Market Capitalization and Corporate Performance Across Economic Disruption: Evidence from Manufacturing Firms on the Dar es Salaam Stock Exchange

Abstract

This study examined the relationship between market capitalization and financial performance in pre-pandemic, pandemic and post-pandemic periods for manufacturing firms listed on Dar es Salaam Stock Exchange (DSE). The study adopted a quantitative longitudinal panel design using an unbalanced panel of 126 firm-quarter observations from seven listed manufacturing firms for the period 2018–2023. Financial performance was measured using Return on Assets (ROA). Market capitalization was measured as the natural logarithm of the quarter-end share price multiplied by ordinary shares outstanding. Firm size and leverage were included as control variables. The study used a fixed-effects estimation following the Hausman specification test, while Driscoll–Kraay standard errors were used to deal with heteroskedasticity and cross-sectional dependence. An interaction between market capitalization and pandemic phase was used to examine whether the association differed across periods. The findings show a positive and statistically significant association between market capitalization and ROA across the three pandemic phases. The estimated association is strongest in the post-pandemic period. However, evidence of differences across phases is sensitive to the inference method. Wild-cluster bootstrap results do not confirm significant differences in the market capitalization–ROA relationship across the phases, while a one-quarter lag specification produces positive but statistically insignificant estimates. The study therefore provides stronger evidence of a positive contemporaneous association between market capitalization and financial performance than of systematic phase differences. The findings provide context-specific evidence consistent with Signaling Theory by suggesting that the informational role of market valuation may vary with economic conditions. Firms should strengthen financial reporting and investor relations, while investors should interpret market capitalization alongside firm-specific and prevailing economic conditions.