSION PAGEREF _Toc513493866 h 364.1. Introduction PAGEREF _Toc513493867 h 364.2. Diagnosis Tests PAGEREF _Toc513493868 h 37Table 4.2. Correlation test results PAGEREF _Toc513493869 h 374.2.2. Fixed or Random effect test PAGEREF _Toc513493870 h 374.3. Capital structure and ROE PAGEREF _Toc513493871 h 384.4. Capital structure and CAR PAGEREF _Toc513493872 h 404.4. Cost to Income Ratio (CITR) PAGEREF _Toc513493873 h 434.5. Discussion of findings PAGEREF _Toc513493874 h 454.6.Chapter Summary PAGEREF _Toc513493875 h 45CHAPTER V PAGEREF _Toc513493876 h 45SUMMARY CONCLUSIONAND RECOMMEDATIONS PAGEREF _Toc513493877 h 455.1 Introduction PAGEREF _Toc513493878 h 455.2. Interpretation of Findings PAGEREF _Toc513493879 h 465.2.1. Capital structure and ROE PAGEREF _Toc513493880 h 465.2.2. Capital structure and CAR PAGEREF _Toc513493881 h 465.2.3. Capital structure and CITR PAGEREF _Toc513493882 h 475.3 Conclusion PAGEREF _Toc513493883 h 485.4. Recommendations PAGEREF _Toc513493884 h 48References PAGEREF _Toc513493885 h 49Marking giude PAGEREF _Toc513493886 h 52

List of TablesTable 1.1 Financial Institutions in Bulawayo…………………………3
Table 3.1 List of Survey Banks………………………………………..30
Table 4.1 List of Selected Banks for the Study……………………….35
Table 4.2 Correlation Test Result……………………………………..36
Table 4.3 Hausman Test (ROE)……………………………………….38
Table 4.4 Regression Analysis (ROE)….………………………………39
Table 4.5 Hausman Test (CAR)……………………………………….41
Table 4.6 Regression Analysis (CAR)…………………………………41
Table 4.7 Hausman Test (CTIR)……………………………………….43
Table 4.8 Regression Analysis (CTIR)…………………………………43LIST OF ABBREVIATIONS AND ACRONYMS
CARCapital Adequacy Ratio
CTIRCost to Income Ratio
LTDTALong Term Debt to Total Assets ratio
RBZReserve Bank of Zimbabwe
ROEReturn on Equity
STDTAShort Term Debt to Total Assets ratio
ZIMSTATSZimbabwe Statistical Office
CHAPTER I Introduction
The theory of capital structure and its relationship with a firm’s performance has been a topic of interest in corporate finance and accounting literature since the Modigliani and Miller theory (MM) (1958) which argued that under the perfect capital market conditions, if without taxes and without asymmetric information the firm’s value is independent from capital structure. According to Brigham & Ehrhardt (2011) a firm’s capital structure decision includes its choice of a target capital structure, the average maturity of its debt, and the specific types of financing it decides to use at any particular time. Capital structure refers to the kinds of securities and the proportionate amounts that make up capitalization. It is the mix of different sources of long-term sources such as equity shares, preference shares, debentures, long-term loans and retained earnings (Paramasivan and Subramanian, 2009).

In Zimbabwe there has been limited study on the impact of capital structure decisions on the performance of banks in the country and thus this study aims to fill the gap on the lack of knowledge of the impact of capital structure on the performance of banks currently operating in the Zimbabwe. The main thrust of this study is on examining whether different capital structure decisions can affect the performance of banks operating in Zimbabwe.

This chapter therefore, outlines the problem statement soon after a brief background of the study. Following the problem statement are research objectives, research questions, hypothesis to be tested, significance of the study and scope of the study in that order. Finally, the chapter will close by a summary of the study after assumptions; limitations and definition of terms have been presented.

Background of the study
Banks have numerous techniques of moulding their capital structure such as issuing of shares, issuing of assets and debentures. Daryai (2009) stated that the form of capital structure a bank adopts is influenced by size, profitability, growth, uniqueness, and asset structure. According to Larson (2011) banks are a fundamental part of a nation’s economy facilitating spending and investment that stimulate economic growth. Despite their important function in the economy, banks are at risk of failure due to difficulties of meeting their capital requirements; hence there is a need for banks to structure their capital so as to militate against any risk of failure.
Fabbozi (2003) defined capital structure as the composition of all the securities the firm issues in order to finance its operations. Abor (2008) stated that capital structure is a mix of a company’s long-term debt, specific short-term debt, and common equity and preferred equity to finances its overall operation and growth.
According to Abor (2008) capital structure vary among banks within the banking industry and such diversity can be explained by theories of capital structure such as the capital structure irrelevance theory, trade off theory, pecking order theory and market timing theory of capital structure. Amidu (2007) stated that as capital structure theories sought to explain why businesses choose different financial mix, banks present a special case because of their unique features. Banks are a fundamental part of the nation’s economy facilitating spending and investment that stimulate economic growth.
According to Chikoko and Roux (2013) the Basel Framework issued guidelines on the minimum capital requirements that banks should hold to mitigate against any credit, market and operational risks which may arise as a result of the environment they operate in, mismatches between assets and liabilities and defaults from counterparties. These regulations affect capital structure decisions for banks and thus affecting banks’ performance.
In Zimbabwe, the Reserve Bank of Zimbabwe (RBZ) has been on a drive to ensure that all banks adopt the Basel Framework so as to mitigate against any credit, operational and market risk (Chikoko and Roux, 2013). According to the RBZ Monetary Policy (2011) the RBZ in cooperation with the government increased the minimum capital requirements for banks from $25 million for commercial banks to $100 million in 2010 in compliance with the Basel Framework regulation.
Many local banks in Zimbabwe were struggling to raise capital so as to meet the RBZ minimum capital requirements as a result of their capital structure decisions (Chikoko and Roux, 2013). The RBZ Monetary Policy (2009) stated that all banking institutions failing to meet the minimum capital requirement of $100 million or without the capacity to maintain sufficient capital levels corresponding with their risk profiles on an on-going basis were to be shut down or put under curatorship. This resulted in the closure of several banks such as the Allied Bank Limited, Interfin Bank, Metropolitan Bank, AfrAsia Bank and Tetrad Investment Bank, which were failing to raise capital so as to meet the RBZ minimum capital requirement of $100 million (RBZ Banking Sector Report, 2014).
According to the RBZ Banking Sector Report (2014) the architecture of the banking sector was as shown below:
Type of Institution Number of Institutions
Commercial Banks 15
Merchant Banks 2
Building Societies 3
Savings Bank 1
Microfinance Institution 146
Chikoko and Roux (2013) noted that other banks such as the Barclays, Standard Chartered, and Stanbic Bank as a result of their capital structure decisions continued to perform well and managed to raise capital to meet the RBZ minimum capital requirement. On the other hand, other banks such as the Allied Bank Limited, Interfin Bank, Metropolitan Bank, AfrAsia Bank and Tetrad Investment Bank due to their capital structure decisions, performed poorly and failed to raise capital to meet the RBZ minimum capital requirement and this necessitated a study to examine the impact of capital structure on the performance of banks.

