Firm and country specific determinants of capital structure in Sub Saharan Africa

The purpose of this paper is to examine the effects of firm- and country-specific factors on the dynamics of capital structure for a new data set of firms in Sub-Saharan Africa.

Panel data estimation techniques are carried out on a set of 412 firms from 12 countries within Sub-Saharan Africa.

The results show that firm- and country-specific factors play an important role in the choice of debt for firms in Sub-Saharan Africa. First, firm profitability is the most common significant predictor of capital structure for firms in Sub-Saharan Africa. The significance and magnitude of profitability coefficients is more pronounced in countries with the least developed banking and stock markets and the weakest legal systems. Second, the rule of law in Nigeria and Zimbabwe provides avenues for firms in these countries to increase their debt maturity structures. The choice of debt for firms in Ghana is significantly influenced by the strength of the legal rights, the time to enforce a contract and the cost of contract enforcement. Third, capital structure adjustment speeds in all the sampled countries are relatively slow, possibly due to the market imperfections associated with the underdeveloped financial markets of Sub-Saharan Africa. Lastly, firms in the most developed stock markets of Sub-Saharan Africa tend to have lower mean debt ratios and faster capital structure adjustment speeds. Similarly, firms in countries with strong legal mechanisms tend to have higher mean long-term debt ratios and faster capital structure adjustment speeds.

This paper explores the influence of firm-level and country-specific factors on the dynamics of capital structure for a new data set that was previously ignored in the literature.