Abstract
The focus of this paper is to determine the impact of capital structure on the performance of companies listed in the financial sector of the Johannesburg Stock Exchange (JSE). Determining if capital structure influences the profitability of this sector is the first step in defining the optimal capital structure of companies of this sector. If a model of the optimal structure can be determined, supported by relevant capital structure theories, best practice would dictate acceptance and use of such a model.
As the financial sector acts as an intermediary for the economy of a country, it is one of the fundamental elements that supports economic growth. If this sector’s capacity and capabilities can be increased, it will lead to an improvement in the performance of this sector, which will thus be better suited to serve the needs of the country’s economy.
There are different capital structure theories that could hold sway in the financial sector in a South African context; these theories are the underlying theoretical framework on which this study is based. A quantitative approach, in the form of a Panel Data Analysis, is employed. This makes use of proxy variables that represent profitability (dependent variables) and capital structure (independent variables).
It was found that the major influencer of profitability of companies on the financial sector was the total debt that is part of their capital structure as well as their overall size. Although this reflects elements that are applicable within several different capital structure theories, it is the first time that these elements have been discussed in the financial sector context, as a whole, in South Africa. These variables are thus key elements in determining optimal capital structure for South African financial companies.
M.Com. (Finance)