Abstract
Abstract : This study investigated the impact of capital structure on the financial performance of South African construction companies listed on the Johannesburg Stock Exchange (JSE). Short-term Debt to Total Assets Ratio (STDTA), Long-term Debt to Total Assets Ratio (LTDTA) and Interest Cover Ratio (ICR) were used as independent variables proxying capital structure whilst Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q (TOBIN) were used as dependent variables representing financial performance to determine the impact of capital structure on financial performance. The final sample consisted of nine companies in the South African construction sector that were listed on the JSE. Annual data for seven years from 2011 to 2017 was collected from the audited consolidated financial statements of these companies and was examined using a panel regression analysis. The Hausman test was conducted to select the final model between the fixed effects model and random effects model. Size in terms of sales growth was noted to have a positive impact on financial performance as represented by ROA, thus construction companies’ management ought to come up with strategies that improve sales. Both STDTA and LTDTA had no impact on TOBIN whilst ICR had no impact on the companies’ financial performance. However ROA and ROE were inversely related to both STDTA and LTDTA. The study indicates to stakeholders that debt needs to be managed properly since it has the power to adversely affect the company’s financial performance. The results of the study are therefore contrary to the trade-off theory that advocates the use of debt to enhance financial performance through tax deductions. The study contributes to existing literature on finance, especially in the context of African emerging economies such as South Africa.
M.Com. (Finance)