This study tests the trade-off and pecking order hypotheses of corporate financing decisions and estimates the speed of adjustment toward target leverage using a cross-section of 42 manufacturing, 24 mining and 21 retail firms listed on the Johannesburg Stock Exchange (JSE) for the period 2000-2010. It uses the generalised least squares (GLS) random effects, maximum likelihood (ML) random effects, fixed effects, time series regression, Arellano and Bond (1991), Blundell and Bond (1998) and random effects Tobit estimators to fit the two versions of the partial adjustment models. The study finds that leverage is positively correlated to profitability and this supports the trade-off theory. The trade-off theory is further supported by the negative correlation on non-debt tax shields. Consistent with the pecking order theory, capital expenditure and growth rate are positively correlated to leverage while asset tangibility is inversely related to leverage. The negative correlation on financial distress and the positive correlation on dividends paid support both the pecking order and trade-off theories. These results are consistent with the view that the pecking order and trade-off theories are non-mutual exclusive in explaining the financing decisions of firms. The results also show that South African manufacturing, mining and retail firms do have target leverage ratios and the true speed of adjustment towards target leverage is 57.64% for book-to-debt ratio and 42.44% for market-to-debt ratio.

This study used the random effects Tobit model to investigate the validity of the market timing, trade-off and pecking order hypotheses of capital structure in 143 non-financial firms listed on the Johannesburg Stock Exchange. The results show that leverage is positively correlated to the modified external finance weighted average market-to-book ratio (EFWAMB). Firm profitability and growth rate are negatively correlated to leverage whilst firm size and asset tangibility are positively correlated to leverage. The firms also have target leverage ratios towards which they actively adjust at an unbiased speed of 41.80% for the market-to-debt ratio and 52.82% for the book-to-debt ratio. EFWAMB has a negligible effect on the firms’ speeds of adjustment towards target leverage. The results are robust. These results reject the market timing hypothesis in support of the dynamic trade-off and pecking order hypotheses. They further confirm the fact that these two theories of capital structure are not mutual exclusive.

The core function of a commercial bank is the provision of credit facilities to its customers and to keep the flow and cycle of economic and financial resources balanced. Banks can only perform these functions if they are well regulated and efficient. The main focus of this study is to analyse the efficiency of African banks, most importantly after the 2008 global financial crisis when the Basel III regulations were popularly adopted by banks globally. The research focus was examined in two ways, the first part focused on investigating the impact of the Basel III capital regulations on the operational and investment efficiency of African banks by using the random effects and pooled ordinary least square panel data regression models. The second part examined if the African banks are indeed efficient by analysing their level of efficiency using the input-oriented DEA approach. The study used audited bank-level data from 45 listed banks operating in six African nations, namely, South Africa, Nigeria, Kenya, Tanzania, Uganda and Malawi, that have adopted the Basel III Accord for the period from 2010 to 2019. The bank-level data were obtained from the IRESS database. The findings revealed that capital buffer premiums significantly affect the operating and investment efficiency of African banks positively. This relationship implies that the capital buffer premium does not only serve as cushion capital against financial, market and economic shocks but also improves the banks’ efficiency by influencing the banks’ decisions and perspective on cost containment strategies. Another key finding is the positive influence the liquidity coverage ratio has on banks’ operational efficiency. The implication of this relationship may simply mean that African banks with well-performing liquidity ratios are efficient in their operations with the ability to meet their short-term obligations such as meeting customers’ credit needs, unannounced depositors’ withdrawals and creditors’ repayments, amongst others. This result could well be interpreted that adopting stricter liquidity requirements creates a liquidity buffer for African banks, giving them cushion confidence to undertake profitable and high-yielding projects, which invariably lead to increased profitability and operational efficiency. Furthermore, the DEA results showed that the sampled banks are operationally efficient with an aggregate of 84.8%, and for their investment efficiency, an aggregate of 94.9%. These findings suggest that African banks are largely efficient and can survive any possible financial or economic crisis. It can be put forward that it is probable that banks that are yet to adopt the Basel III Accord or strengthen their capital and liquidity base, are less efficient and might fail during a global crisis. The current work suggests some appropriate policy-based recommendations.

This study uses a sample of 49 manufacturing, 24 mining and 23 retail firms listed on the Johannesburg Stock Exchange during the period 2005-2010 to investigate the relationship between leverage and the firm’s key financial performance variables. Leverage is directly proportional to cash flow. This is consistent with the trade-off (TO) and agency theories. Capital expenditure is positively correlated to leverage, while asset tangibility and retention rate are negatively correlated to leverage. These findings confirm the validity of the pecking order theory. Liquidity and financial distress are negatively correlated to leverage. Consistently with the TO theory, leverage increases with profitability. Share price is positively correlated to leverage and this finding validates the market timing theory. The economic value added (EVA) is positively correlated to leverage and this finding rejects the TO theory. The true speed of adjustment for the sample is 64.20% for book-to-debt ratio and 28.11% for market-to-debt ratio.

Empirical studies on the impact of regulation on the financial policies of banks have documented that unconstrained forward-looking banks with sufficient franchise value build and actively maintain capital buffers. This financing behaviour thus relegates the regulatory intervention to non-binding and of secondary importance. This study used a sample of 29 financial services firms listed on the Johannesburg Stock Exchange (JSE) during the period 2003 to 2012 to test for the validity of the market timing, pecking order and the dynamic trade-off theories in explaining the financing behaviour of financial services firms. Consistent with the dynamic trade-off theory and contrary to the market timing and pecking order theories, the study documents that, leverage is positively correlated to firm profitability, size and asset tangibility. The firms’ true speed of adjustment is 56.80% for the market-to-debt ratio (MDR) and 71.31% for the book-to-debt ratio (BDR). The modified external finance-weighted average market-to-book has an insignificant positive and negative correlation with the MDR and the BDR respectively. Taken together, the JSE-listed financial services firms have target optimal capital structures which they actively adjusts towards. Their security issuance decisions are not driven by the stock market performance, share returns or the time-varying adverse selection costs.