Structural breaks in the parameter estimates of the determinants of capital structure : Some evidence from the JSE

Purpose – This paper aims to test the effects of financial reforms on the structural stability of the parameter estimates in the determinants of capital structure. Design/methodology/approach – A panel of 100 non‐financial companies listed on the Johannesburg Stock Exchange is constructed, and a panel least squares estimation technique is used to test for lagged, current and leading structural breaks in the firm specific determinants of leverage. Findings – The results show that structural reforms have a significant role in influencing the empirical relationship between leverage and its determinants. Specifically, the lifting of international sanctions and stock market liberalisation have a significant impact on the stability of the profitability, growth and tax rate variables for the book and market values of the debt to equity ratio. Furthermore, when the total and short term debt ratios are considered, only stock market liberalisation appears to have a significant influence on the stability of the profitability parameter. Originality/value – This paper adds to the existing body of literature on capital structure by documenting the extent of structural breaks in the parameter estimates of the relationship between leverage and firm specific determinants of capital structure for listed non‐financial firms in South Africa.