Capital Structure and Financial Performance of State-Owned Enterprises in South Africa: Does Corporate Governance matter?

Abstract

The study examines the relationship between capital structure and financial performance of South African State-Owned Enterprises (SOEs) considering corporate governance factors. Using empirical data derived from financial reports and audited statements of 21 major SOEs listed in the Public Finance Management Act (PFMA) of South Africa, this study employs a quantitative methodology, specifically employing Fixed Effect (FE) and Generalized Methods of Moments (GMM) regression models on annual data from 2010 to 2022 to examine variables that affect financial performance of the South African SOEs.The research reveals mixed relationships between capital structure factors and financial performance, yet these relationships lack significance. Similarly, corporate governance demonstrates diverse relationships with financial performance, however, a significant negative correlation exists between board composition and return on assets. When examining the effect of corporate governance on capital structure in influencing financial performance, the study indicates an insignificant impact on financial performance. The policy implications of the study suggest that enhancing corporate governance practices, combating corruption, promoting strategic investments, efficient resource allocation, and government support for SOEs as drivers of economic growth should be guided by a clearly defined funding policy to enhance the financial performance of SOEs.