Dimensions of capital structure of companies : evidence from Sub-Saharan Africa

• Main Author: Danso, Albert
• Other Authors: Uddin, Moshfique ; Anderson, Keith
• Published: University of York 2014
• Subjects: 658
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.631493

The purpose of this study was to identify the factors of capital structure decisions among firms in Sub-Saharan Africa (hereafter SSA) and to find out whether the fundamental assumptions underpinning the western capital structure theories are also valid in the SSA region. This study therefore examined the capital structure practices of firms in SSA countries by combining responses from a survey of 119 firms in Ghana and secondary data from seven other SSA countries obtained from Datastream. The two data were analysed separately using SPSS, STATA and ORIGIN to provide an in-depth understanding of the situation. The findings from this study indicate that firms in SSA possess a lower leverage ratio as observed in other less developed market economies. Firm-specific factors such as profitability, earnings volatility, and tangibility have significant impacts on leverage and are also consistent with the predictions of conventional capital structure models, particularly the pecking order and the trade–off models. In spite of the institutional differences that exist between the Western world and SSA firms, the results suggest that some of the firm-level factors that are relevant in explaining capital structure in the western context are also relevant in SSA. Besides, drawing on the institutional differences hypothesis, this study observes that tax is less important in capital structure decisions of firms in SSA. The results also show that firm size, asset tangibility, and rule of law moderate the association between firm-level factors and leverage. Notably, the results show that the weak regulatory environment in SSA facilitates tax evasion by large firms in SSA and that size-tax interaction is negatively related to leverage in SSA. This study has contributed to knowledge in a number of ways: Firstly, no study has specifically investigated the financing behaviour of firms through a cross-country comparison analysis in SSA. In addition, this study is the first within the SSA to quantify the effects of non-conventional institutional factors and to provide support for incorporating these factors as essential components in the traditional theories of debt-equity choice.