Dear Selection Committee
Dear Selection Committee
Dear Selection Committee
Corporate Finance
1) The structure by which firms finances its activities and provides for future financial
needs is known as capital structure. This structure is not limited to financing activities but also
aimed at optimizing the market value of the firm while being cost effective. Emerging economies
around the globe provide suitable markets for firms to develop even though the growth
fluctuations and socio-political environment can present a risk for firms. This created the need
for an examination of capital structures determinants of companies in emerging markets. The
research objectives are to analyse the influence of corporate and macroeconomic variables on
financing. Further, the contrast of pecking order against trade-off to identify the one companies
follow on JSE.
This study investigates on leverage determinants of all listed non-financial companies on
the Johannesburg stock exchange (JSE) from 2011 to 2018. Fourteen explanatory variables made
up of firms specific and macroeconomic determinants with short and long-term debt as
dependent variables. Data is organised as panel data and fixed effect model is employed to
estimate variables. The research concludes by advocating for increased flexibility in capital
structures, participation for firms in macroeconomic policies, market player’s orientation towards
the benefits of optimum leverage and the ability for economic agents to make better-informed
decisions on the market.
The research objective is to investigate on the financing decision of all listed non-financial
companies on the JSE. By doing so, the research identifies various determinants which
significantly affect leverage. By being fully informed of these determinants, listed JSE
companies could make better informed decisions on its financial health. The research does not
limit itself to firm specific variables but goes further to examining macroeconomic variables that
could potentially influences companies. A company can take advantage of debt not only to
finance it activities but also to raise it market value.
The study based on non-financial companies on JSE market. There are 388 listed companies
on the JSE of which, 254 firms are non-financial. Data of 210 companies where collected as the
remaining company’s data were not available. The target study period here is eight years from
2011 to 2018. Overall, all the non-financial firms with the largest market capitalisation made up
the sample of our research. All data collected are from the JSE official website, Bloomberg and
the World bank. Firms that experiences merger or acquisition during the observed period where
excluded from our sample, this maintain consistent a consistent data sample. Financial sector
companies were excluded because of the regulatory and operational requirement that apply to
banks and make their capital structure different. Numerous independent variables, multiple
regression models enable us to monitor their simultaneous effect on dependent ones
(Wooldridge, 2009).
As multiple variables observed, data here is constructed as panel data. Balanced panel data
refers to when all firms being observed in all periods, unbalanced panel data means information
is not available for all periods. The data in this research is fairly unbalanced as all data for all
observations not available. Panel data enables us to study the changes in variables. More
information can be utilized in the datasets enabling us to respond to complex issues. Further,
with panel data, the use if suitable effect model enables us to eliminate omitted variable bias and
control unobserved heterogeneity among firms.
The common proxy used is mean debt ratio over the sample period as debt being the
dependent variable in our research. The measure of the level of debt vary between previous
research. In addition, previous researches do not make unanimity between using book and
market debt value.
Abstract.......................................................................................................................................ii
List of tables...............................................................................................................................iv
Abbreviations..............................................................................................................................v
Introduction...................................................................................................................................
References...................................................................................................................................4
Appendices....................................................................................................................................
1))))))))))))))0 The research investigates on the determinants of non-financial firms on the JSE.
For this purpose, the research considers all non-financial companies. This is a contribution to the
current literature as no research to date investigated on all companies. In addition, the research
investigates on the influence of macro-economic variables on corporate financing which
sometimes are neglected. By separately investigating STDR and LTDR, research gives precise
influence of explanatory variables on debt. Furthermore, the research makes a comparison
between pecking order and trade-off theory giving more information on which better describes
the financial characteristics of businesses listed on the JSE. The research objective was an in-
depth analysis of corporate financing decisions determinants at the firm level and at the macro
level. In addition, a comparison of these variables between main theories and previous literature
related to the research question.
Research results starts by describing the financial situation of companies and present and precise
description of each determinant. By comparing accuracy of the trade-off and pecking predictions,
STDR model estimation better validates pecking order predictions compared to the trade-off
theory.
To conclude, companies will benefit by considering the research results and making better-
informed decisions on their financing mix to satisfy corporate specificities. Also, government
and country policy will benefit not only by knowing the necessity of including corporate
representatives in designing macroeconomic objectives but will know where to push in other to
oriented companies to the desire financing model or leverage level as corporate financing
determinants has been identified. Investors can also benefit from present research results. As
financing determinants been identified, investors can forecast the next move to be made by the
company in case of a change in it financing structure determinants. This will lead to a better
forecast of economic agents on non-financial companies listed on JSE.
Finally, the future research which initially was planned to be part of the current research but
could not be fully overviewed due to character limitations and the desire to present a
comprehensive research will be based on determine the optimal leverage level per industry using
the Tobin’s Q model.
Titman and Wessels (1988)
This research carried out on different debts types has evaluated the theoretical suggestion of
determinants influencing financing mix. The research did not take total debt but observed debt
types like convertible, short and long-term. Linear structural modelling is employed to analyse
469 American firms constituted their sample for a period from 1974 to 1982. Explanatory
variables in the study where asset mix, growth, industry, volatility, profitability, , non-debt shield
and size.
An inverse correlation is found in firm uniqueness and debt. The main finding of this research
was an inverse relationship between firm uniqueness and debt. However, this research doesn’t
find enough evidence of a correlation between collateral value and assets, debt and volatility.
Further, the research provides evidence of higher short-term debt in smaller firms than in large
firms. The transaction cost incurred for small firms in issuing long-term is comparatively high to
what is incurred for short-term debt reason why small companies tend to limit long-term
engagements.
Rajan and Zingales (1995)
This study conducted for advanced nations comprising of Germany, United Kingdom, Japan,
Italy, United States, France and Canada. The period studied was from 1987 to 1991 for these
seven nations. In United Stated, firms observed were of number of 2500 whereas those from the
G7 were of 2000. This study is based on highly developed economies with the aim of knowing
whether the financing evidence found for companies in the United States is true in other nations
observed.
Here focus is set on the general patterns across countries and an analysis of singularities instead
of individually analysis each country. Germany and the United States showed lower levels of
leverage compare to other nations. The study found a positive relationship with size and leverage
whereas Germany present an inverse relationship here. Again, Germany present a positive
relation for profitability and leverage while the six remaining countries present an inverse
relation.
Frank and Goyal (2009)
The research observes fifteen financing determinants to identify the most reliable determinants.
The study surveys 270 000 unite States firms between 1950-2003. Leverage was calculated as
market plus book value assets which divides long term and total debt separately. With market
leverage, six factors provided significance evidence and consistency. These factors are
tangibility, profit, expected inflation, size and market to book ratio. Insignificant variables to
market leverage are inflation, size, market to book ratio.
The study finds companies with more tangible assets enjoy higher debt levels. Whereas
companies with higher profits and market to book value take less debt. Higher debt level is found
with expected high inflation rates and the overall debt level in a n industry affect specific firms
borrowing capacity.