Dynamics in capital structure determinants in South Africa

Anil Ramjee; Tendai Gwatidzo

doi:10.1108/10222521211234228

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Meditari Accountancy Research

ISSN: 2049-372X

Online from: 2000

Subject Area: Accounting and Finance

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Dynamics in capital structure determinants in South Africa

Document Information:
Title:	Dynamics in capital structure determinants in South Africa
Author(s):	Anil Ramjee, (School of Economic and Business Sciences, Witwatersrand University, Johannesburg, South Africa), Tendai Gwatidzo, (School of Economic and Business Sciences, Witwatersrand University, Johannesburg, South Africa)
Citation:	Anil Ramjee, Tendai Gwatidzo, (2012) "Dynamics in capital structure determinants in South Africa", Meditari Accountancy Research, Vol. 20 Iss: 1, pp.52 - 67
Keywords:	Capital structure, Cost of adjustment, Financial reporting, Generalized method of moments, Optimal capital structure, Pecking order theory, Republic of South Africa, Trade-off theory
Article type:	Research paper
DOI:	10.1108/10222521211234228 (Permanent URL)
Publisher:	Emerald Group Publishing Limited
Acknowledgements:	The authors are very grateful for the constructive comments and help provided on earlier versions of the paper by the Meditari Accountancy Research Editor and anonymous reviewers. The authors also thank Professor Uma Kollamparambil at the Witwatersrand University who encouraged them to further refine the paper and send it for publication. The help by Witwatersrand University's WLS Translation and Interpreting Services is gratefully acknowledged by the authors.
Abstract:	Purpose – The purpose of this paper is to use a dynamic model to investigate capital structure determinants for 178 firms listed on the Johannesburg Stock Exchange for the period 1998-2008. The sample of firms is also used to examine the cost and speed of adjustment towards a target debt ratio. Design/methodology/approach – A target adjustment model is estimated using a generalized method of moments technique to examine the cost and speed of adjustment towards a target debt ratio. The determinants of target capital structure for South African listed firms are also examined. Findings – The results show that South African firms adjust relatively fast towards a target leverage level. It is also found that asset tangibility, growth, size and risk are positively related to leverage, while profitability and tax are negatively related to leverage. The results also suggest that capital structure decisions of South African listed firms follow both the pecking order and trade-off theories of capital structure. Research limitations/implications – The sample chosen focused on listed firms, thus the results cannot credibly be generalized to all South African firms (listed and unlisted). Also, whilst a lot can be gleaned from the results, they may not be readily applicable to firms in other African countries. Originality/value – The issue of dynamic adjustment towards a target or optimal debt ratio has not received sufficient attention in developing economies. Using data from an emerging economy, this paper attempts to fill this gap in the literature. A target adjustment model is estimated using a generalized method of moments technique.