Statement of the problem
The Basel Framework issued guidelines on minimum capital that banks should hold to mitigate against any credit, market and operational risk that may arise. The RBZ increased their minimum capital requirement to $100 million in 2010 for all banks in Zimbabwe so as to comply with the Basel Framework Regulation of minimum capital requirement. This resulted in banks adopting different capital structures so as to raise capital to meet the RBZ minimum capital requirement of $100 million. The performance of banks since the RBZ increased the minimum capital requirement has been poor as evidenced by non-declaration of dividends, depressed share prices and closure of banks such as the Allied Bank Limited; Interfin Bank, Metropolitan Bank, AfrAsia Bank and Tetrad Investment Bank which were failing to raise capital to meet the RBZ minimum capital requirement. This has raised questions on whether capital structure have an impact on the performance of banks and has necessitated this study to examine the impact of capital structure on the performance of banks currently operating in Zimbabwe.
1.4. Objective of the study
1) To examine the impact of capital structure on the return on assets of banks in Zimbabwe.

2) To examine the impact of capital structure on the return on equity of banks in Zimbabwe.

3) To examine the impact of capital structure on the return on investment of banks in Zimbabwe.

4) To assess the relationship between capital structure and banks’ performance operating in Zimbabwe.
1.5. Research Questions
1) What is the impact of capital structure on the return on assets of banks in Zimbabwe?
2) What is the impact of capital structure on the return on equity of banks in Zimbabwe?
3) How does capital structure impact on the return on investment of banks in Zimbabwe?
4) What is the relationship between capital structure and banks’ performance operating in Zimbabwe?
1.6. Hypotheses
The following hypotheses are developed to investigate the impact of capital structure on banking performance in Zimbabwe.

H0 – Capital structure has no significant impact on banking performance
H1 – Capital structure has significant impact on banking performance
1.7. Significance of the study
The University- The research is of great use to other students and academics in the area of commerce as it gives practical insight on how capital structure affect the performance of banks in a developing nation without financial flexibility. The study extends the existing empirical research of capital structure and seeks to close the gaps left by prior studies.
Managers – Managers of banks face difficulties in determining the optimal capital structure. The study will enlighten managers on the best financial mix in crises that can have positive relationship with performance. The process of assessing the determinants of capital structure it’s a difficult task to any bank. The research may even lay basis for more research in the field.
The government and other regulators- The study will help the government on how international regulations affect banks in developing nations. There is need to analyse if local banks are ready to adapt such requirements given available resources and the macroeconomic environment.
1.8. Delimitation
In view of the research problems under investigation, there are a number of constraints that limit the scope of the study. The study covering the period 2011- 2016 is predicated on 3 sets of boundaries.
Geographical boundaries – The research will be undertaken on banks in Zimbabwe. This is necessitated by the fact that they are under homogenous macroeconomic, regulatory and supervisory environment.
Theoretical boundaries – Key concepts and theoretical principles shall be borrowed from various disciplines ranging from capital structure theories and studies carried out on the same discipline in developed and developing nations.
1.9. Limitations of the studyThe following restrictions beyond the researchers control reduce generalization of results.

This study is dependent on secondary accounting data obtained from banks’ annual financial statements and hence, it is subject to all the limitations associated with published consolidated financial statements.

The research process faces financial challenges in printing and stationary costs

1.10. Chapter SummaryThis chapter introduced the area of study and gave a brief background of the study. The research problem, research objectives, hypothesis to be tested, justification and the scope and delimitation of the study were also presented in this chapter. The rest of this study will be organized as follows. Chapter two explains literature review, chapter three explains methodology, chapter four includes data presentation and analysis, and chapter five contains summary, conclusions and recommendations.

1.11. Definitions of terms.
Earnings Per Share (EPS) – The portion of a company’s profit allocated to each outstanding share of common stock (Arnold, 2013).

Return on equity (ROE) – A profitability ratio that measures the ability of a firm to generate profits from its shareholders investment in the company (Hove and Chidoko, 2012)
Short term debt – Current liabilities portion of a company’s balance sheet. Debt incurred by the company within one year (Ginblatt ; Tittman, 2002).

Return on assets (ROA) – Account profit earned on the project divided by the amount invested to acquire the project’s assets (Ginblatt & Tittman, 2002).

Long Term Debt – Debt obligations such as bank loans, mortgage loans or debentures which have maturities greater than one year (Arnold, 2013).
Capital Structure – How a firm finances its overall operations and growth using different sources of funds inclusive of debt and equity(Arnold, 2013)CHAPTER II
LITERATURE REVIEW
2.0. Introduction
This chapter reviews both the theoretical and empirical evidence regarding the examination of the impact of capital structure on the performance of banks. The relevant literature pertaining to the impact of capital structure on the performance of banks is organized in conceptual subjects and in turn evaluated in detail. In this chapter, the concept of capital structure will explained. Following that, the research will discuss financial performance and its interplay with capital structure. The research will also present the capital structure theories and the factors that may influence a firm’s capital structure decision. The term capital structure refers to the long term financing of a company. Essentially, the choices of financing that a company has available to it are either from an internal source, external source or a combination of the two. Internal sources of finance primarily refer to the retained earnings of a company and its working capital whilst external sources of finance consists of debt and equity. There is no universal theory of capital structure or a „one-size-fits-all? approach, but rather guidelines from established theory that is available to the financial manager to interpret, which should then enable them to make an optimal decision for the firm under their stewardship, given its circumstances (Professor Myers, 2001).

2.1. Theoretical Framework
There are a number of capital structure theories that have been put across by various authors. These include the traditional theory, the Modigliani and Miller theory, the Pecking Order theory, Efficient Market Hypothesis, Agency theory, the market timing theory, signaling theory and Trade off theory. These theories are going to be briefly discussed below.

