An Empirical Investigation of Capital Structure Strategies Adopted by Botswana Firms – An Exploratory Study

  • Mogotsinyana Mapharing Lecturer Department of Accounting and Finance University of Botswana
  • Simangaliso Biza-Khupe University of Botswana
  • Sadie K. Sekolokwane Researcher Department of Accounting and Finance University of Botswana

Abstract

The paper is set on the theoretical backdrop of the importance and exigency of capital structure in firms’ pursuits to maximize shareholders’ wealth. The study investigates the different capital structure strategies adopted by Botswana firms. In its methodology, the study adopted an approach used by Graham and Harvey [1] in developing the research instrument. The study methodology used is premised on the presupposition that issues of capital structure are more pronounced with the increase in firm size, with the largest firms generally being those listed on the stock exchange. Primary data was collected from a small sample of firms listed on the Botswana Stock Exchange (BSE), in keeping with the exploratory nature of the study. The results were indicative of lack of theoretical considerations in the adoption and application of capital structure strategies by management across the listed firms. While most firms preferred using external equity as a financing option, followed by retained earnings, debt was found to be the least preferred financing option. Also found was that management was generally knowledgeable of the benefits associated with debt financing, and in particular the tax-deductibility of the cost of debt and reduction of agency costs. Overall, the findings were puzzling when juxtaposed with the theoretical perspectives of the trade-off theory, the pecking order theory and agency costs theory. The study concludes by suggesting further research to uncover the extent to which these preliminary results are applicable and uncovering the underlying rationality.

Author Biographies

Mogotsinyana Mapharing, Lecturer Department of Accounting and Finance University of Botswana

Lecturer

Department of Accounting and Finance

University of Botswana

 

Simangaliso Biza-Khupe, University of Botswana

Senior Lecturer

Department of Accounting and Finance

University of Botswana

References

References

Graham, J.R. and C.R. Harvey, The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 2001. 60(2): p. 187-243.

Singh, M., W.N. Davidson, and J.-A. Suchard, Corporate Diversification Strategies and Capital Structure The Quarterly Review of Economics and Finance, 2003. 43(1): p. 147-167.

O'Brien, J.P., The Capital Structure Implications of Pursuing a Strategy of Innovation. Strategic Management Journal, 2003. 24(5): p. 415-431.

Naidu, G., Capital Structure Strategies of Australian and South African Firms. Management International Review, 1986. 26(2): p. 52-61.

Bradley, M., G.A. Jarrell, and E. Kim, On the Existence of an Optimal Capital Structure: Theory and Evidence. The Journal of Finance, 1984. 39(3): p. 857-878.

Gatsi, J.G., Capital Structure of Ghanaian Banks: An Evaluation of its Impact on Performance. The IUP Journal of Bank Management, 2012. 11(4): p. 86-99.

Abor, J., Debt Policy and Performance of SMEs: Evidence from Ghanaian and South African Firms. Journal of Risk Finance, 2007. 8(4): p. 364-379.

De Mesquita, J.M. and J.E. CLara, Capital Structure and Profitability: The Brazilian Case, 2003.

Fama, E.F. and K.R. French, Taxes, Financing Decisions and Firm Value. The Journal of Finance, 1998. 53(3): p. 819-843.

Hammes, K., Essays on Capital Structure and Trade Financing., 2003.

Majumdar, S.K. and P. Chhibber, Capital Structure and Performance: Evidence from a Transition Economy on an Aspect of Corporate Governance. Public Choice, 1999. 98(3/4): p. 287-305.

Akintoye, I., Effect of capital structure on firms’ performance: the Nigerian experience. European Journal of Economics, Finance and Administrative Sciences, 2008. 10: p. 233-243.

Nerlove, M., Factors Affecting Differences Among Rates of Return on Investments in Individual Common Stocks. The Review of Economics and Statistics, 1968: p. 312-331.

Petersen, M.A. and R.G. Rajan, The Benefits of Lending Relationships: Evidence from Small Business Data. The Journal of Finance, 1994. 49(1): p. 3-37.

Myers, S.C., Capital Structure. The Journal of Economic Perspectives, 2001. 15(2): p. 81-102.

Modigliani, F. and M.H. Miller, The Cost of Capital, Corporation Finance and the Theory of Investment. The American economic review, 1958: p. 261-297.

Durand, D., The Cost of Capital, Corporation Finance, and the Theory of Investment: Comment. The American Economic Review, 1959: p. 639-655.

