Includes bibliographical references (leaves 83-88). / This study intends to offer further insight into the determinants of capital structure of industrial firms listed on the Johannesburg Stock Exchange. The amount of debt in a firm is an indication of leverage and this study uses various different ratios as a proxy for capital structure. Using multiple regressions, the study sets out to establish whether a relationship exists between a selection of determinants and the capital structure of a firm. The study considers previous research and seminal theories such as the Modigliani-Miller theorem, the trade-off theory, the agency theory and the pecking order theory. The determinants used in this study (and their respective measures) are; the firm's business risk (standard deviation of sales), size (natural log of sales), asset composition (fixed assets/total assets), profitability (earnings before interest and tax/total assets), growth opportunities (market value of equity/book value of equity) and age of the firm (years since incorporation). The study also considers the differentiation between long and short-term debt in identifying the determinants of capital structure. The sample constitutes seventy-one listed industrial firms, for each year, during the period from 2001 to 2005. Using cross-sectional multiple regression, the study attempts to establish whether relationships change over time. Comparing the coefficient of determination of the models over the five years, no significant trend was noted. Overall however, there did appear to be a general decline in the coefficient of determination from 2001 to 2002, and increases in 2003 and 2005. The decline in 2002 could potentially be related to the global market downturn and devaluation of the Rand during this period. In the multiple regression tests done on the pooled sample, there was found to be a positive correlation between both business risk and tangibility, with total and long-term debt, and a negative correlation with short-term debt. It is suggested that riskier firms are dissuaded from issuing shares at their low market prices, therefore prefer debt, and firms with more tangible assets have more to offer as means of collateral. The size and age of the firm were found to have a negative correlation with total and long-term debt, and firm size a positive correlation with short-term debt. Across all leverage ratios, there was evidence of a significant negative correlation with profitability. The findings of the latter three determinants; firm size, age and profitability, are consistent with the pecking order theory. This theory suggests that firms prefer to use their accumulated income before taking on more debt or issuing equity. The findings of this study were found to be consistent with past empirical research.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:uct/oai:localhost:11427/8981 |
| Date | January 2009 |
| Creators | Luscombe, Leshane |
| Contributors | Wormald, Michael |
| Publisher | University of Cape Town, Faculty of Commerce, Department of Finance and Tax |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Master Thesis, Masters, MCom |
| Format | application/pdf |
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