2.1.1. Traditional theory of capital structure
Traditional theory assumes that an optimal capital structure does exist and depends on the level of gearing. The company cannot maximise wealth unless the optimal weighted average cost of capital (WACC) is achieved. Ehrhardt and Brigham (2011) point out that a firm’s financing choices obviously have a direct effect on the weighted average cost of capital (WACC). The cost of debt capital is viewed as cheaper than the cost of equity finance due to the tax benefits of debt (Atrill, 2009). This results in a firm reducing its overall cost of capital if it were to increase its levels of borrowing. However, as the level of borrowing increases so does the financial risk of the firm leading the equity shareholders to require a greater return to compensate them for the risk. This increases the cost of equity and the debt providers would also notice the increased financial risk of the firm and require a greater return for additional levels of debt provided to compensate them for the risk. Thus the cost of debt would increase at higher levels of gearing.
2.1.2. The Modigliani and Miller (MM) Capital Structure Irrelevance Theory
Modigliani and Miller’s capital structure irrelevance theory also known as the debt tax shield and non-debt is based on several assumptions. One theory assumed a non-debt tax shield or capital structure irrelevance. More or less use of debt in capital structure brings no benefits for the company. The other theory is based on existence of debt tax shield (tax benefits). This is because debt interest is tax deductible and thus composes a tax shield, the higher proportion of leverage will be of benefit to each company concerned it and it will decrease the capital cost. In this theory, Miller and Modigliani consciously neglect some debt obligations like financial distress and bankruptcy.
Modigliani and Miller proposition 1 without tax (Non- debt tax shield) was put forward in 1958 and is referred to as capital structure irrelevance proposition. Modigliani and Miller hypothesised that in a perfect market it does not matter what capital structure a company uses to finance its operations. They theorised that the market value of a firm is determined by its earning power and by the risk of its underlying assets, and that its value is independent of the way it chooses to finance its investments or distribute dividends.
Ross et al, (2011) stated that the proposition of no taxes or irrelevant proposition is the first proposition of the MM theorem in absence of taxation. It simply states that, in perfect financial markets, the value of a levered company is exactly the same as an unlevered company. The basic MM proposition 1 (1958) without tax is based on the assumptions that there are no transaction costs, no taxes, no bankruptcy costs, equivalence in borrowing costs for both companies and investors, symmetry of market information, meaning companies and investors has the same information and no effect of debt on a company’s earnings before interest and taxes
Modigliani and Miller proposition II with tax (Debt tax shield)
According to Malm & Roslund (2013), when MM introduced taxes into their proposition in 1963 the result was altered. It was shown that it was beneficial for firms to include debt in their capital structure. Firms that are partly financed by debt can deduct the interest it pays on its debt, from the tax it has to pay on its income as MM (1958). It creates a higher total value for a firm that is financed with debt and equity, a leveraged firm, than for a firm that is financed only with equity, an unleveraged firm. The value of firm is equal to the value of the firm’s cash flow with no debt tax shield which is the value of an all equity firm plus the present value of tax shield in the case of perpetual cash flows.
According to Miller and Modigliani (1963) preposition of debt tax shield, the tax shield allows corporations to deduct interest payments as an expense, but dividend payments to stockholders are not deductible. The differential treatment encourages corporations to use debt in their capital structures. This means that interest payments reduce the taxes paid by a corporation, and if a corporation pays less to the government then more of its cash flow is available for its investors. In other words, the tax deductibility of the interest payments shields the firm’s pre-tax income.
One of the main limitations of the MM capital irrelevance theory (1958) is on the fact that it does not take into consideration debt obligations such as financial distress and bankruptcy. This proposition made by Miller and Modigliani in 1963 of debt tax shield is applicable in Zimbabwe as many banking institutions in the country are largely financed by debt and also include debt in their capital structure. According to the MM’s theory (1958) of Non-Debt tax shield banks financed by debt can deduct the interest they pay on their debt, from the tax they have to pay on their income.
2.1.3. The Trade-off Theory
This theory originated from the study of Kraus and Litzenberger (1973), who formally introduced the interest tax shields associated with debt and the costs of financial distress into a state preference model and the major proponent who developed this theory was Myers in 1984 who argued that managers attempt to balance the benefits of interest tax shields against the present value of the possible costs of financial distress. According to Dittmar (2004) the trade- off theory of capital structure refers to the idea that a company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits. This theory mainly refers to the two concepts which are the cost of financial distress and agency costs. Often agency costs are also included in the balance. The theory is often set up as a competitor theory to the pecking order theory of capital structure.
MM I states that in a perfect capital market it is irrelevant how a firm chooses to raise finance as the financing decision has no impact on firm value. However, capital markets are imperfect and the existence of bankruptcy costs, taxes and agency costs imply that MM I does not apply in reality. Modigliani and Miller then followed up their article in 1963 and introduced corporate taxes and suggested that to achieve maximum value a firm should have 100% debt. The environment in which a firm operates, taxes, bankruptcy costs, agency costs, asymmetric information as well as non-debt tax credits restricts a firm from using 100% debt, thus the solution provided by MM II seems too extreme in reality. In reality, bankruptcy costs can be quite onerous and can be incurred not only when bankruptcy proceedings are in process, but also when the threat of bankruptcy is imminent. Firms that are experiencing bankruptcy issues have high legal and accounting related expenses, costs of debt covenants as well as the potential loss of clients/suppliers, impaired ability to conduct business. The trade-off theory attempts to incorporate the costs of financial distress into the capital structure decision.

According to Murray (2005) an important purpose of this theory is to explain the fact that corporations usually are financed partly with debt and partly with equity. Myers (1984) stated that there is an advantage to financing with debt, the tax benefits of debt and there is a cost of financing with debt, the costs of financial distress including bankruptcy costs of debt and non- bankruptcy costs such as staff leaving, suppliers demanding disadvantageous payment terms and bondholder. The marginal benefit of further increases in debt declines as debt increases while the marginal cost increases, so that a firm that is optimizing its overall value will focus on this trade off when choosing how much debt and equity to use for financing.
2.1.4. The Pecking Order Theory
This theory was propounded by Myers and Majluf (1984) and argues that firms follow a financing hierarchy to minimise the problem of information asymmetry between the firm’s managers, insiders and outsider’s shareholders. According to Ehrhardt ; Brigham (2011), the firm first raises capital internally by reinvesting its net income and selling its short term marketable securities. When that supply of funds has been exhausted, the firm will issue debt and perhaps preferred stock. Only as a last resort, the firm will issue common stock.
Myer (1984) stated that companies show a distinct preference for utilizing internal finance such as retained earnings or excess liquid assets over external finance. If internal funds are insufficient to finance investment opportunities, a company might source external finance in a manner as to minimize additional costs. This theory further regards the market to book ratio as a way of measuring investment opportunities.
According to Ehrhardt ; Brigham (2011), the pecking order theory states that companies seeking to finance a new project or product have a hierarchy of preferred financing options which goes from the most preferred to the least preferred. The sources in order of preference are as follows:
Internal funding
Debt issuance
Debt to equity hybrid securities
Equity issuance
The reasons why firms have that order of preference have to do with asymmetric information. Asymmetric information occurs because managers have more information than the shareholders about the state of the firm and how well it is doing. The result is therefore that the shareholders will base their belief on the firm’s future on the manager’s actions. The manager’s actions are believed to signal information about the state of the firm. Malm & Roslund (2013) stated that issuing shares sends a message that the shares are overvalued, whereas issuing debt does not send any message. Managers will only issue shares when they are overvalued in order to protect the interests of existing shareholders. Issuing underpriced shares would actually result in the transfer of wealth from old to new shareholders. Since the market is aware of this, an issue of shares by a firm will thus be construed as a signal that the shares are overvalued, or as bad information about an issuing firms? quality. Internal funds and debt involve little or no undervaluation or information costs and therefore will be preferred to equity by firms in this situation. In other words, management prefer internal funds to external funds and if there is any need for external funds they will go for debt rather than equity. Myers refers to this behaviour as the “pecking order” theory of financing. According to Malm and Roslund (2013) the main implication of this theory is that there is a negative relationship between firm profitability and debt ratio.
2.1.5. Signaling Theory
This is another theory postulated out of the concept of asymmetric information. It was first coined by Ross (1977) who posits that if managers have inside information, their choice of capital structure will signal information to the market. Managers often have better information than outside investors, and this has an effect on the optimal capital structure. Signalling theory states that corporate financial decisions are signals sent by the company’s managers to investors in order to shake up these asymmetries. Ross argued that the value of a firm will increase with the addition of leverage as the increased leverage causes the market’s perception of the firm’s value to improve. Ross also stated that the increasing of leverage can be a costly signal for a firm. A good firm would adopt a higher debt ratio than a poor firm as the manager of a good firm would be confident of the future prospects of the good firm due to insider information of the good firm’s future prospects and its ability to safely service higher debt payments. Also, there is an incentive for managers of large corporate to convey signals such that the value of the firm would increase, but may not always convey the correct message to the market regarding the firms prospects, but rather convey messages to the managers? benefit.
According to Gangeni (2006), the argument is that management will only issue debt or equity if there are not enough internal resources to finance the desired investments or the risk is not in line with the anticipated returns. In this case, the emphasis will be on identifying what trends in the type, level and reliability of the information supplied. Managers would not issue additional equity if they think that the current stock price was less than the true value of the stock given their inside information and thus investors often perceive an additional issuance of stock as a negative signal, and the stock price falls (Gangeni, 2006). The implication of the signaling theory is that corporate managers will attempt to time equity issues based on the market’s assessment of their shares. The capital structure of a firm is the cumulative result of corporate managers’ past attempts to time the market.
2.1.6. Agency Cost Theories
The agency cost theory of capital structure emanates from the principal-agent relationship
(Jensen and Meckling, 1976). In modern corporations there is a separation of ownership and control where most firms are managed by managers who act as agents of shareholders. These managers do not necessarily own shares in the firm and as such this relationship is fraught with agency problems. Jensen and Meckling (1976) argue that, managers do not always pursue shareholders interest. They may be inclined to misuse company funds by incurring huge on the job expenses (Gwatidzo, 2008).
According to the agency theory, the observed capital structure of a firm should thus aim to minimize the potential for opportunistic behaviour in the firm. The extent of opportunistic behaviour depends on the environment in which the firm is operating. The Agency cost theory suggests that leveed firms are better for shareholders as debt can be used to monitor managerial behavior (Crawther 2009). Thus, higher leverage is expected to lower agency cost, reduce managerial inefficiency and thereby enhancing firm and managerial performance.
2.1.7. Market Timing Theory
This theory of capital structure was propounded by Baker and Wurgler (2002). They argued that in corporate finance, the intention of equity market timing is to exploit temporary fluctuations in the cost of equity relative to the cost of other forms of capital. Baker and Wurgler explained that a firm’s current capital structure is merely the result of all historical attempts to time the equity market. Managers would look at conditions in the debt and equity markets and issue either debt or equity based on which was more favourable at the time. At times when conditions are favourable additional finance may be raised to exploit the favourable circumstances even if there were no immediate projects that warranted such finance (Frank ; Goyal, 2009).
In the efficient and integrated capital markets studied by Miller and Modigliani (1958), the costs of different forms of capital do not vary independently, so there is no gain from opportunistically switching between equity and debt. In capital markets that are inefficient or segmented, by contrast, market timing benefits on-going shareholders at the expense of entering and exiting ones. Managers thus have incentives to time the market if they think it is possible and if they care more about on-going shareholders. Management would tend to only issue shares when the prices of their shares are high, issue cost is low and the firm’s cost of equity is relatively lower than debt. Conversely, when the value of a firm’s equity is low, management may seek to raise finance with the issuance of debt and may seek to repurchase their equity.

