Relationship between capital structure decisions and variousfinancial indicators: Evidence from West African Economicand Monetary Union (WAEMU) regional companies

Capital structure has been a widely discussed research topic in recent years. Our study examines the relationship between capital structure decisions and various financial indicators. By using static and dynamic panel data techniques, the study is based on 29 non-financial companies from BRVM stock Exchange during the 1998-2018 period. The study is subdivided into three main parts including the influence of macroeconomic factors along with firm-specific variables on capital structure decisions. Financing choice is a process that depends on not only a firm characteristic but also on the evolution of the economy in the short and long-term periods. Thus, the related impact of capital structure choice on firm performance and market risk exposure was discussed in the last parts. Most of the empirical studies were based on developed and emerging markets. This study contributes to the literature by investigating the drivers of capital structure of companies from the West African Economic and Monetary Union (WAEMU) stock market. In regards to the determinants of financing decisions, the results show evidence that the macroeconomic and institutional environment, as well as certain firm-specific characteristics, are important factors in explaining the choice of a capital structure. In general, firms prefer to choose internal rather than external financing in periods of high inflation, high interest rates, and increased money supply, since these conditions increase the cost of obtaining external financing. When firms have to resort to external financing, they prefer debt to capital. The result shows that the manager's decision follows both the Pecking Order Theory (POT) and the Trade-Off Theory (TOT). As concerning firm performance, the relationship depends on indicators of performance and also debt ratio measures. Most of the time, capital structure is revealed to be negatively related to profitability and that supports the POT theory. The results of this study show a positive relationship between capital structure and market risk of a company in a static and dynamic equilibrium model.