Factors that influence debt financing of municipal owned entities: a case study of the city of Johannesburg

Abstract

This quantitative research was conducted to examine factors that have an influence on the debt financing of MoEs for the CoJ. It is quite evident from previous literatures that there has been a plethora of research undertaken on debt financing. Despite this, there has been very limited, or no, study conducted in South Africa especially on MoEs. The main objective of the study was to determine the factors that influence the debt financing of MoEs. To achieve this, both descriptive and correlational research designs were used, as well as panel data regression models. Data was collected from 13 MoEs under the CoJ from 2011 to 2015; moreover, secondary data was used as the main sources and extracted from the integrated annual reports. The study tested hypotheses on independent variables. The results show that profitability has a significant negative relationship with debt financing. On the other hand, the results revealed that coefficients such as interest rate (insignificant) size (insignificant), economic growth (significant), age (insignificant) and business risk (significant) have a positive association with debt financing. Results further show that borrowing was consistent throughout the study period, with MoEs relying more on short-term debt than on long-term debt. The study also concluded that during the period of the study, some entities were technically insolvent while others were at high risk of being liquidated. The findings are expected to contribute to the body of knowledge and play a pivotal role in Municipal Finance Management Act, no 56 of 2003 of National Treasury policy and decision making with regard to Local Government Municipal Finance Management Act 56 of 2003, particularly in relation to the parent municipality as well as its entities. More research needs to be conducted to investigate factors that influence investment decisions of MoEs/SOEs in South Africa and compare the various types of debt financing using larger sample size over a longer period.