Capital structure, market conditions and financial performance of small and medium enterprises in Buganda Region, Uganda




Capital Structure, Market Conditions, Financial Performance, Small And Medium-Sized Enterprises


Small and Medium Scale Enterprises (SMEs) continue to be major players in the economic growth of Uganda as well as many of the emerging economies. The Uganda Investment Authority had projected 5.5% economic growth by 2030 in anticipation of stable market conditions necessary for the sustained financial performance of SMEs. However, the business failure rate of SMEs in Uganda had persistently revolved around 70% in 2018 from 50% in 2004. This problem had been linked to the turbulent market conditions characterized by intensive competition as well as volatile consumption behavior of the customers. Empirical literature indicates that competitive intensity, as well as volatile customer demand, presents a negative impact on financial performance. Hence, the study sought to determine the moderating effect of market conditions on the capital structure-financial performance relationship of SMEs in Uganda. From a population of 218,561 SMEs, a sample of 453 respondents was selected out of which, 423 responded to the questionnaire. Primary data were analyzed using descriptive statistics and multiple regression techniques. The hypothesis was tested at a 0.05 level of significance. Findings indicated that Market conditions had a positive and significant moderating effect on the capital structure-financial performance relationship (?= 0.175 and p = -0.027). We conclude that market conditions can strengthen/ weaken the effect of capital structure on the financial performance of SMEs. We recommend that SMEs should evaluate the market conditions during the process of deciding the financing mix for their operations to optimize the impact of capital structure on financial performance


Abaho, E., Aarakit, S., Ntayi, J., & Kisubi, M. (2017). Firm capabilities, entrepreneurial competency, and performance of Ugandan SMEs. Business Management Review, 105-125.

Abba, M., Yahaya, L., & Suleiman, N. (2018). Explored and critique of the contingency theory for management accounting research. Journal of Accounting and Financial Management ISSN, 4(5), 40-50.

Abbas, M. W., & Ul Hassan, M. (2017). Moderating impact of environmental turbulence on business innovation and business performance. Pakistan Journal of Commerce and Social Sciences (PJCSS), 11(2), 576-596.

Abuselidze, G., & Katamadze, G. (2018). The importance of legal forms of business subject for formation of business environment in Georgia. Kwartalnik Nauk o Przedsi?biorstwie, (4), 83-88.

Adair, P., & Adaskou, M. (2015). Trade-off-theory vs. pecking order theory and the determinants of corporate leverage: Evidence from a panel data analysis upon French SMEs (2002–2010). Cogent Economics & Finance, 3(1), 1006477.

Afriyie, S., Du, J., & Musah, A. A. I. (2019). Innovation and marketing performance of SME in an emerging economy: the moderating effect of transformational leadership. Journal of Global Entrepreneurship Research, 9(1), 1-25.

Ahmad, N., & Abdul-Rahim, F. (2013). Theoretical investigation on determinants of government-linked companies' capital structure. Journal of Accounting, Finance, and Economics, 3(2), 72-85.

Ahmadimousaabad, A., Bajuri, N., Jahanzeb, A., Karami, M., & Rehman, S. (2013). Trade-off theory, pecking order theory and market timing theory: a comprehensive review of capital structure theories. International Journal of Management and Commerce Innovations, 1(1), 11-18.

Akeem, L. B., Terer, E. K., Kiyanjui, M. W., & Kayode, A. M. (2014). Effects of capital structure on firm's performance: Empirical study of manufacturing companies in Nigeria. Journal of Finance and Investment Analysis, 3(4), 39-57.

Al-Kahtani, N., & Al-Eraij, M. (2018). Does capital structure matter? Reflection on capital structure irrelevance theory: Modigliani-Miller theorem (MM 1958). International Journal of Financial Services Management, 9(1), 39-46.

Altman, D. G., & Bland, J. M. (1996). Detecting skewness from summary information. British Medical Journal, 313(7066), 1200-1201.

Baron, R. M., & Kenny, D. A. (1986). The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology,51(6),1173–1182.

Butt, S., Khan, Z. A., & Nafees, B. (2013). Static Trade-off theory or Pecking order theory which one suits best the financial sector. Evidence from Pakistan. European Journal of Business and Management, 5(23), 131-140.

Cekrezi, A. (2013). A literature review of the trade?off theory of capital structure. ILIRIA International Review, 3(1), 125-134.

Chasmi, N., & Fadaee, M. (2016). Impact of Financial Performance and Growth Opportunities on Success or failure of companies: evidence from Tehran Stock Exchange. Journal of Accounting and Marketing, Science and Research Branch, Islamic Azad University, Mazandaran, Iran, 5(2), 2-5.

Chen, X., Ender, P. B., Mitchell, M., & Wells, C. (2003). Regression with Stata: Chapter 2–Regression Diagnostics. In Stata Web Books.

Competitive Industries and Innovation Program. (2016). The Financing of Small and Medium-Sized Enterprises in Uganda. Kampala: World Bank Group.

