An analysis of capital structures of listed industrial companies in South Africa
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Date
2016-08
Authors
Popoola, Babatunde Adedeji
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Abstract
This study examines the capital structure theories, specifically the trade-off theory and the
pecking order theory. It also analyses the influence of the capital structures choice among 72 listed industrial companies on the Johannesburg Stock Exchange ltd (JSE) in South Africa from 2005-2013 to determine whether these firms follow the trade-off theory or the peckingorder theory.
The external database (INET BFA) was used to obtain the data needed for the statistical
analysis. From the database, annual standardised financial statements, statement of
comprehensive income, cash flow statements, financial ratios, statement of change in equity and the retained earnings to debt ratio of all the listed industrial companies in South Africa from 2005- 2013 were extracted in order to enable the conducted research. A multiple regression and correlation analysis were carried out the with leverage ratio (trade-off theory) and the retained earnings to debt ratio (pecking order theory) as the independent variables and share price as the dependent variable, in order to examine which of the two theories is closely related to share prices in South Africa.
Furthermore, a multiple regression and correlation analysis was also done with common shares issued, retained earnings, long-term debt and weighted average cost of capital as the independent variables and share price as dependent variable, to determine if there is a relationship between the capital structure and share prices of the listed industrial company.
The results indicated that there were little or no influence of capital structure theory on share prices, the financing practices and the performance of listed companies in South Africa. This indicated that industrial companies in South Africa rarely practice capital structure in accordance with the capital structure theories. Moreover, retained earnings and long-term debt have a positive influence on the performance of listed industrial companies in South Africa from 2005-2013.
Description
M. Tech. (Cost and Management Accounting), Vaal University of Technology|