This thesis examines the determinants of capital structure in Sub-Saharan Africa. It looksat three related issues. The first issue is the financing decisions of firms, that is, thechoice between debt and equity. It investigates the extent to which firm characteristicsaffect the way African firms (in Ghana, Kenya, Nigeria, South Africa and Zimbabwe)raise capital. Secondary data from financial statements for listed firms as well as from theWorld Bank’s Investment Climate surveys are used. The main results from this part ofthe thesis are: firms in Africa are roughly leveraged to the same extent as those inemerging economies like Mexico, Thailand, Brazil, South Korea, Malaysia and Turkey;firms in Sub-Saharan Africa tend to be heavily dependent on internal finance and wherethey use debt, they tend to overly rely on short-term debt to finance their investmentactivities. We also find that, across the sample countries, firm characteristics likeprofitability and asset tangibility are generally negatively related to leverage. Theevidence from our results suggests that heterodox variables like education, ethnicity ofmajority owner and location of a firm within a given country are not as important when itcomes to raising capital.The second issue relates to the determinants of corporate debt choice. Using data fromthe World Bank’s Investment Climate surveys we investigate the decision of the Africanfirms (in Ghana, Kenya, Nigeria and South Africa) to fill their borrowing needs. For ourpurposes we categorize debt sources into bank debt and non-bank debt. We find that mostfirms in Africa tend to use bank debt to finance additional investment. About 70% of totalincremental debt used by firms in the sample countries comes from banks as loans. Thisconfirms the hypothesis that bank debt dominates other forms of debt. The use of bankdebt increases with firm size: we find that larger firms tend to use more bank debt ascompared to smaller ones. This confirms the argument that smaller firms tend to facesevere difficulties when it comes to accessing finance. This is because they lack therequisite reputation that banks or any other suppliers of funds require. We also find thatdebt preference and use tend to increase with firm size and age. We find mixed resultsiiiwhen it comes to the impact of profitability and asset tangibility on debt preference. Wedo not find ample evidence on the impact of heterodox variables on debt choice.The third issue focuses on the supply-side of capital, relative to the first two issuesexplained above that dwelt on the demand side. In order to better understand the supplysideof finance we analyze a number of financial development indicators. We comparethe indicators among the sample countries, across different countries, emergingeconomies and developed economies. We find that the stock markets and financialintermediaries in Africa, even though still underdeveloped, are fast growing. When itcomes to legal systems in Africa, we find that contract enforcement in African countriesis inefficient as compared to a number of emerging and developed economies. This, wesuggest, may be one reason why firms in Africa tend to rely heavily on internal financeand short-term debt rather than external finance and long-term debt.
