The capital structure practises of listed firms in South Africa

Abstract

This study examines the divide between finance theory and practice by analysing the significance of the determinants of capital structure choice among 123 listed firms on the JSE, to determine whether these firms follow the trade-off theory or the pecking-order theory. Data obtained from McGregor’s Bureau of Financial Analysis database was analysed using standard multiple regressions, stepwise regressions and ANOVA techniques to test for financing behaviour. The results indicated that the trade-off model has both cross-sectional and time-series explanatory power for explaining the financing behaviour, while tests on the pecking-order model were weak. The results further revealed a significant positive correlation between debt financing and financial distress, and a significant negative correlation between debt financing and the collateral value of assets during the period under study (1995-2005). These findings suggest a divergence between finance theory and practice for JSE listed firms and manifest conflicting ideologies between finance practices of developed and developing economies.