Managerial confidence and capital structure announcement effects on share prices on the Johannesburg Share Exchange

Abstract

Background: In an attempt to enhance our understanding of the important determinants of the debt–equity choice, there is a need to explore the behavioural facets driving the decision to issue either debt or equity. Furthermore, the divergent set of implications of equity and debt issues on the share prices are empirical matters that need to be addressed. Aim: In this article the link is investigated between managerial confidence and the likelihood of issuing debt, as well as the share price implications of equity and debt issue announcements on the Johannesburg Share Exchange (JSE). Setting: The study is based on the equity bond issue announcements of JSE-listed firms for the period 2000–2020. Method: In this article, panel data regression and event study approaches are used in a sample of 81 and 113 bond and equity issue announcements, respectively, for 69 firms listed on the JSE. Results: The main findings of this article indicate that managerial optimism drives debt issuing activities on the JSE and that there are negative and significant abnormal returns associated with the announcement of equity issues. Conclusion: Overall, we conclude that behavioural finance is an important factor driving capital structure decisions, and that signalling, as well as market-timing concerns drive share price reactions on the JSE. Contribution: This article highlights the importance of behavioural factors in capital structure decisions and identifies the firm-specific channels through which managerial optimism drives leverage. Additionally, the article sheds light on the role of signalling and market timing in capital structure decisions.