Capital Structure and Financial Performance of Retail Firms: Empirical Evidence from South Africa
Keywords:
Capital structure; financial performance; retail sector; South AfricaAbstract
Capital structure has been a subject of debate for a number of decades. Extant studies have tried to test the various theories of capital structure. The most notable theories are the Modigliani and Miller capital structure irrelevance propositions; the trade-off, and the pecking order theories. Therefore, due to inconclusive findings in earlier studies this paper attempted to determine the relationship between capital structure and financial performance within the retail industry in South Africa. The wholesale and retail sector accounts for a large portion of South Africa’s Gross Domestic Product, which signifies that the retail sector is worth exploring in order to obtain an overview of their capital structure and financial performance. This study employed as sample of 18 South African firms in the wholesale and retail sector listed on the Johannesburg Securities Exchange. The data was extracted for a ten-year period ranging from 2010 to 2019. Panel data econometric techniques were used to conduct the analysis. The study found a negative relationship between capital structure and financial performance of South African retail firms. The findings were consistent with the pecking order theory that predicted a negative relationship between debt and financial performance. Therefore, it can be inferred that the profitability of retail firms in South Africa is not a function of how much debt firms have accumulated. The current debt levels in this sector negatively influenced financial performance. This finding was in alignment with the pecking order theory of financing behaviour as opposed to the trade-off theory of financing behaviour.
References
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41. Myers, S.C. 2001. Capital structure. Journal of Economic Perspectives, 15(2): 81-102.
42. Nassar, S. 2016. The impact of capital structure on Financial Performance of the firms: Evidence from Borsa Istanbul. Journal of Business & Financial Affairs, 5(2):1-4.
43. Obim, E.N., Anake, A.F. & Awara, F.A. 2014. Determinants of Financial Structure: Evidence from Nigerian Quoted Firms. Research Journal of Finance and Accounting, 5(16):53-66.
44. Ochola, V.O. 2013. The relationship between corporate governance and financial performance of fund managers in Kenya. Master of Business Administration. University of Nairobi, Nairobi.
45. Ogbulu, O.M. & Emeni, F.K. 2012. Capital structure and firm value: Empirical evidence from Nigeria. International Journal of Business and Social Science, 3(19):252-259.
46. Pinegar, J. & Wilbricht, L. 1989. What managers think of capital structure theory: a survey. Financial Management, 18(4):82-91.
47. Pouraghajan, A., Malekian, E., Emamgholipour, E., Lotfollahpour, V., & Bagheri, M.M. 2012. The relationship between capital structure and financial performance evaluation measures: evidence from the Tehran Stock Exchange. International Journal of Business and Commerce, 1(9):166-188.
48. Rashid, K. 2008. A Comparison of Corporate Governance and Financial performance in Developing (Malaysia) and Developed (Australia) Financial Markets. Doctoral Thesis, Victoria University, Melbourne.
49. Rouf, A. 2015. Capital Structure and Financial performance of Listed Non-Financial Companies in Bangladesh. The International Journal of Applied Economics and Finance, 9(1):25-32.
50. Salim, M. & Yadav, R. 2012. Capital Structure and Financial performance: Evidence from Malaysian Listed Companies. Procedia - Social and Behavioral Sciences, 65:156-166.
51. Sheikh, J., Wajid, S.A., Waheed, I., & Muhammad, T.M. 2012. Pecking at Pecking Order Theory: Evidence from Pakistan’s Non-financial Sector. Journal of Competitiveness, 4(4):86-95.
52. Shyam-Sunder, L. & Myers S.C. 1999. Testing static trade-off against pecking order models of capital structure. Journal of Financial Economics, 51(2):219-244.
53. Simerly, R. & Li, M. 2000. Environmental dynamism, capital structure and performance: a theoretical integration and an empirical test. Strategic Management Journal, 21(1):31-49.
54. Statistics SA. 2018. Statistical release P6242.1. Pretoria: Statistics SA.
55. Titman, S. & Wessels, R. 1988. The Determinants of Capital Structure Choice. The Journal of Finance, 43(1):1-19.
56. Tshipa, J. & Mokoteli, T. 2015. The South African Code of Corporate Governance: The relationship between compliance and financial performance: Evidence from South African publicly listed firms. Corporate Ownership & Control, 12(2): 149-169.
57. Van Esch, R. 2001. The differences in capital structure between the G-7 countries and the E-7 countries. International Business Administration. VU Amsterdam, Amsterdam.
58. Young, J. 2010. Corporate governance and risk management: a South African perspective. Corporate Ownership & Control, 7(3): 36-145.
2. Abor, J. 2005. The effect of capital structure on profitability: empirical analysis of listed firms in Ghana. The Journal of Risk Finance, 6(5):435-45.
