Firm and country specific determinants of capital structure in Sub Saharan Africa

Abstract

Purpose The purpose of this paper is to examine the effects of firm- and country-specific factors on the dynamics of capital structure for a new data set of firms in Sub-Saharan Africa. Design/methodology/approach Panel data estimation techniques are carried out on a set of 412 firms from 12 countries within Sub-Saharan Africa. Findings The results show that firm- and country-specific factors play an important role in the choice of debt for firms in Sub-Saharan Africa. First, firm profitability is the most common significant predictor of capital structure for firms in Sub-Saharan Africa. The significance and magnitude of profitability coefficients is more pronounced in countries with the least developed banking and stock markets and the weakest legal systems. Second, the rule of law in Nigeria and Zimbabwe provides avenues for firms in these countries to increase their debt maturity structures. The choice of debt for firms in Ghana is significantly influenced by the strength of the legal rights, the time to enforce a contract and the cost of contract enforcement. Third, capital structure adjustment speeds in all the sampled countries are relatively slow, possibly due to the market imperfections associated with the underdeveloped financial markets of Sub-Saharan Africa. Lastly, firms in the most developed stock markets of Sub-Saharan Africa tend to have lower mean debt ratios and faster capital structure adjustment speeds. Similarly, firms in countries with strong legal mechanisms tend to have higher mean long-term debt ratios and faster capital structure adjustment speeds. Originality/value This paper explores the influence of firm-level and country-specific factors on the dynamics of capital structure for a new data set that was previously ignored in the literature.

How Financial Leverage Differs Between Conventional and Islamic Banks: A Dynamic Model Perspective of Banking Sector in Pakistan

“…Therefore, bank leverage ratio is negatively associated with profitability of banks and similar pattern is also observed in our study. These results are coherent with pecking order theory of capital structure which exhibits negative association between profitability and level of debt (Chipeta & Deressa, 2016). In our sample of banks, tangibility is negatively related with bank leverage in CBs, while insignificant in sample of IBs.…”

“…However, impact of firm level factors exhibit under the umbrella of institutional factors as well as macro environmental factors embodying sensible differences in intensity and magnitude of their impact. As in the work of Chipeta and Deressa (2016), impact of profitability on leverage increases in countries with least developed stock and banking markets. This area is eye catching in research on capital structure because literature on financial decision making somehow empirically reports industry or sectoral impact on financial decisions of firms operating in the same industry (Antoniou, Guney, & Paudyal, 2008;MacKay & Phillips, 2005).…”

Determinants of Capital Structure: A Conceptual Understanding of Oil and Gas Firms in Malaysia

“…Several studies confirmed that assets tangibility has a positive relationship with leverage level which is in line with the Trade-off theory (Berkman, Iskenderoglu, Karadeniz, & Ayyildiz, 2016;Deesomsak, Paudyal, & Pescetto, 2004;Dhingra & Dev, 2016;Hussain et al, 2015;Md-Yusuf, Mohammad Yunus, & Md Supaat, 2013;Sabir & Malik, 2012;Vo, 2017). Matias and Serrasqueiro (2017), Vo (2017), Chipeta and Deressa (2016), Oino and Ukaegbu (2015), Proença, Laureano, and Laureano (2014), Taddese Lemma and Negash (2013), Ting and Lean (2011) showed evidence that assets tangibility has a positive relationship with long-term debt as posited by Trade-off theory, and it has a negative relationship with short-term debt as posited by Pecking Order theory. Thus, it suggests that most of the firms use tangible assets as collateral to issue long-term debt, hence being less dependent on short-term debt.…”

“…This is because the use of retained earnings can avoid the issuance cost of debt and equity. According to Chipeta and Deressa (2016), in developing countries, the capital markets are not well-developed. It is supported by Vo (2017), Bekaert and Harvey (2017) that firms in developing countries heavily rely on banks as a major source of financing.…”

“…According to Hall (2012), the existence of collateral can help creditors to determine the riskiness of borrowers and used as a resort in the event of bankruptcy. Furthermore, less financial distress costs are expected with the existence of tangible assets (Chipeta & Deressa, 2016) as tangible assets can be converted into cash in the case on any cash requirement situation. Thus, creditors will feel confident that the firm will be able to meet the obligation to pay the debt and at the same time firms are able to reduce the financial distress cost.…”