Oyebola Fatima, Etudaiye-Muhtar (2016) The effect of financial market development on capital and debt maturity structure of firms in selected African countries / Oyebola Fatima Etudaiye-Muhtar. PhD thesis, University of Malaya.
Abstract
Spurred by the finance-growth literature establishing that development of the financial system promotes growth in the economy, some African countries introduced financial sector development policies to accelerate economic growth. Introducing these policies (examples include removal of sectoral allocation of credit, interest rate deregulation, privatisation of state-owned banks, relaxation of foreign participation in investment activities in the domestic stock exchange, cross-listing of shares across different stock exchanges etc.), besides enhancing economic growth also facilitates firms’ access to financial markets for external capital. This is particularly important for firms in Africa because access to external finance is one of the obstacles facing firms in the region. A comparison of financial market development indicators between countries in Africa and other developing regions by earlier studies showed that African financial markets lag behind in some indicators, which may be attributed to some of the issues that besiege financial markets in Africa. These issues include difficulty in accessing external funds by firms, information asymmetry, high transaction costs, and illiquidity of the market. With the introduction of market development measures meant to enhance firms’ access to finance, earlier studies on capital and debt maturity structure decisions of firms in African countries largely overlooked the effect of the development measures on these two key financial decisions. Thus, supply-side factors affecting firms’ re-balancing of capital and debt maturity structure are yet to be researched. Given this scenario, this thesis investigates the effect of financial market development on corporate capital and debt maturity structure within a framework that allows for the determination of adjustment costs and speed of adjustment. The annual financial and accounting data of publicly-listed non-financial firms and country level data in nine African countries over the period 2003-2012 are compiled and analysed. These countries are classified either as emerging or frontier markets. The countries in the study are Botswana, Egypt, Ghana, Kenya, iv Mauritius, Morocco, Nigeria, South Africa and Tunisia. The two-step system generalized methods of moments technique is used in analysing the data. Results of the analysis indicate that the financial intermediation theory of an increase in debt financing following banking sector development is not supported for the banking sector. However, a decline in debt finance supports the hypothesis that development in the stock market leads to a substitution effect with equity being substituted for debt. Furthermore, firm-level data (used as control variables) supports dynamic trade-off theory of capital structure, contracting and signalling theory of debt maturity structure for firms in the study. This reflects the dynamism in capital and debt maturity decisions and indicates that transaction costs due to market imperfections may hinder firms from reaching optimal capital structure. In summary, the results suggest that while stock market development to an extent has been successful in promoting the use of equity, financial system policy makers need to put more effort into developing the banking sector to improve debt usage. This may be achieved by introducing and implementing banking sector development measures that lowers the cost of debt finance making it readily accessible.
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