Baker ; Wurgler (2002) assumed that managers, depending on their definition of firm value, tend to issue equity when they feel that the market overvalues their company. Market timing is sometimes classified as part of the behavioural finance literature, because it does not explain why there would be any asset mispricing, or why firms would be better able to tell when there was mispricing than financial markets. Baker and Wurgler provided evidence that equity market timing has a persistent effect on the capital structure of the firm. They defined a market timing measure, which is a weighted average of external capital needs over the past few years, where the weights used are market to book values of the firm. Their findings was that leverage changes are strongly and positively related to the market timing measure and thus they concluded that the capital structure of a firm is the cumulative outcome of past attempts to time the equity market.
2.2. Indicators of Bank Performance
2.2.1. Return on Assets (ROA)
According to Gitman and Zutter (2012), ROA measures the overall effectiveness of management in generating profits with its available assets. ROA is a measure that is commonly used to measure the profitability of a firm’s operations. It will therefore be used in the regression model as a measure of financial performance. It can be depicted by the following formula:
ROA= Earnings before Interest and Tax/Total Assets
ROA measures how profitable the firm is in terms of its assets. As mentioned above, it also indicates the overall financial health of a firm. ROA is a good measure to use to evaluate a firm’s financial performance (Gitman and Zutter, 2012).
2.2.2. Return on Equity (ROE)
According to Gitman and Zutter (2012), ROE shows the income generated for the shareholder’s by the equity, which is the financing provided by the shareholders. The ROE measures the return earned on the stockholders’ investment in the firm. ROE is calculated as follows according to Lindow (2013):
ROE=Earnings before Interest and Tax/Shareholders’ Equity
Return on equity is an alternative measure of overall bank performance and is a common measure of the return to shareholders from the investments made in the firm. It measures how well management is attaining the goal of owner wealth maximization. Madura (2008) defines this ratio as net income divided by total shareholders’ equity. Like ROA, ROE indicates managerial efficiency but in this case, in utilizing investor’s funds.
2.2.3. Return on Investment (ROI)
Return on Investment or Return on Capital Employed (ROCE) is generally regarded as the key performance measure. The main reason for its widespread use is that it ties in directly with the accounting process, and is identifiable from the income statement and balance sheet. ROI show how much profit has been made in relation to the amount of capital invested and it is calculated as the follow according to ACCA Study Text for Paper F9 Financial Management (2009, Pp.18) :
ROI= Earnings before Interest and Tax/Capital Employed
In addition, ROI conveys the return on invested capital from the different perspectives of contributors including creditors and shareholders. Therefore, ROI is a popular measurement of corporate performance because it contrasts the net income generated with the total value of assets under management control. Consequently, it shows the effectiveness of management in terms of utilizing firm assets and its power to create shareholder value (Gansuwan and Önel, 2012).
2.2.4. Debt Ratio
According to Gitman and Zutter (2012), the ratio of total liabilities to total assets is called the debt ratio, or sometimes the total debt ratio. It measures the percentage of funds provided by sources other than equity:
Debt Ratio=Total Liabilities/Total Assets
According to Ehrhardt & Brigham (2011) assets can include both tangible which is made up of property, plant and equipment and intangible which include patents and trademarks resources. On the liability side, this ratio normally includes both short- term and long-term debt. A lower debt ratio indicates that a company relies less on borrowing as compared to equity for financing its assets. Generally, the lower the debt to-assets ratio the better, but acceptable levels will vary across industries and companies. Larger, stable and more established companies can take on more debt without adding too much risk for investors.
2.3. Empirical Literature ReviewDube (2013) carried out an investigation on the impact of debt finance on the productivity of small to medium enterprises in Masvingo urban covering the period 2009 to 2012. The researcher used both qualitative and quantitative research designs in the study and a sample of 80 SMEs was selected. Primary data was collected by means of a survey. Secondary data from SMEs records was used in the study. The results from the study showed that debt finance had a positive impact on productivity of SMEs. He also established that firms which received adequate funding from banks improved their productivity. Another finding of the study was that the cost of borrowing was too high to enable firms to borrow adequate amount of required finance investment. The study concluded that a reasonable level of debt in the capital structure of the SMEs helped to improve their productivity.

Fosu (2013) did a research in South Africa which investigated the relationship between capital structure and corporate performance paying particular attention to the degree of competition. The paper examined the extent to which the relationship between capital structure and corporate performance depended on the level of product market competition. The findings from the research showed that there was positive relationship between capital structure and corporate performance. The study also found out that product market competition enhanced the performance effect of leverage. Booth et al. (2001) evaluates the determinants capital structure theory across countries with diverse institutional structures. They collected data from 10 developing and the G7 countries between 1980 and 1991, and concluded that there is a constant relationship between profitability, asset tangibility, growth options and leverage for each country. The ten developing countries studied included Zimbabwe.
Zhanje and Kwesu (2003) also stresses that traditional theory like the Net income approach which assumes that an optimal capital structure does exist and depends on the level of gearing. The argument is based on the reasoning that since interest on debt is tax deductible, as debt is moderately increased, the weighted average cost of capital falls leading to an increase in the value of the firm. The weighted average cost of debt will fall because the moderate increase in debt does not increase the overall risk of the firm and hence the shareholders will not increase their required rate of return. However, as more and more debt is employed, an optimal point will be reached. Any further increase in the debt ratio result in an increase in weighted average cost of capital as the overall risk of the firm is increased and the shareholders will ask for an increase in the required rate of return on capital.

