The mediation effect of efficiency on the competition-stability nexus: Implications for capital structure strategic decisions

Abstract

This study investigates the mediating role of efficiency in the relationship between competition and financial stability in African commercial banks and examines its implications for capital structure decisions. Using panel data from 66 banks across 12 African countries over 2010–2021, mediation is tested using the ordinary least squares approach following the Baron and Kenny (1986) methodology and validated through structural equation modeling (SEM) to ensure robustness. A composite competition-efficiency-stability index (CESINDEX) is constructed to capture the joint mediation effect, and its impact on capital structure is assessed using fixed effects models (FEM), with two-step system generalized method of moments (GMM) estimations as a robustness check. Results reveal that competition negatively affects stability but positively influences efficiency, which in turn negatively impacts stability, confirming the mediating role of efficiency in the competition-stability nexus. The CESINDEX shows a positive and significant effect on capital structure, indicating that banks respond to these interrelated pressures by strengthening capital buffers. The study provides actionable insights for policymakers and bank managers, highlighting the strategic importance of promoting operational efficiency to enhance stability and guide capital structure decisions in fragile African banking systems.