ENGLISH ABSTRACT:The determinants of capital structure form an important part of the finance profession.Contemporary capital structure theory began in 1958 when Modigliani and Millerindicated that in a perfect capital market, the value of a firm is not influenced by itscapital structure. However, when considering, inter alia, the effect of taxes, bankruptcycosts and asymmetric information, the value of a firm could be affected by its leverage.Capital structure theory offers two contrasting capital structure models, namely thetrade-off and pecking order models. According to the trade-off model, firms trade-offthe costs and benefits of debt financing in order to reach an optimal capital structure.According to this model, a positive relationship exists between leverage andprofitability. In contrast, the pecking order model indicates that firms use a financinghierarchy where internal funds are preferred above debt and equity usage. This modelindicates a negative relationship between leverage and profitability. However, inpractice, firms often deviate from these models to incorporate the benefits of the othermodel or to adapt to changing circumstances.Firms' financing decisions may be influenced by both firm-specific and economicalfactors within the country where they are operating. Therefore, a firm's managers shouldconsider the growth rate, interest rate, repo rate, inflation rate, exchange rates and thetax rate when conducting finance decisions, since these factors could influence the costand availability of capital. In addition, these economical factors often have a significantinfluence on each other.Prior capital structure research mainly focused on developed countries. However, SouthAfrica provides the ideal environment to consider the effect of economic changes oncapital structure within a developing country, due to South Africa's profound economicchanges during 1994 and the years to follow. The primary objective of this study wasthus to determine whether the capital structures of South African listed industrial firmsare influenced by changes in the South African economical environment.The effect of economic changes on capital structure was examined by using aTSCSREG (time-series cross-section regression) procedure. The regression model isbased on a model developed by Fan, Titman and Twite (2008). One-period lags were built into the model to make provision for the effect of economic changes that oftenonly occur after some time. The study was conducted on a sample of firms listed on theindustrial sector of the Johannesburg Securities Exchange (JSE Ltd) over the period1989 to 2008.The data, required to calculate the measures, were obtained from the South AfricanReserve Bank, the South African Revenue Service and the McGregor BFA database.This database contains standardised financial statements for both listed and delistedSouth African firms. In an attempt to reduce the possible skewing of results due tosurvivorship bias, both listed and delisted firms were included in the sample. In order toreflect its true nature, data should be available for consecutive years. Therefore, onlyfirms with data available for more than five years were included in the final sample. Theresulting sample consisted of 320 firms and 4 172 observations. The sample was alsodivided into years before and years after 1994, in order to determine the effect of theeconomic changes during 1994 and the years to follow on the firms' capital structures. The results of this study indicated that some of the economic factors influenced the D/Eratio as well as each other. However, the effect of economic changes often onlyoccurred after a lagged period. A strong relationship was indicated between the tax rateand the repo rate, which influenced the significance of the regression results. Supportwas found for both the trade-off and the pecking order models. The combinedprofitability variable ROA-ROE also had a significant effect on the other variables.Based on these results, the claim that economic changes have an impact on capitalstructure is supported. The effect is often only indicated after a certain period. It alsoseems that the combination of the two capital structure models have a significant effecton leverage. Firms therefore appear to consider a combination of these models whenconducting finance decisions.