David and Olorumfemi (2010) concluded that as the ratio of debt in a firm’s capital structure is increased, the overall cost of capital will be reduced and the value of the firm increased. They went on to state that as the ratio of debt is increased in the capital structure the weighted average cost of capital (WACC) falls and approaches the cost of debt. They also affirms the Net Income approach which assumes that an optimum capital structure exists and will be attained when the value of the firm is maximised. This occurs when the weighted average cost of capital is at its minimum.
Cecchetti et al. (2011) studied the effects of debt on firms and concluded that moderate debt level improves welfare and enhances growth but high levels can lead to a decline in growth of the firm. Cecchetti et al based their study on eighteen (18) OECD countries for the period 1980 – 2010. They grouped data into private debt for a large number of industrial countries as well as its breakdown non-financial corporate and household debt. They began by looking at the relationship between debt and growth, in terms of both level and volatility. They concluded that beyond certain levels, which they placed at 90% , debt is bad for growth.
Rainhart and Rogoff (2009) in their assessment on the aftermath of financial crisis in rich countries and emerging markets argued that debt impacted positively to the growth of a firm only when it is within certain levels. They grouped countries into developed economies (special emphasis on the big five) and the emerging markets (Asia mainly) and compared the depth and duration of the crisis. They stated that when the ratio of amount of debt and growth of the firm goes beyond certain levels financial crisis is very likely. The argument is also supported by Stern Stewart and Company which argues that a high level of debt increases the probability of a firm facing financial distress. Over borrowing can lead to bankruptcy and financial ruin (Cecchetti et al., 2011). High levels of debt will constrain the firm from undertaking project that are likely to be profitable because of the inability to attract more debt from financial institutions.
Jaramillo and Schiantarelli (2002) carried out a research titled, “Access to Long Term Debt and Effects on Firms’ Performance: Lessons from Ecuador” in the 1980s and 1990s. The researchers used a two panel data set on firms assessing their access to loans against their characteristics. They concluded that the availability of long-term finance allows firms to improve their productivity. The nature of debt is an important determinant of productivity of a firm. If a firm has access to long-term debt finance, it can invest in new capital and equipment which helps to increase productivity. According to Marcouse et al. (2003), by investing in more modern and sophisticated machines, productivity per worker increases. Ventire et al. (2004) adds that modern know-how fuels greater output per unit of effort. The firm can also invest in new technologies which are more productive. The inability to access long-term finance can force firms to use short-term debt to finance long-term projects. This will create mismatches of assets and liabilities and depletes working capital. Depletion of working capital will negatively affect firm operations. It is crucial that the primary source of loan repayments should be cash flows from the project.

Umar et al (2012) examined the impact of capital structure on financial performance of Pakistan’s top 100 companies listed on Karachi Stock Exchange for the period of 2006-2009. Exponential generalized least square regression was used to test the relationship. The results showed that all the three variables of capital structure, Short term Debt to Total Assets (STDTA), Long- term Debt to Total Assets (LTDTA), and Total Debt to Total Assets (TDTA), have negative impact on the Earnings before Interest and Tax (EBIT), Return On Asset (ROA), EPS and Net Profit Margin whereas Price Earnings ratio showed negative relationship with STDTA and positive relationship was found with LTDTA where the relationship is insignificant with, TDTA. The results also indicated that Return on Equity (ROE) has an insignificant impact on STDTA and TDTA but a positive relationship exists with LTDTA.
Salim and Yadav (2012) investigated the relationship between capital structure and firms’ performance using panel data model for a sample of 237 Malaysian listed companies on the Bursa Malaysia Stock exchange during 1995 to 2011. The study used four performance measures including return on equity, return on asset, Tobin’s Q and earning per shares as dependent variable. The five capital structure measures including long term debt, short term debt, total debt ratios and growth were used as independent variables. Size was also used as a control variable. The results indicated that firm performance, which is measured by return on asset (ROA), return on Equity( ROE) and earning per share (EPS) had negative relationship with short term debt (STD) ,long term debt (LTD),total debt (TD), as independent variable. Moreover, there was a positive relationship between the growth and performance for all the sectors. The results also indicated that capital structure was significant and positive associated with firm performance which is measured by Tobin’s Q.
Goyal (2013) studied the impact of capital structure on profitability of public sector banks in India listed on national stock exchange during 2008 to 2012. Linear regression analysis was used for establishing relationship between ROE, ROA and EPS with capital structure. The findings revealed positive relationship of STDTA with profitability as measured by ROE, ROA and EPS. Taani (2013) examined the impact of capital structure on performance of Jordanian banks. Data from the annual financial statements of 12 commercial banks listed on Amman Stock Exchange were used which covers a period from 2007 to 2011. Non- linear regression model was applied on performance indicators such as Net Profit, Return on Capital Employed, ROE and Net Interest Margin as well as Total Debt to Total Funds and Total Debt to Total Equity as capital structure variables. The results showed that bank performance was significant and positively associated with TD; while TD was found to be insignificant in determining ROE in the banking industry of Jordan.
Victor and Badu (2013) analysed the relationship between capital structure and performance of listed banks in Ghana from 2000 to 2010. Data was collected from Ghana Stock Exchange and annual reports. Panel regression methodology was used to analyse the data. The results showed that the banks were highly geared, negatively affecting their performance. Banks relied heavily on short term debt granted by the Bank of Ghana which attracted high lending rates. Banks experienced low profits because of high cost of funding.
Twairesh (2014) investigated the impact of capital structure on the performance of non-financial firms operating in Saudi Arabia as one of the emerging or transition economies. Panel econometric technique was used for the period 2004 to 2012 to analyse data. Sample data included 74 companies. The study analyzed the relationship between capital structure proxies that include STDTA, LTDTA and TDTA and the operating performance measured by ROA and ROE. The firm’s size was used as a control variable. The findings of the study were that STDTA, LTDTA and TDTA had significant impact on ROA while only LTDTA had significant impact on ROE. Firm size had significant impact on firm performance when ROA is a dependent variable.
Hasan et al. (2014) studied the influence of capital structure on firm performance based on 36 Bangladeshi firms listed in Dhaka Stock Exchange during the period 2007–2012. The study used four performance measures which included EPS, ROE, ROA and Tobin’s Q; as dependent variables and three capital structure ratios; STDTA, LTDTA and TDTA ratios; as independent variables. Using panel data regression method, the study found that EPS is significant positively related to STDTA while significant negatively related to LTDTA. There was significant negative relation between ROA and capital structure. On the other hand, there was no statistically significant relation that existed between capital structure and firm’s performance as measured by ROE and Tobin’s Q.
Seetanah et al. (2014) assessed the impact of capital structure on performance of Mauritian firms listed on the Official Market of the Stock Exchange of Mauritius for the period 2005-2011. The study employed both static and dynamic panel data techniques to identify the determinants of firm performance. The results indicated that the main determinants of firm performance are capital structure, firm size, business risk and exchange rates. Growth opportunities, free cash flow, age of the firm and price of oil were found to have insignificant influence on firm performance. Firm performance was observed to be negatively related to capital structure indicating that firms with lower leverage have better performance thereby supporting the pecking order theory.
Sorrana (2015) investigated the impact of capital structure on financial performance in 196 Romanian companies listed on the Bucharest Stock Exchange and operating in the manufacturing sector, over a period of eight-years (2003 to 2010). The capital structure indicators included long-term debt, short-term debt; total debt and total equity, while return on assets and return on equity were used as the performance proxies. Results indicated that performance in Romanian companies is higher when they avoid debt and operate based on equity. The results also showed that the shareholders’ equity had a positive impact on performance indicators, while total debt and short-term debt had negative relationships with ROA and ROE.
2.4 SummaryThis chapter explored both theoretical and empirical literature review on the effect of capital structure on the performance of banks. Most researchers mainly concentrated on debt financing and its effects on performance of firms. A greater number of these researchers concurred that debt finance is useful up to a certain limit after which it becomes too costly. Limited study was available relating specifically to banks. The next chapter will discuss how data on the current study was collected for analysis.
CHAPTER IIIRESEARCH METHODOLOGY3.1 Introduction
This chapter discusses the research methodology of the study. This include description of the study area, research design, and sampling procedures. The research instruments, data collection techniques and data analysis procedure are also discussed.

