A pre- and post-event analysis of leverage changes by JSE-listed firms: understanding the rationale

Abstract

This study investigates the capital structure practices of companies listed on the JSE by analysing their operating performance before and after significant leverage events defined as increases or decreases of more than 30% in a year. We develop a performance scorecard that acts as a complete synopsis of firm performance on aspects relating to leverage. We use a fixed effects regression on unbalanced panel data to test the relationship between the leverage change and 12 concurrent performance variables selected on the basis of their pre-established impact on firm leverage according to prior studies. We also test the relationship between the leverage change and the same set of performance variables five years before and five years after the event. We run a multiple discriminant analysis to test the predictive ability of our model. A 20% hold-out sample achieves a 48% correct classification rate.