Original Research

The impact of operating leverage on the capital structure of Johannesburg Stock Exchange-listed firms before and after the 2008 global financial crisis

Matabane T. Mohohlo, Johan H. Hall
Journal of Economic and Financial Sciences | Vol 11, No 1 | a164 | DOI: https://doi.org/10.4102/jef.v11i1.164 | © 2018 Matabane T. Mohohlo | This work is licensed under CC Attribution 4.0
Submitted: 24 January 2018 | Published: 05 April 2018

About the author(s)

Matabane T. Mohohlo, Department of Accountancy, University of Johannesburg, South Africa
Johan H. Hall, Department of Financial Management, University of Pretoria, South Africa

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.

Keywords

internationalisation; liquidity; volatility; JSE

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