Debt Financing and Firm Performance in Zambia’s Manufacturing Sector: Panel Evidence from Listed Firms on the Lusaka Securities Exchange

This study sought to examine the relationship between capital structure and financial performance of manufacturing firms listed on the Lusaka Securities Exchange over the period 2011–2024. Specifically, it investigated whether firms employing higher levels of debt financing perform better or worse in terms of shareholder returns. The study utilized audited annual reports of nine listed manufacturing firms, generating a balanced panel of 126 firm-year observations. Return on Equity (ROE) was used as the measure of financial performance, while the debt ratio served as the proxy for capital structure. Firm size, liquidity, and growth were included as control variables. Panel data estimation techniques were employed, with both fixed-effects and random-effects models estimated. The Hausman specification test favored the random-effects model, although both models produced remarkably similar results. The findings revealed that debt financing has a negative and statistically significant relationship with return on equity, indicating that greater reliance on debt financing reduces shareholder returns. Firm size was found to have a positive and significant effect on financial performance, whereas liquidity and firm growth were not statistically significant determinants. The findings support the Pecking Order Theory, suggesting that more profitable firms rely primarily on internally generated funds before seeking external debt financing. The results also reflect the high cost of borrowing, financial distress risks, and limited access to affordable long-term credit within Zambia's financial markets. The study concludes that debt financing should be applied prudently and only where expected project returns exceed borrowing costs. It further recommends policies aimed at improving access to affordable long-term finance for manufacturing firms to support sustainable industrial growth.