DETERMINANTS OF CAPITAL STRUCTURE OF OIL AND GAS COMPANIES IN TANZANIA

Abstract

This study examined the determinants of capital structure of oil and gas companies in Tanzania. Based on two theories - Pecking Order and Trade-Off - the study tested tangibility, firm size, growth, profitability and tax shield. To test these variables, secondary data of eight oil and gas firms operating from 2008 to 2014 was used. Using multiple regression analysis, the study found that the effect of the independent variables on leverage differs with the level of operations. When all firms are considered, the size of the firm, profitability, tax effect and growth rate tend to be negatively but insignificantly related with the capital structure. Tangibility has an insignificant positive relationship with capital structure. When considering only firms that are at the selling level, profitability, tangibility and growth variables significantly but negatively relate with capital structure. Tax significantly affects the capital structure positively while size has no effect. The study contributes to the Pecking Order Theory that firms tend to use for internally generated funds before using external sources. It challenges the Trade-Off Theory which suggests that there is a positive relationship between tangible assets and leverage. Practically, the study suggests that determining factors differ along the project life cycle. Their effect on the capital structure may not be significant at the initial and developmental stage but significant during the selling and growth stages.