3.2 Research Design
This section discusses the research approach adopted to answer the research questions. John W. Creswell (2014) defines research design as plans and the procedures for research that span the steps from broad assumptions to detailed methods of data collection, analysis, and interpretation. The overall decision involves which approach should be adopted to study a topic. Bryman (2004) defines research approach as the overall plan for a research, which guides the collecting and analysing of data evidence in such a manner that makes it possible for the research questions to be answered.
A descriptive survey design was used in this study. A quantitative approach employs quantitative measurement using different statistical tools (Gillham,2000). It is an approach for testing objective theories by examining the relationship among variables. These variables, in turn, can be measured, typically on instruments, so that numbered data can be analysed using statistical procedures (J.W. Creswell, 2014). The approach is believed to provide stronger forms of measurement and establish more reliability and the ability to generalise the results (Bryman, 2001). The approach can also deal with a large number of samples within a shorter period of time (Berg, 2001).In this case, the relationship between capital structure and financial performance of all commercial banks was determined by having the dependent variable as the financial performance while the independent variables representing capital structure were the Long-term debt to Total assets ratio and the Short-term debt to Total Assets Ratio.
3.3 Population
The population of this study consisted of all commercial banks in Bulawayo, Zimbabwe over the period of 2012 to 2016. There were sixteen (16) registered commercial banks in Bulawayo in 2016 and all of them made the survey population.

3.4 Sample and Sampling Procedure
From the population of commercial banks in Bulawayo, the researcher picked nine (9) banks using stratified sampling. Banks were chosen as to include foreign banks, indigenous banks and state owned banks. The list of the studied banks is given on table 3.1 below;
Table 3.1. List of survey banks
Bank Number of branches Ownership
1. ABC 1 Foreign
2.Agribank 3 government
3. Barclays 2 Foreign
4. CBZ 5 government
5. FBC 2 Private indigenous
6.MBCA 2 Foreign
7. NMB 2 foreign
7.Stanbic 1 Foreign
10.ZB 2 Private Indigenous
Source: Own compilation
3.5 Data Collection
The data which was used in this study was secondary data which was collected from the annual reports of the various banks over the s period. In this research panel data was used to explore, in detail, the capital structure and financial performance of the selected commercial banks over the five years.
3.6 Data Analysis
The term data analysis refers to computation of certain statistical measures or indices along with searching for patterns of relationships that exist among data groups (Choga and Njaya, 2013). It involves estimating the values of unknown parameters of the population and testing of hypotheses for drawing inferences. Data analysis thus can be divided into two, namely descriptive analysis and inferential analysis. A descriptive analysis was chosen for this study as it was considered the best method of explaining relationships betheen the dependent and independent variables. Multiple Regression analysis was used to analyse the data that using Eviews version 8. Data was analysed using descriptive statistics such as mean, range and variance.
3.6.1 Analytical Model
The models was developed using return on equity (ROE), capital adequacy ratio (CAR), and cost to income ratio (CITR) as dependent variables. Long-term debt to total assets (LTDA), and short-term debt to total assets (STDA) were used as independent variables.
The model was constructed into a linear equation:
Yit = B0 + B1 LTDTA + B2 STDTA + µ
Where
Y = ROE; CAR and CITR.
B0 = Is the intercept, i.e., factor affecting performance when X is zero
µ = Random error term
B1, B2, = Coefficients of the variables
The various variables were extracted from the financial reports of the various banks under study for the period 2012 to 2016.
3.7. Variables3.7.1. The independent variables.Long-term debt to total assets ratio= Long-term debtx 100
Total assets
This represents the proportion of total assets that was acquired using debt financing. A higher proportion shows that most assets of the bank are used as collateral and the bank’s profitability is reduced because of high interests paid in servicing the debt.

Short-term debt to total assets ratio = Short-term debtx 100
Total assets
It shows the percentage of the total assets linked to the short-term liabilities of the bank. It is interpreted in a similar manner as the Long-term debt to total assets. Short-term debt of the bank is mainly made up of deposits by customers.

3.8. Methods of measuring performance3.8.1. Capital Adequacy Ratio (CAR)
This is the ratio of a bank’s is the ratio of a bank’s capital to its risk. The Reserve Bank of Zimbabwe regulators track a bank’s CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements. This ratio is used to protect depositors and promote stability and efficiency of financial systems around the world. It is expressed as a percentage of a bank’s risk weighted credit exposures.

Two types of capital are measured, that is, tier one capital and tier two capital. Tier one capital is used to absorb losses without a bank being required to cease trading and tier two capital can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Tier 1 capital = (paid up capital + statutory reserves + disclosed free reserves) – (equity investments in subsidiary + intangible assets + current ; brought-forward losses)
Tier 2 capital = A) Undisclosed Reserves + B) General Loss reserves + C) hybrid debt capital instruments and subordinated debts.

Capital adequacy ratio= Tier 1 capital + Tier 2 capital
Risk weighted exposures
{displaystyle {mbox{CAR}}={cfrac {mbox{Tier 1 capital + Tier 2 capital}}{mbox{Risk weighted assets}}}}Where Risk can either be weighted assets {displaystyle ,a}or the respective national regulator’s minimum total capital requirement. The percent threshold varies from bank to bank and is set by the
The reason why minimum capital adequacy ratios are critical is to make sure that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent and consequently lose depositors’ funds. Capital adequacy ratios ensure the efficiency and stability of a nation’s financial system by lowering the risk of banks becoming insolvent. If a bank is declared insolvent, this shakes the confidence in the financial system and unsettles the entire financial market system.

3.8.2. Cost-to-income ratio.It is equal to a company’s operating costs divided by its operating income. The cost-to-income ratio shows the efficiency of a firm in minimizing costs while increasing profits. The lower the cost-to-income ratio, the more efficient the firm is running. The higher the ratio, the less efficient management is at reducing costs.

Cost to income ratio= Total costx 100
Total Income
3.8.3. Return on Equity (ROE)
The return on equity is similar to ROA but specifically measures the profitability of a firm in relation to the equity it utilises to generate that profit. It is calculated as:
Return on Equity (ROE)= Profit after tax and preference dividendx 100
Shareholders’ equity
3.9 ConclusionThis chapter looked at the research design, the methods used to collect and present data highlighting the reasons for choosing the methods. A descriptive design was chosen as the researcher sought to determine the relationship between the dependent and independent variables. The CAR, CITR and ROE were used as dependent variables while LTDTA and STDTA were the independent variables. The next chapter will focus on data presentation, analysis and discussion.

CHAPTER IVDATA PRESENTATION, ANALYSIS AND DISCUSSION4.1. IntroductionThis Chapter provides the findings obtained from the study. The findings are presented, analysed and discussed in line with the objectives of the study and the research questions articulated in Chapter One. The study was intended to examine the impact of capital structure on performance of banks in Zimbabwe. Nine (9) banks were studied over a period of five (5) years from 2012 to 2016. Table 4.1below shows the studied banks in alphabetical order.

