Abstract:
This study uses a sample of 49 manufacturing, 24 mining and 23 retail firms listed on the Johannesburg Stock Exchange during the period 2005-2010 to investigate the relationship between leverage and the firm’s key financial performance variables. Leverage is directly proportional to cash flow. This is consistent with the trade-off (TO) and agency theories. Capital expenditure is positively correlated to leverage, while asset tangibility and retention rate are negatively correlated to leverage. These findings confirm the validity of the pecking order theory. Liquidity and financial distress are negatively correlated to leverage. Consistently with the TO theory, leverage increases with profitability. Share price is positively correlated to leverage and this finding validates the market timing theory. The economic value added (EVA) is positively correlated to leverage and this finding rejects the TO theory. The true speed of adjustment for the sample is 64.20% for book-to-debt ratio and 28.11% for market-to-debt ratio.
