Institutional, macroeconomic and firm-specific determinants of capital structure

Abstract

Purpose – The study aims to investigate the role of institutions, macroeconomic conditions, industry and firm characteristics on firm's capital structure decision within the context of nine African countries. Design/methodology/approach – A sample of 986 firms over the period 1999-2008 were analysed using a series of models that link institutional, macroeconomic, industry and firm-specific characteristics, on the one hand, and measures of capital structure, on the other. The paper used system generalized method of moments and seemingly unrelated regression which are robust to data heterogeneity and endogeneity problems to estimate the relationships between variables. Furthermore, the paper checked the robustness of findings using various estimation procedures. Findings – The paper found evidence that the legal and financial institutions, income level of the country in which a firm operates, growth rate of the economy and inflation matter in capital structure choices of firms in the sample countries. Furthermore, capital structure choice of firms in the sample countries was affected by industry and firm-specific characteristics. These findings signify the role that probability of bankruptcy, agency costs, transaction costs, tax issues, information asymmetry problems, access to finance and market timing play in capital structure decisions of firms in Africa. Research limitations/implications – As in most empirical studies, this study focused on listed firms. Nonetheless, future studies that focus on non-listed firms could add additional insights to the extant literature. Practical implications – The findings have practical implications for corporate managers, governments, legislators and policymakers in the African continent. Originality/value – The study focuses on firms in African countries for which cross-country studies such as this are rare. It also explicitly models industry variable as one of the determinants of capital structure, a marked departure from previous studies on capital structure decision of firms.