Table 4.1. List of banks selected for study
Bank Ownership Branches
1. ABC Private Foreign 1
2. AgribankGovernment 2
3. Barclays Foreign 2
4.CBZ Government 5
5.FBC Private Local 3
6. MBCA Private Foreign 2
7. NMB Private Local 1
8. StanbicPrivate Foreign 1
9. ZB Private Local 4
4.2. Diagnosis TestsTable 4.2. Correlation test results
LTDTA STDTA
LTDTA  1.000000  0.061826
STDTA  0.061826  1.000000
A correlation test was performed in order to find out if there was no multi co-linearity between the independent variables. As evident from table 4.2 above the correlation coefficient of short-term debt and long-term debt is 0.0618, which is a very low indicator of multi co-linearity. Both variables could be used together on a regression equation without affecting the reliability of the outcome.
4.2.2. Fixed or Random effect testA Hausman test was carried out on each of the dependent variables in order to select between using a fixed effect model or random effect model. This test the null hypothesis which says that the random effects model should be adopted and the alternate hypothesis which says the null hypothesis be rejected. A p-value of less than 0.05 means that the random effect is not appropriate for the study.
4.3. Capital structure and ROETable 4.3.Hausman test (ROE)
Correlated Random Effects – Hausman Test Equation: EQ01 Test cross-section random effects Test Summary Chi-Sq. Statistic Chi-Sq. d.f.Prob. 
Cross-section random 7.905651 2 0.0192
Cross-section random effects test comparisons:
Variable Fixed   Random  Var(Diff.)  Prob. 
LTDTA 0.272847 0.119363 0.003631 0.0109
STDTA -1.438081 -0.108171 0.223742 0.0049
Source: Analysis results
The Hausman test results reveals that the random effect should not be used as the p-value was 0, 0192 which is less than the standard of at least 0.05. This means that if the random effects regression analysis is used, the independent variables will have a very insignificant effect on the dependent variable. The regression analysis was carried out and the following table shows the results.

Table 4.4. Regression analysis (ROE)
Dependent Variable: ROE Method: Panel Least Squares Date: 05/08/18 Time: 08:26 Sample: 2012 2016 Periods included: 5 Cross-sections included: 9 Total panel (balanced) observations: 45 Variable Coefficient Std. Error t-Statistic Prob.  
C -0.478283 0.272502 -1.755158 0.0865
LTDTA 0.022064 0.124595 0.177085 0.8603
STDTA 0.775213 0.349177 2.220119 0.0319
R-squared 0.106917     Mean dependent var0.129353
Adjusted R-squared 0.064390     S.D. dependent var0.098900
S.E. of regression 0.095663     Akaike info criterion -1.791629
Sum squared resid0.384360     Schwarz criterion -1.671185
Log likelihood 43.31165     Hannan-Quinn criter. -1.746728
F-statistic 2.514060     Durbin-Watson stat 1.190766
Prob(F-statistic) 0.093052 Source: Analysis results
On the above analysis, the “C” value is a negative (-0.478), with a probability of 0.576. LTDTA influences 0.119 of the return on equity and STDTA shows a negative relationship with a coefficient of -0.108. The probability of the predictions of the “C is 0.576, that of the LTDTA is 0.299 and 0.816 for STDTA.
The “Std. Error” column reports the estimated standard errors of the coefficient estimates. The standard errors measure the statistical reliability of the coefficient estimates, the larger the standard errors, the more statistical noise in the estimates. The standard error of 0.356 for the ‘C’ value, 0.46 for the STDTA coefficient and 0.11 for the LTDTA. The R2 shows the success of the above equation in predicting the dependent variable and it was 0.09 which figure is too small to rely on as reasonable indicator of the influence of the independent variables on the dependent.

4.4. Capital structure and CARCapital adequacy ratio indicates the amount proportion of money available to the banks to pay off their liabilities in the event of liquidation.
Figure 4.5. Hausman Test (CAR)
Correlated Random Effects – Hausman Test Equation: EQ02CAR Test cross-section random effects Test Summary Chi-Sq. Statistic Chi-Sq. d.f.Prob. 
Cross-section random 2.612194 2 0.2709
Cross-section random effects test comparisons:
Variable Fixed   Random  Var(Diff.)  Prob. 
LTDTA 0.069524 0.035989 0.001395 0.3693
STDTA -0.028843 0.440176 0.109918 0.1572
Source: Analysis results
The results of the Hausman test performed above produced a p-value of 0.27 which supports the use of the random effect model. The p-value must be at least 0.05 for the null hypothesis to be accepted. After the Hausman, a regression analysis was then carried out and the outcome is shown in table 4.6 below.
Table 4.6. Regression analysis (CAR)
Dependent Variable: CAR Method: Panel Least Squares Date: 05/08/18 Time: 11:40 Sample: 2012 2016 Periods included: 5 Cross-sections included: 9 Total panel (balanced) observations: 45 Variable Coefficient Std. Error t-Statistic Prob.  
C -0.495580 0.205851 -2.407470 0.0205
LTDTA 0.052898 0.094120 0.562021 0.5771
STDTA 0.847588 0.263772 3.213333 0.0025
R-squared 0.206145     Mean dependent var0.171878
Adjusted R-squared 0.168342     S.D. dependent var0.079242
S.E. of regression 0.072265     Akaike info criterion -2.352613
Sum squared resid0.219334     Schwarz criterion -2.232169
Log likelihood 55.93379     Hannan-Quinn criter. -2.307712
F-statistic 5.453188     Durbin-Watson stat 1.158732
Prob(F-statistic) 0.007845 Source: Analysis results
As indicated on table 4.6 below, the C value of the regression is -0.496, LTDTA has a coefficient of 0.052 and STDTA had a significant proportion of 0.848 which shows a strong relationship between STDTA and CAR. The standard error of the STDTA coefficient was 0.26 and 0.094 for the LTDTA. Thus the prediction of the LTDTA could be safely relied upon with that of the STDTA having to be treated with precaution. The R2 was considerably low at 0.206 indicating a weak reliability of the outcome of the analysis.
4.4. Cost to Income Ratio (CTIR)Table 4.7. Hausman Test (CITR)
Correlated Random Effects – Hausman Test Equation: EQ02CITR Test cross-section random effects Test Summary Chi-Sq. Statistic Chi-Sq. d.f.Prob. 
Cross-section random 3.335800 2 0.1886
Cross-section random effects test comparisons:
Variable Fixed   Random  Var(Diff.)  Prob. 
LTDTA -0.133629 -0.066025 0.001543 0.0852
STDTA 0.704060 0.126666 0.100067 0.0680
Source: Analysis results
The test on reliability of the equation represented on table 4.7 above reveals a p-value of 0.18 and thus the null hypothesis should be accepted. Thus a random effects regression analysis was then carried out to determine the relationship of the capital structure variables on the cost to income ratio.

Table 4.8. Regression analysis (CTIR)
Dependent Variable: CTIR Method: Panel Least Squares Date: 05/08/18 Time: 11:44 Sample: 2012 2016 Periods included: 5 Cross-sections included: 9 Total panel (balanced) observations: 45 Variable Coefficient Std. Error t-Statistic Prob.  
C 1.686462 0.342166 4.928789 0.0000
LTDTA 0.047431 0.156447 0.303178 0.7633
STDTA -1.156393 0.438442 -2.637505 0.0117
R-squared 0.142440     Mean dependent var0.788678
Adjusted R-squared 0.101603     S.D. dependent var0.126729
S.E. of regression 0.120119     Akaike info criterion -1.336329
Sum squared resid0.605999     Schwarz criterion -1.215885
Log likelihood 33.06740     Hannan-Quinn criter. -1.291429
F-statistic 3.488068     Durbin-Watson stat 0.754924
Prob(F-statistic) 0.039679 Source: Analysis results
A random effects regression analysis was then carried out to determine the relationship between CTIR and the Short-term debt and Long-term debt. This indicated an intercept value of 1.686. The Long-term debt to total assets had a negative coefficient of is 0.047 and STDTA has -1.156. The standard error of the STDTA coefficient was 0.438 and 0.156 for the LTDTA. The R2 of the regression equation for CITR was 0.14 which indicates a fairly weak reliability of the equation as a predictor of the relationship between the independent and the dependent variables.4.5. Discussion of findingsFor the simple linear models, the coefficient measures the marginal contribution of the independent variable to the dependent variable, holding all other variables fixed. The “C” value included in the list of regressors has a coefficient showing the constant or intercept in the regression, that is, the base level of the prediction when all of the other independent variables are zero. The other coefficients are interpreted as the slope of the relation between the corresponding independent variable and the dependent variable, assuming all other variables do not change.

