Impact of macroeconomic and idiosyncratic uncertainty on firms' financing decisions: Evidence from SADC countries

Abstract

Purpose of Study: The purpose of this study is to investigate the impact of idiosyncratic and macroeconomic risks on financing decision on SADC countries. Methodology: Employing data from the African Financials database, the analysis is conducted over a ten-year period spanning from 2008 - 2019 for 309 companies. Unit Root Fisher Chi- Square Test and Granger Causality test were employed to test for unidirectional and bidirectional relationships cross-sectionally. Pooled Regression Analysis- (Fixed and Random effect) was employed as main topology for panel regression analysis. Findings: The study confirmed that companies become risk averse when there is an increase in idiosyncratic and macroeconomic risk and therefore take less leverage whichever type of financing decision is opted. In other words, when there are high idiosyncratic risks, debt to equity ratio is low. Banking and financial institutions charge a higher risk premium for companies having a high-risk profile. Due to this, the cost of debt financing augments. Therefore, companies employ internal financing and reduce debts due to high bankruptcy risk and costs. This finding is in line with the pecking order theory (Myers and Majluf, 1984). Conversely, a significant positive linkage is reported in Namibia and South Africa. This estimate posits that these companies use more debts during periods of high idiosyncratic risk which corresponds to the trade- off theory. Originality: The study is among one of the pioneering works underpinning the idiosyncratic risk and macroeconomic risk on capital structure and relying on a large number of companies across the SADC region. In this respect, it adds contribution to the existing literature on risks and capital structure to the socio-economic goals of the SADC region.