Impact of Gearing on the Performance of top 20 JSE listed Companies

Abstract

Firm managers in South Africa are regularly confronted with the conundrum of employing optimal capital structure to enhance shareholders’ returns. This problem is sparingly addressed in empirical literature using South African data. This study aims to fill this gap by studying the influence of gearing (capital structure) on company performance. This research examines (i) the influence of short-term debt-to-equity ratio, (ii) long-term debt-to-equity ratio and (iii) total debt-to-equity ratio on economic value added (EVA) as a proxy for company performance using Panel regression analysis on top 20 Johannesburg Stock Exchange (JSE) listed non-financial companies for a period between 2010 and 2019. Firm size, turnover growth, and company age were control variables. Short-term debt and total debt were found to have an insignificant influence on company performance. In contrast, long-term debt was found to have a negative and significant influence on EVA at a 10% confidence level. Consequently, we made recommendations for managers to consider