The relationship between capital structure and financial performance of Johannesburg Stock Exchange listed construction companies

Date
2017
Authors
Garaba, Simbarashe
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Abstract
The purpose of this study was to find the relationship between capital structure through its determinants, and financial performance of Johannesburg Stock Exchange listed construction companies for the period between 2008 and 2015.The construction industry`s performance has been dismal since the South African 2010 Soccer World Cup projects were completed owing to reduced spend on infrastructure development and increased competition. The study discusses and interrogates the literature with respect to capital structure evolution. The trade-off, market and pecking order theories are put forward as the most popular theories in use today. The trade-off theory argues that the net tax benefit of debt is higher than the agency costs associated with debt and equity in addition to the financial costs of obtaining equity. Market theory puts forward a notion that shares are sold when they are overvalued and held back when they are undervalued and thus the capital structure is a function of share price. The pecking order theory suggests that the order of preference for funds is retained earnings, debt and equity respectively. The main determinants of capital structure namely size, growth, tax, asset tangibility, type and nature of industry, profitability, asset turnover and total debt to capital were identified and related to financial performance measures return on equity (ROE) and return on assets (ROA). The relationship between the determinants of capital structure and financial performance measures is discussed in the context of the main capital structure theories. Data collection was drawn from the publicly available financial statements and captured on an excel spreadsheet with preset formulae. Quantitative analysis using regression models is used to analyse the data. The results show that asset turnover and growth have a significant positive relationship with ROA, whilst ROE had a significant positive relationship with asset turnover and age only. ROA has a significant negative relationship with asset tangibility. The results do not support any particular theory out right but provides insight into how construction companies operate and how the determinants of capital structure affect the financial performance.
Description
MBA Thesis
Keywords
Corporations -- South Africa -- Finance,Capital -- South Africa,Construction industry -- South Africa -- Finance
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