Analysis of the effects of long-term debt and short-term debt to the return on equity was found to be an intercept of -0.478, LTDTA coefficient of 0.022 and STDTA coefficient of 0.775. This shows a very insignificant effect of LTDTA on ROE whereas the STDTA have a very high influence on ROE. The intercept of regression analysis for CAR was -0.496 with the LTDTA having a coefficient of 0.052 and the one for STDTA was 0.848. This also indicates a very weak relationship between LTDTA and CAR with a very significant relationship between STDTA and CAR. CITR regression analysis produced different similar results with regards to LTDTA which had a coefficient of 0.047 but had a negative coefficient of -1.156 and the intercept was a positive 1.69.

The R-squared (R2) statistic measures the success of the regression in predicting the values of the dependent variable within the sample. This may be interpreted as the fraction of the variance of the dependent variable explained by the independent variables. The statistic will equal one if the regression fits perfectly, and zero if it fits no better than the simple mean of the dependent variable.

4.6. Chapter SummaryThe chapter presented the findings from the research and interpreted the values obtained from the various statistical computations carried out. The next chapter will present the research conclusions arrived at by the researcher based on the findings presented.CHAPTER VSUMMARY CONCLUSIONAND RECOMMEDATIONS5.1 Introduction
This chapter provides a summary of the findings from the study, give the researcher’s conclusions. The researcher will also come with necessary recommendations for the banks and other fellow researchers. This study was carried out to investigate the effect of capital structure on the performance of commercial banks in Zimbabwe. Long term debt and Short term debt were used as independent variables in the study while Return on Equity, Capital Adequacy ratio and Cost to income ratio were the dependent variables. The analysis indicated a weak relationship between the capital structure on the performance of commercial banks in Zimbabwe. The random effects regression model was used on the panel data obtained from the financial results of the banks over the study period which stretches from 2011 to 2016.
5.2. Interpretation of Findings
5.2.1. Capital structure and ROEFrom the above analysis, it can be observed that capital structure does have some effects on the performance of commercial banks in Zimbabwe. The results of the regression analysis shows a ‘C’ intercept of -0.478, long term debt coefficient of 0.022 and the short term debt to total assets have a coefficient of 0.775. Thus the model detects a significant effect of STDTA on ROE and a very insignificant effect of LTDTA. However the R2 value was 0.107 indicating that the regression was not perfectly fitting as a predictor of the dependent variable.
5.2.2. Capital structure and CARAnalysis of the effect of capital structure on CAR also indicates that 0.052 and 0.848 is determined by LTDTA and STDTA respectively. This also means that LTDTA have an insignificant effect on CAR while STDTA has a very high impact on CAR and subsequently on the performance of Zimbabwean banks. The R2 value was 0.206 which is also a considerably low indicator of reliability of the prediction.

5.2.3. Capital structure and CTIRThe findings on CTIR suggested that capital structure has a very significant impact on the performance on the banks ‘performance. It shows that STDTA have a negative coefficient of -1.156 suggesting no relationship with CTIR. The coefficient of LTDTA was 0.047 which is a very insignificant determinant of the performance.
5.3 Conclusion
The general conclusion is therefore that capital structure have a positive influence on financial performance commercial banks although the effect of LTDTA is very small. Thus it can be said that there are some other major factors which affect the performance of commercial banks more than its capital structure. These may include the level of marketing and marketing strategies as well as the number of products being offered by the banks.
These findings were in sync with those from studies carried out by Fosu (2013) in South Africa investigating the relationship between capital structure and corporate performance paying particular attention to the degree of competition. The findings from the research showed that there was positive relationship between capital structure and corporate performance. Cecchetti et al. (2011) studied the effects of debt on firms and concluded that moderate debt level improves welfare and enhances growth but high levels can lead to a decline in growth of the firm. Salim and Yadav (2012) investigated the relationship between capital structure and firms’ performance using panel data model for a sample of 237 Malaysian listed companies on the Bursa Malaysia Stock exchange during 1995 to 2011. The results also indicated that capital structure was significant and positive associated with firm performance which is measured by Tobin’s Q.
The research findings however disagrees with Zhanje and Kwesu (2003) who stressed out the traditional theory like the Net income approach which assumes that an optimal capital structure does exist and depends on the level of gearing. This also supports the MM theory which states that there is no difference between a firm with or without debt indicating no significance of capital structure to the performance of banks.
5.4. Recommendations
Based on the research findings and conclusions drawn the researcher strong recommend that banks should reduce the level of short-term debt as it has a huge impact on the cost to income ratio and reduces return on equity. Reducing short-term debt will thus result in increased performance for the bank.
The researcher also recommends that more studies be carried out on other factors which may affect performance of financial banks other than the capital structure. This is because a weak relationship was discovered between the capital structure and the banks’ performance. This will enable banks to control those other factors and to ensure increased profitability.

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Undergraduate Dissertation Assessment SheetBachelor of COMMERCE HONOURS DEGREE IN ………………………………………………………..

STUDENT NAMEREG. NO.

Tittle of the Research
EXPECTATION Max score (%) Actual score % Remarks
ABSTRACT
Clear, concise and synoptic abstract 1
Outlines Clear objectives, methodology, findings and conclusion 4 5
BACKGROUND PROBLEM STATEMENT AND OBJECTIVES
Introduces the topic 1
Ability to clearly state the problem 5
Are the objectives and aims clearly stated 3
Amount and quality of background research, 2
Good chapter outline 2
Limitation and Delimitations 2 15
LITERATURE REVIEW
Has a comprehensive range of Relevant theoretical and empirical literature been used to discuss concepts models and theories 8
Sources used are up to date 2
Relevance of literature to research question and objectives (are the key themes and issues surrounding research questions clearly drawn from literature 5 15 METHODOLOGY
The use of appropriate methods, justifying the method and full understanding of the methodology
Clear rationale for research design and methodology 5
Indicates nature and source of data used 4
Procedure on data collection and instrument design 5
Method of data analysis 3
Population and sample discussed 3 20
RESULTS ANALYSIS AND INTERPRETATION
Clarity and informational content of tables/figure/equations 5
Findings related to aims/hypothesis 5
Synthesis ; critical thinking evident 3
Appropriate ;thorough analysis/exploration of data 5
Proper evaluation and discussion of findings 2
Discussion of findings in relation to literature 5 25
CONCLUSIONS AND RECOMMENDATIONS
Summary of main Findings 3
Link between objectives and outcomes and supportable conclusions drawn 3
Ability to come up with good policy recommendations 2
Suggestion for improvement/future research 2 10 PRESENTATION (Ability to report cogently( writing skills, Headings, formatting, grammar)
Good punctuation and spelling and reporting tense 2
Clear presentation of dissertation (fonts, margins, etc.) and Figures and tables well-formatted 3 5 REFERENCING
Proper in text referencing according to Harvard style 3
Reference list according to Harvard style 2
5 TOTAL 100 Supervisor……………………………………………………………………………………………………
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