Research report submitted to partially fulfill the Master of Management in Finance and Investments to the Faculty of Commerce, Law and Management at the University of Witwatersrand March 2017 / This study empirically examines whether the capital structure for natural monopolies (parastatals) dynamically responds to macroeconomic conditions. It further examines whether the balance sheet channel theory holds for this industry sample. The study adopts a double sampling approach from the population of water boards in South Africa (SA), which raise their capital in open financial markets. A quantitative research approach is adopted with a descriptive design to achieve relevant deductions. Panel techniques are used in the descriptive design for the regressions. The study finds that leverage partly dynamically responds to macroeconomic conditions. Furthermore, the evidence shows that inflation is an exception that has no significant relationship with leverage. The balance sheet channel theory is found to hold for water boards that access capital in open financial markets. Specifically, empirical evidence shows that changes in the interest rate have a delayed impact on the companies’ characteristics, including capital structure. Overall, our evidence suggests that water boards in SA need to consider the benefits of linking financial policies to the business cycle and that their policies should consider the delayed effect of interest rate changes. / 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

The main objective of the thesis was to investigate the factors that determine capital structures of financial firms using two separate samples of banks and insurance companies. In the first instance, the results of the study showed that the financing behaviour of banks mirrors that of non-financial firms. It was also observed bank financing behaviour can be best explained by the pecking order theory. Risk and size variables were observed to be negatively related to the Tier 1 regulatory capital ratio, whereas the dividend variable was positively related. Similarly, risk and size were found to be negatively associated with buffer capital, while dividends were positively related. The 2007–2009 global financial crisis (GFC) was found to have negatively affected the financial structures of banks. Consistent with similar studies, it was observed that banks have a target capital structure, and adjust to this target at an adjustment speed of 44%. With regard to insurance companies, it was observed that the firm-level determinants of capital structure explain insurer leveraging. Unlike banks, the 2007–2009 GFC positively affected the capital structure of insurance companies. Similar to banks, results showed that insurers have target capital structures which they seek to achieve in their financing and adjust to such targets at a rate of 21%, which is lower than that of banks. The study contributes to the body of knowledge in four major ways. Firstly, it adds to the literature on the capital structure of financial firms, which area has not been extensively and conclusively studied. Using a different environment, it validates the ‘standard corporate finance view’ as has been observed in the few studies on financial firms. Secondly, it validates the ‘buffer view’ and ‘regulatory view’ of capital structures of financial firms that have taken prominence since the last GFC. Thirdly, the study recognises that banks and insurance companies are fundamentally different with regard to capital structure and regulation and therefore warranted separate treatment in studies. This is in contrast with recent studies that do not recognise the heterogeneity of the two types of firms. Fourthly, to the researcher’s knowledge this study is the first to examine the impact of business cycles/financial crises on the financing patterns of financial firms. Confirming the fundamental differences between banks and insurance companies, the study observed that financial crises have a negative impact on capital structures of banks (meaning that they deleverage during crises). In contrast, financial crises have a positive impact on capital structures of insurance companies (meaning, unlike banks, they leverage during crises). / Business Management / D. Phil. (Management Studies)

Abstract in English, Afrikaans and Zulu / This study is aimed at investigating the capital structures of the Johannesburg Stock Exchange listed South African IT firms and compare these to the capital structures of NASDAQ listed US IT firms in order to better understand the capital structures that JSE listed South African firms employ. The study made use of secondary data in the form of ratio analysis from public sources, as well as the published annual financial statements of the firms. The Generalised Method of Moments regression analysis technique was used in order to test the data for relationships between certain ratios. The study found positive relationships between the firm’s capital structure and its return on equity; meaning that firms should make use of their capital structures to maximise their return on equity and as a result, returns for its shareholders. / Hierdie studie is daarop gerig om die kapitaalstrukture van Suid-Afrikaanse IT-ondernemings wat op die Johannesburgse Aandelebeurs (JSE) genoteer is te ondersoek, en dit te vergelyk met die kapitaalstrukture van NASDAQ-genoteerde Amerikaanse IT-ondernemings ten einde die kapitaalstrukture wat JSE-genoteerde Suid-Afrikaanse ondernemings gebruik, beter te verstaan. Die studie het sekondêre data in die vorm van verhoudingsontleding uit openbare bronne, asook die gepubliseerde finansiële jaarstate van die ondernemings gebruik. Die Veralgemeende Metode van Momente-regressieanalisetegniek is gebruik ten einde die data vir verwantskappe tussen bepaalde verhoudings te toets. Die studie het positiewe verwantskappe tussen die ondernemings se kapitaalstruktuur en opbrengs op ekwiteit gevind; dit beteken dat ondernemings hul kapitaalstrukture behoort te gebruik om hul opbrengs op ekwiteit en gevolglik ook opbrengste vir hul aandeelhouers te maksimeer. / Lolu cwaningo kuhloswe ngalo ukuhlola izinhlaka ezifaka imali ezinkampanini zobuchwephese bamakhompuyutha ezisohlwini lwe-Johannesburg Stock Exchange (i-JSE), nokuziqhathanisa nezinhlaka ezifaka imali ezinkampanini zase-US zobuchwepheshe bekhompuyutha ezisohlwini lwe-NASDAQ ukuze kuqondakale kangcono izinhlaka ezifaka imali ezinkampanini zaseNingizimu Afrika ezisohlwini lwe-JSE. Lolu cwaningo lusebenzise imininingwane eqoqwe kweminye emayelana nokucwaningwa kwezinombolo etholakala emithonjeni evulelekile emalungwini omphakathi kanye nakwizitatimende zezezimali zonyaka zezinkampani. Kusetshenziswe indlela yokucwaninga ehlawumbiselayo ngokuqhathanisa ubudlelwano neyaziwa ngokuthi yi-Generalised Method of Moments, ukuze kuhlolwe imininingwane eveza ubudlelwano phakathi kwezinombolo ezithile. Ucwaningo luthole ubudlelwano obubonakalayo phakathi kwezinhlaka ezifaka imali enkampanini kanye nenzuzo yayo yamanani amasheya; okusho ukuthi izinkampani kumele zisebenzise izinhlaka zazo ezizifakela imali ukwandisa amathuba enzuzo yamanani amasheya okuyinto ezodala ukuba kuhlomule abanini-bamasheya. / Finance, Risk Management and Banking / M. Com. (Finance)