Effect of disaggregated country risk shocks on financing decisions of the jse listed firms

Abstract

Firms in South Africa and other developing countries are facing a rapid increase in capital cost accompanied by an increase in leverage as a result of operating in uncertain environments, which complicate firms' financing decisions and strategies. This paper examined the impact of rising leverage levels on firm's cost of capital and the effect of country risk shocks on cost of capital and financing decisions among JSE listed firms. A dynamic panel model estimated with two-step system generalised methods of moments (GMM) was used to analyse panel data from 198 listed non-financial firms. The results suggest that the rising debt levels of JSE listed firms are negatively associated with weighted average cost of capital and cost of debt. Cost of equity was found to be an increasing function of firm leverage. High financial risk was found to be associated with an increase in cost of capital, high political risk associated with an increase in cost of equity and weighted average cost of capital (WACC), while an increase in economic risk is associated with high WACC and cost of debt. The study establishes that disaggregated country risk shocks significantly affect firms financing decisions.