Capital structure, corporate citizenship and the performance of small and medium enterprises: panel evidence of JSE Altx listed companies

Abstract

In recent times, there has been a shift in emphasis from evaluating firms based solely on financial performance indicators to evaluating their performance based on broader indicators, incorporating financial, societal and environmental factors. Consequently, corporate governance has evolved to incorporate these broader indicators. Of these indicators, capital structure choice and corporate citizenship have been established as two of many critical aspects of corporate governance. This study aims to establish whether capital structure and corporate citizenship impact the performance of small and medium enterprises (SMEs). The focus is on SMEs because they are not only drivers of a growing and inclusive economy, but are drivers of societal transformation as well. The focus on how the capital structure of SMEs impact their firm performance is an important one. In particular given that short- and long-term financing decisions to fund a firm’s short- and long-term investments can have a significant impact on maximising shareholder wealth by maximising firm value. The King IV report explicitly states that good corporate governance (incorporating corporate citizenship) contributes to the success of an SME as it enhances how its leadership structures function and guides the board to govern in a manner that helps the SME meet its strategic objectives. This study is important because in recent times within the South African context, there have been no studies found to establish the link between the capital structure or corporate citizenship of SMEs and their performance. The study examined all non-financial services firms that were recently or currently listed on the JSE AltX. The analysis included descriptive statistics, examination of the correlation matrix, Granger causality tests, estimation of equations using the fixed effects or random effects models; and robustness checks using the generalised method of moments approach (GMM). The findings pertaining to the relationship between capital structure and firm performance are mixed; and between corporate citizenship and firm performance no significant relationship was found. The GMM approach shows that the chosen fixed effects or random effects models are robust in most cases. The mixed results for capital structure suggest that there is an opportunity for SMEs to use the capital structure lever of corporate governance to drive the agenda of maximising firm value and by extension, shareholder returns depending on the needs of the firm. Keywords: capital structure, corporate governance, corporate citizenship, firm performance, small and medium enterprises