3. Agrawal, A. & Mandelker, G.N. 1987. Managerial incentives and corporate investment and financing decisions. The Journal of Finance, 42(4):823-837.
4. Ahmeti, F. & Prenaj, B. 2016. A critical review of Modigliani and Miller’s theorem of capital structure. International Journal of Economics, Commerce and Management, 3(6):914-924.
5. Appiadjei, E. 2014. Capital Structure and Financial performance: Evidence from Ghana Stock Exchange. Research Journal of Finance and Accounting, 5(16):37-43.
6. Arnold, G. 2005. The handbook of corporate finance: a business companion to financial markets, decisions and techniques. London: Prentice Hall.
7. Atrill, P. 2009. Financial management for decision makers. 5th ed. Harlow, UK: Prentice Hall.
8. Ayeni, T.B. & Olaoye, B. J. 2015. Cost of capital theory and firm value: Conceptual perspective. International Journal of Multidisciplinary Research and Development, 2(10):632-636.
9. Berger, A.N. & Bonaccorsi di Patti, E. 2006. Capital structure and financial performance: a new approach to testing agency theory and an application to the banking industry. Journal of Banking and Finance, 30(4):1065-1102.
10. Champion, D. 1999. Finance: the joy of leverage, Harvard Business Review. 77:19-22.
11. Chen, L. & Strange, R. 2005. The determinants of capital structure: evidence from Chinese listed companies. Journal Economic Change and Restructuring, 38:11-35.
12. Chen, L., Jung, C., & Chen, S.Y. 2011. How the Pecking-Order Theory Explain Capital Structure. Journal of International Management Studies, 6.2(1984),1-9.
13. Correia, C., Flynn, D., Uliana, E., Wormald, M. & Dillon, D. 2015. Financial management. 8th edition. Juta & Company Limited, Cape Town.
14. Datta, R., Chowdhury, T., & Mohajan, H. 2013. Reassess of capital structure theories. International Journal of Research in Computer Application & Management, 3(10):1-6.
15. De Jong, A., Kabir, R., & Nguyen, T.T. 2008. Capital structure around the world: the roles of firm and country specifics determinants. Journal of Banking and Finance, 32(9):1954- 1969.
16. Du Plessis, S. & Smit, B. 2006. Economic policy under democracy: a ten year review: Stellenbosch, October 28-29, 2005, Department of Economics. University of Stellenbosch.
17. Ebaid, I.E. 2009. The impact of capital structure choice on financial performance: empirical evidence from Egypt. The Journal of Risk Finance, 10(5):477-487.
18. Fama, E. & French, K. 2002. Testing trade-off and pecking order predictions about dividends and debt. The Review of Financial Studies, 15(1):1-33.
19. Frank, M.Z. & Goyal V.K. 2002. Testing the pecking order theory of capital structure. Journal of Financial Economics, 67:217-248.
20. Graham, J.R. 1996. Debt and the marginal tax rate. Journal of Financial Economics, 41(1):41–73.
21. Gwatidzo, T. & Ojah, K. 2009. Corporate capital structure: evidence from five African countries. The African Finance
22. Hadlock, C. & James, C. 2002. Do banks provide financial slack?. Journal of Finance, 57:1383-420.
23. Hamdan, A.M.M. & Al Mubarak, M.M.S. 2017. The impact of board independence on accounting-based performance: Evidence from Saudi Arabia and Bahrain. Journal of Economic and Administrative Sciences, 33(2):114-130.
24. Hawawini, G. & Viallet, C. 1999. Finance for executives. Cincinnati: South Western.
25. Harris, M. & Raviv, A. 1991. The Theory of Capital Structure. Journal of Finance, 46(1):297–355.
26. Hove, R. 2017. The impact of capital structure on company profitability of industrial companies listed on the Johannesburg Stock Exchange. Master of Commerce. University of Pretoria, Pretoria.
27. Jensen, M. & Meckling, W. 1976. Theory of the firm: managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(4):305-360.
28. Jensen, M. 1986. Agency costs of free cash flow, corporate finance and takeovers. The American Economic Review, 76(2):323-329.
29. Jensen, M. 2001.Value maximization, Stakeholders Theory and the Corporate Objective Function. Journal of Applied Corporate Finance, 14(3):8-21.
30. Kasozi, J.S. 2018. Capital Structure and The Profitability of Listed Retail Firms. Journal of Economics and Behavioral Studies, 10(1):171-181.
31. Kasozi, J.S. & Ngwenya, S. 2010. The capital structure practices of listed firms in South Africa. Corporate Ownership & Control, 8(1):624-636.
32. Kraus, A. & Litzenberger, R. 1982. A State-Preference Model of Optimal Financial Leverage. Journal of Finance, 28(4):911-922.
33. Le, T.P.V. & Phan, T.B.N. 2017. Capital structure and financial performance: Empirical evidence from a small transition country. Research in International Business and Finance, 42:710-726.
