Annalien De Vries
Lecturer, Stellenbosch University, South Africa.
P. D. Erasmus
Professor, Stellenbosch University, South Africa.Financing Decisions of Firms:
A South African Study
The overriding goal of most firms is to maximise the value of
shareholders and the overall value of the firm. In order to maximise the
value of the firm, management needs to make investments in order to
generate cash flow. If management is able to choose an optimal
financing combination to finance their investments, it can minimise the
firm’s weighted average cost of capital and maximise its share price.
This should ultimately result in the maximisation of shareholder- and
firm value. It is, therefore, important for financial managers to decide
how to finance their particular investments. This study, therefore,
investigates how South African firms finance their investments as well
as profit shortfalls. All South African firms listed in the industrial sector
of the Johannesburg Securities Exchange during the period 1995 to 2010
are considered for the study. Both those firms that remained listed, as
well as those firms that delisted from the exchange during the period
under investigation are included in the study. This is done in order to
reduce survivorship bias. The study focuses on the period following
the demise of apartheid in 1994, after which the South African economy
has undergone significant changes. The removal of trade and financial
sanctions along with a successful political transition contributed to a
positive turnaround in the performance of the South African economy.
The results of this study should indicate how firms in South Africa
finance their investments and profit shortfalls.