Determinants of capital structure of listed firms in the South African manufacturing industry

Abstract

This study sought to investigate the impact of firm specific variables and corporate governance variables on capital structure of manufacturing firms listed in Johannesburg Stock Exchange (JSE) for the period 2004-2017. This resulted in a panel of 74 out of 108. Return on asset (ROA), size, asset tangibility, growth, tax and business risk, board size, non-executive and Chief Executive Officer (CEO)’s tenure effects on capital structure decisions were analysed. Correlation analysis reveal no strong co-movement among the regressors, while Unit root tests using Augmented Dickey-Fuller and Fisher-type test showed the errors have non-zero mean and non-persistent over time. Dynamic GMM applied provide significant coefficients using lagged values of the dependent variable as instrument. Results reveal that firms follow both pecking order and trade-off capital structure theories. There is positive relationship between lagged leverage and ROA, size, and tax. Asset tangibility and growth have a negative relationship and positive relationship respectively with the lagged leverage of the firms. Growth rate of the sector was slow and less risky, indicating freedom to choose whatever financing method. However, these variables only became significant with the introduction of the lagged leverage variable. This means that any debt-equity decision critically relies on the previous debt equity levels.