34. Mashayekhi, B. & Bazaz, M.S. 2008. Corporate Governance and Financial performance in Iran. Journal of Contemporary Accounting and Economics, 4(2):156-172.
35. Miles, J. & Ezzell, J. 1980. The weighted average cost of capital, perfect capital markets, and project life: A clarification. Journal of Financial and Quantitative Analysis, 15(3):719–730.
36. Miller, M.H.1988. The Modigliani-Miller Propositions After Thirty Years. The Journal of Economic Perspectives, 2(4):99-120.
37. Modigliani, F., & Miller, M. 1958. The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3):261-297.
38. Modigliani, F., & Miller, M. H. 1963. Corporate income taxes and the cost of capital: a correction. The American Economic Review, 53(3):433-443.
39. Muazeib, A.I., Chairiri, A., & Ghozali, I. 2015. Does corporate governance drive capital structure of Johannesburg listed companies?. International Journal of Business, Economics and Law, 6(1):23-34.
40. Myers, S. C. & Majluf. N. S. 1984. Corporate Financing and Investment Decision when Firms have Information that Investors do not have. Journal of Financial Economics, 13(2):187-221.
41. Myers, S.C. 2001. Capital structure. Journal of Economic Perspectives, 15(2): 81-102.
42. Nassar, S. 2016. The impact of capital structure on Financial Performance of the firms: Evidence from Borsa Istanbul. Journal of Business & Financial Affairs, 5(2):1-4.
43. Obim, E.N., Anake, A.F. & Awara, F.A. 2014. Determinants of Financial Structure: Evidence from Nigerian Quoted Firms. Research Journal of Finance and Accounting, 5(16):53-66.
44. Ochola, V.O. 2013. The relationship between corporate governance and financial performance of fund managers in Kenya. Master of Business Administration. University of Nairobi, Nairobi.
45. Ogbulu, O.M. & Emeni, F.K. 2012. Capital structure and firm value: Empirical evidence from Nigeria. International Journal of Business and Social Science, 3(19):252-259.
46. Pinegar, J. & Wilbricht, L. 1989. What managers think of capital structure theory: a survey. Financial Management, 18(4):82-91.
47. Pouraghajan, A., Malekian, E., Emamgholipour, E., Lotfollahpour, V., & Bagheri, M.M. 2012. The relationship between capital structure and financial performance evaluation measures: evidence from the Tehran Stock Exchange. International Journal of Business and Commerce, 1(9):166-188.
48. Rashid, K. 2008. A Comparison of Corporate Governance and Financial performance in Developing (Malaysia) and Developed (Australia) Financial Markets. Doctoral Thesis, Victoria University, Melbourne.
49. Rouf, A. 2015. Capital Structure and Financial performance of Listed Non-Financial Companies in Bangladesh. The International Journal of Applied Economics and Finance, 9(1):25-32.
50. Salim, M. & Yadav, R. 2012. Capital Structure and Financial performance: Evidence from Malaysian Listed Companies. Procedia - Social and Behavioral Sciences, 65:156-166.
51. Sheikh, J., Wajid, S.A., Waheed, I., & Muhammad, T.M. 2012. Pecking at Pecking Order Theory: Evidence from Pakistan’s Non-financial Sector. Journal of Competitiveness, 4(4):86-95.
52. Shyam-Sunder, L. & Myers S.C. 1999. Testing static trade-off against pecking order models of capital structure. Journal of Financial Economics, 51(2):219-244.
53. Simerly, R. & Li, M. 2000. Environmental dynamism, capital structure and performance: a theoretical integration and an empirical test. Strategic Management Journal, 21(1):31-49.
54. Statistics SA. 2018. Statistical release P6242.1. Pretoria: Statistics SA.
55. Titman, S. & Wessels, R. 1988. The Determinants of Capital Structure Choice. The Journal of Finance, 43(1):1-19.
56. Tshipa, J. & Mokoteli, T. 2015. The South African Code of Corporate Governance: The relationship between compliance and financial performance: Evidence from South African publicly listed firms. Corporate Ownership & Control, 12(2): 149-169.
57. Van Esch, R. 2001. The differences in capital structure between the G-7 countries and the E-7 countries. International Business Administration. VU Amsterdam, Amsterdam.
58. Young, J. 2010. Corporate governance and risk management: a South African perspective. Corporate Ownership & Control, 7(3): 36-145.
Published
2020-09-17
How to Cite
Mukaddam, S., & Sibindi, A. B. (2020). Capital Structure and Financial Performance of Retail Firms: Empirical Evidence from South Africa: Array. Acta Universitatis Danubius. Œconomica, 16(5). Retrieved from https://dj.univ-danubius.ro/index.php/AUDOE/article/view/553
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Business Administration and Business Economics
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