Ownership structure and capital structure dynamics in South African firms

Abstract

Background: The ownership structure can impact capital structure decisions as owners are an influential group that govern the financial decisions of firms. Hence, the ownership structure and the categories of its owners have important implications for the capital structure of firms. Aim: This study investigates the linear and non-linear effects of different ownership types (managerial, foreign, institutional, government, and family) on the debt ratios of firms. Setting: This study includes 267 non-financial firms listed on the Johannesburg Stock Exchange (JSE) from 2004 to 2021, accounting for fluctuation in listings during this period. Method: The fixed effects model is used to estimate the impact of ownership structure on capital structure, while the Sasabuchi-Lind-Mehlum test evaluates non-linearity. Additionally, the Durbin-Wu-Hausman test is employed to detect whether endogeneity is present in this study. Results: The findings indicate that government ownership has a positive linear relation with the total debt and long-term debt ratio, while a non-linear inverse U-shaped relationship is found between institutional ownership and long-term debt, with an optimal level of 34.3%. Conclusion: The study concludes that the ownership structure is an important factor driving capital structure decisions, with government and institutional ownership directly impacting the debt ratios of firms. Contribution: This article expands the limited knowledge of the impact of ownership structure on capital structure and is the first to explore non-linear effects in the South African context. The findings offer valuable insights for boards and management that may aid them in strategically configuring ownership structures that optimise their capital structures.

Keywords

• ownership structure
• ownership types
• capital structure
• debt
• slm
• non-linear
• jse.