Effect of macroeconomic conditions on capital structure choice for listed South African firms

Abstract

The objective of this study was to investigate the effect of macroeconomic conditions on capital structure choices of listed South African firms. Three variables were identified to be of interest, namely: real gross domestic product (GDP) growth rate, inflation rate, and unemployment rate. The sample consisted of 230 listed firms, and analysis was done through fixed-effect regression. Macroeconomic variables were found to have an effect on capital structure choice of firms. Real GDP growth was found to have a positive influence on long term and overall leverage. Whilst inflation was found to have a negative effect on long term and overall leverage. Unemployment rate, on the other hand, was found to positively influence long term leverage, short term leverage and overall leverage. The findings from this study on the influence of both real GDP growth and inflation on leverage suggest that firm management make decisions on issuance of short term debt in a different manner to long term debt. The same was not true with unemployment rate though, this variable influenced both types for leverage in a similar manner. These findings have some implications for how managers should think about macroeconomic changes when making decisions on their firm‟s capital structure.