The impact of capital structure on firms’ performance: a study of some selected South African quoted firms.

Abstract

ABSTRACT This study sought to analyse the impact of capital structure on firms’ performance in South Africa, using a case of 136 selected firms on the main Johannesburg Stock exchange (JSE). Statistical multiple regression analysis method was used to test the relationship between two variables, the capital structure being the independent variable and the firms’ performance being the dependent variable. To estimate the capital structure variable, financial leverage ratios were used. That is total debt ratio, debt/equity ratio and long term debt ratio. To estimate firm performance, profitability ratio was used, that is, Tobin Q ratio, return on equity (ROE) and return of asset (ROA). Data from January 2000 to December 2014 were extracted from audited published financial statements and analysed. The results from the findings showed a mixed view with mainly ROA indicating a negative relationship with independent variables and ROE showing a positive relationship with independent variables. Therefore, it is recommended that firms need to find the optimum capital structure. Key words: Capital structure, firms’ performance, optimal capital structure, return on equity, return on assets and debt/equity ratio