Impact of risk on capital structure adjustments: Evidence from the African markets

Employing panel data analysis, the study investigated the impact of risk on speed and costs of adjustments on target leverage on listed firms from the African markets—a panel data set of 2790 observations for 12 years spanning from 2008 to 2019. Based on the results of the Unit root test and Granger causality test, there are bidirectional relationships between risk and capital structure and vice versa. Additionally, Panel DOLS and System GMM were applied for regression and comparison analysis between the African markets and South Africa. The estimates disclose that when companies experience lower risk, the costs of adjustment toward the target are higher. Hence, companies can re-adjust their capital structure more easily by issuing external capital over periods of stable economic environments, thereby improving their market value. Considering the case of South Africa, the first DOLS results outlined similar estimates compared to the African market. Conversely, when measured with System GMM, the estimates imply that firms incur difficulties in adjusting costs, thus reducing leverage due to unfavorable macroeconomic indicators in line with the pecking order theory stating that in African economies, companies spend more on expenses and adjust their capital structure slowly to reach their optimal target position.