Navigating The Debt-Equity Decisions Of Financial Services Firms: Some Evidence From South Africa

Abstract

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.

The determinant of African banks’ capital structure: Basel III Accord or bank-specific factors?

“…hypothesis 9) has a negative effect on bank leverage because of the low information asymmetry associated with tangible assets; in this case, share issues become less expensive, that is the leverage ratio decreases for firms with higher asset weight. This is consistent with the findings of Lim (2016), Lemma and Negash (2014) and Moyo (2016). This result is equally consistent with the pecking order theory.…”

“…This is in line with the aim of the liquidity standards, ensuring banks have enough liquid assets to withstand liquidity stress in the short term, hence, must be lowly geared to achieve this. The bank profitability, size, growth rate, risk and asset tangibility, which are the bank-specific determinant of capital structure all reported a significant negative relationship with African banks observed leverage ratio, satisfying the prominent theories of capital structure such as the trade-off theory, pecking order theory and the agency cost theory structure (Bilen & Kalash 2020;Bogale 2020;Gavalas & Syriopoulos 2018;Lemma & Negash 2014;Moyo 2016;Neves et al 2020).…”

Are the determinants of banks’ and insurers’ capital structures homogeneous? Evidence using South African data

“…The few studies have mainly been confined to investigating the determinants of solvency rather than capital structure. More recently, Moyo (2016) utilized a heterogeneous panel of South African insurance firms and banks institutions to test for the validity of the market timing, perking order and dynamic trade-off theories in explaining the financing behavior of financial services firms. He established that their financing behavior was consistent with the dynamic trade-off theory and contrary to the pecking order and market timing theories.…”