The implications of capital structure theory and regulation for South African banking institutions

Abstract

The topic of capital structure has been one that has plagued the academic world for a number of years. There have been numerous works published on the subject which have presented such theories as the Modigliani and Miller Propositions, the Trade-off Theory, Pecking Order Theory, Signaling Theory and Agency Cost Theory to name a few. However, little research has been done on the application of these and other theories to banking institutions located in Southern Africa. This adds increased complexity to the determining of a local bank’s capital structure policy and the difficulty is further exacerbated by the increased application of regulatory control. In the wake of the recent global financial crisis, banking institutions have been placed under the spotlight and their capital adequacy levels come into question. A need was identified to investigate the impact that capital adequacy has on a bank’s performance and whether it achieves its purpose of increasing stability amongst banks. This study analysed the determinants of the capital structure of banks in South Africa based on secondary financial data and by performing this analysis attempted to establish trends in capital structure policy and regulatory compliance. The study also attempted to identify best practices that contribute to the overall value and performance of the banking institution. The expectation is that the correct application of capital structure theory and compliance with regulations will decrease a bank’s risk profile and in turn result in a more stable monetary system and economy. Overall, the results of the analysis were inconclusive, but lay the basis for potential future research. Conclusions drawn from the results and literature create greater understanding of the dynamics of capital structure and its implications to South African Banks. Copyright 2011, University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria. Please cite as follows: Naidu, W 2011, The implications of capital structure theory and regulation for South African banking institutions, MCom dissertation, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd-01272012-122305 / > C12/4/97/gm