Modigliani, F. and M.H. Miller, Corporate Income Taxes and the Cost of Capital: A Correction. The American economic review, 1963: p. 433-443.

Chirinko, R.S. and A.R. Singha, Testing Static Tradeoff Against Pecking Order Models of Capital Structure: A Critical Comment. Journal of Financial Economics, 2000. 58(3): p. 417-425.

Myers, S.C. and N.S. Majluf, Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have. Journal of financial economics, 1984. 13(2): p. 187-221.

Frank, M.Z. and V.K. Goyal, Testing the Pecking Order Theory of Capital Structure. Journal of Financial Economics, 2003. 67(2): p. 217-248.

Jensen, M.C., Agency Costs of Free Cash Flow, Corporate Finance and Takeovers. The American Economic Review, 1986: p. 323-329.

Jensen, M.C. and W.H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 1976. 3: p. 305-360.

Abor, J. and N. Biekpe, How Do We Explain the Capital Structure of SMEs in Sub-Saharan Africa? Evidence from Ghana. . Journal of Economic Studies, 2009. 36(1): p. 83-97.

Harvey, C.R., K.V. Lins, and A.H. Roper, The Effect of Capital Structure When Expected Agency Costs are Extreme. Journal of Financial Economics, 2004. 74(1): p. 3-30.

Chen, J.J., Determinants of Capital Structure of Chinese-listed Companies. Journal of Business Research, 2004. 57(12): p. 1341-1351.

Huang, G. and F.M. Song, The Determinants of Capital Structure: Evidence from China. China Economic Review, 2006. 17(1): p. 14-36.

Ang, J.S. and M. Jung, An Alternate Test of Myers' Pecking Order Theory of Capital Structure: The Case of South Korean Firms. . Pacific-Basin Finance Journal, 1993. 1(1): p. 31-46.

Krasker, W.S., Stock Price Movements in Response to Stock Issues Under Asymmetric Information. The journal of Finance, 1986. 41(1): p. 93-105.

Narayanan, M., Debt versus equity under asymmetric information. Journal of Financial and Quantitative Analysis, 1988. 23(1): p. 39-51.

De Miguel, A. and J. Pindado, Determinants of Capital Structure: New Evidence from Spanish Panel Data. Journal of Corporate Finance, 2001. 7(1): p. 77-99.

Baskin, J., An Empirical Investigation of the Pecking Order Hypothesis. Financial Management, 1989: p. 26-35.

Hackbarth, D., C.A. Hennessy, and H.E. Leland, Can the Trade-off Theory Explain Debt Structure? Review of Financial Studies, 2007. 20(5): p. 1389-1428.

Opler, T. and S. Titman, The Determinants of Leveraged Buyout Activity: Free Cash Flow vs. Financial Distress Costs. The Journal of Finance, 1993. 48(5): p. 1985-1999.

Archbold, S. and I. Lazaridis. Capital Structure Decisions and Decision Making: Survey Evidence from the UK and Greece. in 17th Annual Conference, Multinational Finance Society. 2010. Barcelona.

Shapiro, A.C., Financial Structure and Cost of Capital in the Multinational Corporation. Journal of Financial and Quantitative Analysis, 1978. 13: p. 211-226.

Senbet, L.W., International Capital Market Equilibrium and the Multinational Firm Financing and Investment Policies. Journal of Financial and Quantitative Analysis, 1979. 14: p. 455-480.

Michel, A. and I. Shaked, Multinational Corporations vs. Domestic Corporations: Financial Performance and Characteristics. Journal of International Business Studies, 1986. 17: p. 89-100.

Lee, K.C. and C.C.Y. Kwok, Multinational Corporations vs. Domestic Corporations: International Environmental Factors and Determinants of Capital Structure. Journal of International Business Studies, 1988. 19: p. 195-217.

Burgman, T.A., An Empirical Examination of Multinational Corporate Capital Structure. Journal of International Business Studies, 1996. 27: p. 553-570.

Chen, C.J.P., et al., An Investigation of the Relationship Between International Activities and Capital Structure. Journal of Information Systems, 1997. 28: p. 563-577.

Helwege, J. and N. Liang, Is There a Pecking Order? Evidence from a Panel of IPO Firms. Journal of financial economics, 1996. 40(3): p. 429-458.

Published
2016-09-29
How to Cite
Mapharing, M., Biza-Khupe, S., & Sekolokwane, S. K. (2016). An Empirical Investigation of Capital Structure Strategies Adopted by Botswana Firms – An Exploratory Study. Archives of Business Research, 4(5). https://doi.org/10.14738/abr.45.2121