The Effect of Capital Structure on the Profitability of Listed Companies: Short-Run and Long-Run Evidence from Zambia

Abstract

This study examined the effect of capital structure on the profitability of companies listed on the Lusaka Securities Exchange, with particular attention to the short-run and long-run dynamics between leverage and gross profit. Financing decisions are central to corporate management in developing economies such as Zambia, where access to equity finance is limited, and firms rely heavily on debt. The study assessed the effect of three capital structure indicators, namely the Debt to Asset Ratio (DAR), the Debt to Equity Ratio (DER) and the Debt Coverage Ratio (DCR), on profitability measured by Gross Profit (GP). A mixed methods design with a dominant quantitative strand was adopted. The quantitative strand used a longitudinal design covering annual observations for the period 2004 to 2024, which permitted the analysis of trends and dynamic relationships over time, while the qualitative strand drew on semi-structured interviews with ten finance professionals to explain and add depth to the statistical results. The data were analysed using the Augmented Dickey-Fuller unit root test, the Johansen cointegration test, Ordinary Least Squares regression and a Vector Error Correction Model. The findings showed that the Debt to Asset Ratio, the Debt to Equity Ratio and the Debt Coverage Ratio each had a positive and significant effect on gross profit in the long run, all significant at the five per cent level, while the Debt to Asset Ratio had a negative and significant effect in the short run. These results indicated that Zambian firms benefited from the strategic use of leverage over time, although debt imposed short-run financial pressure before its long-run benefits were realised. The study concluded that capital structure is an important determinant of firm profitability in Zambia, provided that debt is well managed and adequately serviced