A research report submitted to the School of Economics and Business Science, Faculty of Commerce, Law and Management, University of the Witwatersrand, in partial fulfilment (50%) of the requirements for degree of Master of Commerce in Finance Johannesburg, South Africa May 2016 / 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. / MT2017

Presented to the School of Accountancy University of the Witwatersrand, Johannesburg This research report is submitted to the faculty of Commerce, Law and Management in partial fulfilment of the requirements for the Degree of Master of Commerce (specialising in Taxation) Date: 31 March 2016 / This research focuses on large corporate transactions and acknowledges that they play a significant role in the allocation of resources in society. For this reason (1) the composition of firms’ capital structure and (2) how they choose to fund their investments are important. The South African income tax system has a bias towards debt and this bias (1) distorts the financing and investment decisions of firms; and (2) creates international tax arbitrage opportunities. These circumstances are not exclusive to South Africa. In order to address these distortions and loopholes the National Treasury and the SARS Commissioner have introduced complicated interest deduction limitations. This research critically analyses (1) the new adjusted tax rules concerning interest deduction limitations in finance transactions and (2) whether these new rules encourage investment. To assist with this critical analysis we use corporate finance theory to examine debt push-down transactions/structures because these structures are seen as highly tax-efficient for investors (both foreign and local). This research demonstrates that there are many different ways to finance a transaction but ultimately the choice of finance lies along the continuum between the issue of debt or equity. From an economic perspective this research confirms that there is no material reason for the disparate treatment between debt and equity. However from a legal perspective debt and equity instruments are materially distinct and thus tax considerations are influential in selecting the form of finance used in a transaction. This research not only concludes that leverage transactions utilising excessive debt pose a risk to tax revenues, tax sovereignty and tax fairness but also that the artificial statutory treatment of interest deductions on leverage transactions and working capital facilities means that (1) firms’ ability to finance their operations is reduced, (2) the value of firms is reduced and (3) the incentive for investors to invest in South Africa is also reduced. / MT2017