Determinants of Capital Structure of African Firms: A Categorical Analysis

Abstract

This study contributes to capital structure literature by investigating the determinant factor of financing decision of firms operating in 13 African countries with different financial, institutional, legal and economic environments.  We employed categorical analysis so as to investigate the factors that influence the financing decision of firms operating in countries with underdeveloped and developed stock and banking sector. We also test in this study the pecking order and trade off theory is more statistically powerful in explaining firms’ financing decision of those African countries and the result confirms both pecking order and trade off theory. Our study found that asset tangibility, financial distress cost, profitability and Non debt tax shield are strong firm specific determinants of capital structure.  This study also found that corporate tax rate, banking sector development, GDP growth rate, and lending interest rate are the most important country specific determinants of capital structure. Rule of law is found to be strong determinants of capital structure of African firms.

Keywords: Africa, Capitals structure, Country’s legal system, Country specific determinants, Pecking order theory, Trade off theory