The global financial crisis and the speed of capital structure adjustment: Evidence from South Africa

Abstract

Orientation: The 2007–2008 global financial crisis (GFC) represented a negative economic shock that financially constrained most firms globally. Research purpose: This study investigated the impact of the 2007–2008 GFC on firms’ speed of adjustment (SOA) towards target leverage and whether this is a good descriptor of corporate financing for Johannesburg Stock Exchange (JSE)-listed nonfinancial firms. Motivation for the study: There is limited evidence, if any, on how the GFC affected firms’ SOA. Research approach/design and method: This study used panel data drawn from 104 nonfinancial firms listed on the JSE and the partial adjustment model fitted with the random-effects tobit estimator (RE tobit). Main findings: The study firstly documents that JSE-listed nonfinancial firms had positive SOAs prior to, during and post the 2007–2008 GFC. Secondly, firms’ SOA decreased during the financial crisis period, meaning that a global negative economic shock reduces the SOA of all JSE-listed nonfinancial firms. Thirdly, financially constrained firms readily eliminate their target leverage deviation spreads, as they have a persistently higher SOA than financially unconstrained firms. Lastly, the SOA of financially unconstrained firms improved after the 2007–2008 GFC. Contributions/value-add: The dynamic trade-off theory is a good descriptor of the financing behaviour of JSE-listed non-financial firms. A negative economic shock reduces the firms’ SOAs. Practical/managerial implications: Managers should therefore maintain capital buffers in the form of cash reserves and lines of credit to reduce the impact of a negative economic shock on a firms’ SOAs.

Keywords

• dynamic trade-off theory
• speed of adjustment
• random effects tobit
• financially constrained
• global financial crisis
• target capital structure