Dananti, K., & Cahjono, M. P. (2017). The Best Indicator of Capital Structure to Predict Firm's Performance. Review of Integrative Business and Economics Research, 6(4), 317-326.

Dao, B.T.T. and Ta, T.D.N. (2020), "A meta-analysis: capital structure and firm performance", Journal of Economics and Development, (22)1, 111-129.

Das, K. R., & Imon, A. H. M. R. (2016). A Brief Review of Tests for Normality. American Journal of Theoretical and Applied Statistics, 5(1), 5-12.

Dossi, A., & Patelli, L. (2010). You learn from what you measure: financial and non-financial performance measures in multinational companies. Long Range Planning, 43(4), 498-526.

Drover, W., Busenitz, L., Matusik, S., Townsend, D., Anglin, A., & Dushnitsky, G. (2017). A review and road map of entrepreneurial equity financing research: venture capital, corporate venture capital, angel investment, crowdfunding, and accelerators. Journal of Management, 43(6), 1820-1853.

Dzulkarnain, M., Abdullah, A. G., & Shuhymee, A. (2011). The moderating role of market orientation in the relationship between entrepreneurial orientation and firm performance. IPBJ, 3(2), 15-31.

Eisenhardt, K. M., & Martin, J. A. (2000). Dynamic capabilities: what are they? Strategic management journal, 21(10?11), 1105-1121.

Ernst, A. F., & Albers, C. J. (2017). Regression assumptions in clinical psychology research practice—a systematic review of common misconceptions. PeerJ, 5, [e3323].

Farsi, J. Y., & Toghraee, M. T. (2014). Identification of the main challenges of small and medium-sized enterprises in exploiting innovative opportunities (Case study: Iran SMEs). Journal of Global Entrepreneurship Research, 4(1), 1-15.

Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pitman.

Ghasem, A., & Zahediasl, S. (2012). Normality tests for statistical analysis: A guide for non-statisticians. International Journal for Endocrinology and Metabolism, 10(2), 486-489.

Ghazouani, T. (2013). The capital structure through the trade-off theory: Evidence from Tunisian firm. International Journal of Economics and Financial Issues, 3(3), 625.

Ha, T. S., Lo, M. C., & Ramayah, T. (2016). Decomposing market orientation and its relationship to the innovativeness of SMEs in Malaysia: the moderating effects of market turbulence. Journal of International Business and Entrepreneurship Development, 9(3), 273-290.

Habimana, O. (2014). Capital structure and financial performance: Evidence from firms operating in emerging markets. International Journal of Academic Research in Economics and Management Sciences, 3(6), 159.

Harrison, J. S., & Wicks, A. C. (2013). Stakeholder theory, value, and firm performance. Business ethics quarterly, 97-124. http://dx.doi.Org/10.1016/j.lrp.2010.01.002

Helm, R., & Antje, M. (2012). Analysis and evaluation of moderator effects in regression models: State of art alternatives and empirical examples. Review of Managerial Science, 6(4), 307-332.

Herr, H., & Nettekoven, Z. M. (2018). The role of small and medium-sized enterprises in development: What can be learned from the German experience? (No. 53). Global Labour University Working Paper.

Ipinnaiye, O., Dineen, D., & Lenihan, H. (2017). Drivers of SME performance: a holistic and multivariate approach. Small Business Economics, 48(4), 883-911.

Iqbal, J., Farooq, M. U., Sandhu, M. A., & Abbas, M. (2018). The Impact of Capital Structure on the Financial Performance of SMEs in Pakistan. Pakistan Journal of Social Sciences (PJSS), 38(2), 363-374.

Javed, T., Younas, W., & Imran, M. (2014). Impact of capital structure on firm performance: Evidence from Pakistani firms. International Journal of Academic Research in Economics and Management Sciences, 3(5), 28. DOI: 10.6007/IJAREMS/v3-i5/1141

Jing, Z., & Yanling, D. (2010). The impact of different market orientations on product innovation performance: Evidence from Chinese manufacturers. Management Decision, 48(6), 849-867.

Karuma, M. N., Ndambiri, A. N., & Oluoch, J. O. (2018). Effect of debt financing on the financial performance of manufacturing firms in Nairobi Securities Exchange. Strategic Journal of Business & Change Management, 5(2).

King, G., & Roberts, M. E. (2015). How robust standard errors expose methodological problems they do not fix, and what to do about it. Political Analysis, 23(2), 159-179.

Krisp, J. M., & Špatenková, O. (2010). Kernel density estimations for visual analysis of emergency response data. In Geographic Information and Cartography for Risk and Crisis Management, 395-408.

Kwiecinski, D. (2017). measures of competitive intensity- Analysis based on literature review. Journal of Management and Business Administration. Central Europe, 25(1), 53-77.

Lau, A. K. (2011). Supplier and customer involvement on new product performance. Industrial Management & Data Systems, 111(6) 910-942.

