The Impact of Capital Structure on Profitability of Egyptian MSMEs in the Period From 2016 to 2019

Abstract

MSMEs are essential for economic development for they act as employment engines, aid poverty alleviation and amplify broad-based economic growth. This research focuses on the impact of capital structure on Egyptian MSMEs profitability.

This dissertation utilizes a quantitative approach in research. Secondary data is used in this study via using the annual reports of 360 MSMEs in Egypt in the period from 2016 to 2019 (120 micro enterprises, 120 small enterprises and 120 medium enterprises). Data was collected for the research variables: capital structure represents the independent variable; it is measured by debt ratio and equity ratio. Profitability of MSMEs represents the dependent variable, it is measured by return on assets, return on equity and net profit margin. Firm size and firm age represent the control variables. 

As far as micro samples and small samples were concerned, it was found that there was a significant negative correlation between Debt ratio and ROE, ROA and NPM. However, it was found that there was a highly significant positive correlation between Equity ratio and ROE, ROA and NPM. This result tends to support the pecking order theory of micro and small businesses capital structure in Egypt which postulates that internal sources of financing are better than external sources in the case of high interest rate due to the high costs of financing. In regards to medium firms, it was found that there was a positive significant correlation between debt ratio and ROE, ROA and NPM. On the other hand, it was found that there was a negative significant correlation between Equity ratio and ROE, ROA and NPM. This result tends to support the tradeoff theory of Medium businesses capital structure in Egypt. Concerning firm age, it was found that smaller aged firms have better rates of profitability than large aged ones. Regarding firm size, it was found that smaller sized firms have better rates of profitability than large sized ones.