Capital structure under different macroeconomic conditions: evidence from South Africa

Abstract

The empirical literature provides conflicting assessments about how firms choose their capital structure and how macroeconomic variables influence capital structure decision making. There has been a minimal research of the impact of macroeconomic conditions on the adjustment of capital structure towards target, specifically in the context of South Africa. This study employs a sample of South African companies listed on JSE Limited stock exchange from 2000 - 2014 to investigate: (1) the relationship between corporate leverage and firm characteristics as well as macroeconomic variables; (2) the impact of extreme capital market frictions on capital structure decisions; and (3) the relation between macroeconomic conditions and capital structure adjustment speed using an integrated partial adjustment dynamic capital structure model. The research results find evidence that certain firm characteristics and macroeconomic factors have pronounced influence on the capital structure of the sample of listed companies. The empirical results are compared to previous international evidence from developed markets and are in line with the international evidence. Results show that profitability, size and tangibility are significant determinants of firms’ capital structure in the pre- extreme capital market friction periods. The rand crisis of 2001 – 2002 and the global financial crisis period of 2007 – 2009 are considered extreme capital market friction periods. The findings highlights that profitability and size have a different relation to leverage during these extreme capital market friction periods. The extreme capital market friction dummy is significant which means that capital supply conditions are also amongst important factors that need to be considered while determining the financing mix during periods where the supply of capital is disrupted. The findings highlight that demand-side and supply-side factors need to be considered in firms’ financial decision making processes, especially during periods where there is extreme capital markets friction. The research also finds evidence supporting the prediction of theoretical framework that firms adjust to target leverage slower in good states than in bad states, where states are defined by real GDP growth rate and inflation rate.