Does Capital Structure Impact on the Performance of South African Listed Firms

Abstract

Issues surrounding capital structure and performance have been widely debated in literature, yet there has been no conclusion as to how composition of firm‘s capital impact on it performance. Using data on 136 quoted companies on the JSE from January 2000 to December 2014, and with a GMM analysis we explore the impact of capital structure on firm performance metrics in South African. The study suggests that total debt to total equity and total debt to total assets are inversely related to both Tobin q and return on assets, while long-term debt to total assets was related positively to both Tobin q and return on assets. On the other hand, total debt to total equity and longterm debt to total assets were inversely related to return on equity, while total debt to total assets were positively related to return on equity. It is therefore recommended that firms need to define their financial objective – either to maximise ROA or ROE. However, an optimal debt/equity mix must be sought, if both financial objectives must be pursued.