Lee, S., & Dalbor, C. M. (2013). Short-term debt and firm performance in the US restaurants industry: The moderating effect of economic conditions. Tourism Economics, 19(3), 565-581.

Li, K., Niskanen, J., & Niskanen, M. (2019). Capital structure and firm performance in European SMEs. Managerial Finance, 45 (5), 582-601.

Mboi, C.S., Muturi, W., & Wanjare, J. (2018). Effect of Short-term Debt to Total Assets Ratio on Financial Performance of Medium-sized and Large Enterprises in Kenya. Research Journal of Finance and Accounting, 9, 40-49.

Mellahi, K., & Harris, L. C. (2016). Response rates in business and management research: An overview of current practice and suggestions for future direction. British Journal of Management, 27(2), 426-437.

Moorman, C., Rindfleisch, A., Malter, A. J., & Ganesan, S. (2008). Cross-Sectional Versus Longitudinal Survey Research: Concepts, Findings, and Guidelines. Journal of Marketing Research, 45, 261-279.

Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of financial economics, 13(2), 187-221.

Newbert, S. L. (2007). Empirical research on the resource?based view of the firm: an assessment and suggestions for future research. Strategic management journal, 28(2), 121-146.

Ng'ang'a, E. W., Lagat, C., & Kieti, D. (2016). Moderating effect of competitive intensity on the relationship between customer orientation and performance of hotels in Kenya. Journal of marketing and consumer research, 25, 7-16.

Nguyen, H. T., & Nguyen, A. H. (2020). The impact of capital structure on firm performance: Evidence from Vietnam. The Journal of Asian Finance, Economics, and Business, 7(4), 97-105.

Nimon, K. F., & Oswald, F. L. (2013). Understanding the results of linear multiple regression: Beyond standardized regression coefficients. Organizational Research Methods, 16(4), 650-674.

Okello-Obura, C., & Muzaki, F. (2015). An audit of records and information management practices and ICTs utilization among SMEs in Northern Uganda. Library Philosophy and Practice, 0_1.

Osborne, J. W. & Waters, E (2002) "Four assumptions of multiple regression that researchers should always test," Practical Assessment, Research, and Evaluation: 8(2).

Ramaswamy, K. (2001). Organizational ownership, competitive intensity, and firm performance: An empirical study of the Indian manufacturing sector. Strategic Management Journal, 22(10), 989-998.

Rosopa, P. J., Schaffer, M. M., & Schroeder, A. N. (2013). Managing heteroscedasticity in general linear models. Psychological Methods, 18(3), 335-351.

Salim, M., & Yadav, R. (2012). Capital structure and firm performance: Evidence from Malaysian listed companies. Procedia-Social and Behavioral Sciences, 65, 156-166.

Shikumo, D. H., Oluoch, O., & Wepukhulu, J. M. (2020). Effect of Short-Term Debt on Financial Growth of Non-Financial Firms Listed at Nairobi Securities Exchange. arXiv preprint arXiv:2011.03339.

Shinozaki, S. (2012). A new regime of SME finance in emerging Asia: Empowering growth-oriented SMEs to build resilient national economies (No. 104). ADB Working Paper Series on Regional Economic Integration.

Singh, S. A., & Masuku, B. M. (2014). Sampling techniques and determination of sample size in applied statistics research: An overview. International Journal of Economics, Commerce and Management, 2(11), 1-22.

Sivalingam, L., & Kengatharan, L. (2018). Capital structure and financial performance: A study on commercial banks in Sri Lanka. Asian Economic and Financial Review, 8(5), 586-598.

Teece, D. J. (2007). Explicating dynamic capabilities: the nature and micro-foundations of (sustainable) enterprise performance. Strategic management journal, 28(13), 1319-1350.

Ting, I. W. K., & Lean, H. H. (2011). The capital structure of government-linked companies in Malaysia. Asian Academy of Management Journal of Accounting & Finance, 7(2).

Vij, S., & Farooq, R. (2017). Moderating variables in business research. The IUP Journal of Business Strategy, 14(4), 34-54.

Wahba, H. (2013). Debt and financial performance of SMEs: the missing role of debt maturity structure. Corporate Ownership & Control, 10(3), 266-277.

World Bank Group. (2018). Investigating the Financial Capabilities of SMEs: Lessons from a 24-Country Survey. World Bank.

Yapa Abeywardhana, D. (2016). Impact of capital structure on firm performance: Evidence from manufacturing sector SMEs in the UK.

Zhang, H., Wang, Y., & Song, M. (2020). Does Competitive Intensity Moderate the Relationships between Sustainable Capabilities and Sustainable Organizational Performance in New Ventures? Sustainability, 12(1), 253.




How to Cite

Mugisha, H., Omagwa, J., & Kilika, J. (2021). Capital structure, market conditions and financial performance of small and medium enterprises in Buganda Region, Uganda. International Journal of Research in Business and Social Science (2147- 4478), 10(3), 276–288.



Special Topics in Financial Ecosystem