Abstract
The financial leverage-operating leverage trade-off hypothesis states that as financial leverage increases, management of firms will seek to reduce the exposure to operating leverage in an attempt to balance the overall risk profile of a firm. It is the objective of this study to test this hypothesis and ascertain whether operating leverage can indeed be added to the list of factors that determine the capital structure of South African firms. Forty-six firms listed on the Johannesburg Stock Exchange between 1994 and 2015 are analysed and the impact of operating leverage is determined. The results are split into two periods, that is, the period before the global financial crisis (1994–2007) and after the global financial crisis (2008–2015). The impact of operating leverage during these two periods is then compared to determine whether a change in the impact of operating leverage on the capital structure can be observed especially following the crisis. The results show that the conservative nature of South African firms leading up to 2008 persisted even after the global financial crisis. At an industry level, the results reveal that operating leverage does not have a noticeable impact on capital structure with the exception of firms in the industrials sector of the South African economy.
Highlights
Following the global financial crisis of 2008, academic literature has been inundated with research investigating the factors that may have contributed to the crisis
The purpose of this study was to identify the impact of operating leverage on the capital structure of Johannesburg Stock Exchange (JSE)-listed firms leading up to the economic crisis in 2008 and after the crisis
This was to identify whether the borrowing patterns of firms in South Africa changed as far as the impact of operating leverage on their capital structures is concerned as a result of the crisis
Summary
Following the global financial crisis of 2008, academic literature has been inundated with research investigating the factors that may have contributed to the crisis. Mandelkher and Rhee (1984:56) found that a negative relationship exists between the two types of leverage This relationship became known as the financial leverage-operating leverage trade-off hypothesis. The following section contains a brief discussion of the South African economy during the period under investigation and a review of capital structure theory and theories on operating leverage. This is followed by a discussion of the hypotheses to be tested and a discussion on the research methodology employed by this study. The results of the analysis are presented, culminating with the conclusions and recommendations for future research
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