Dynamic Relationship between Debt and Cash flow in Pecking Order Theory: Evidence from Panel GMM

The paper investigates the relationship between cash flow and debt for South African firms. The difference generalized method of moment results show cash flow has significance and negative relationship with debt. Similarly, the system generalized method of moment results show negative relationship between cash with debt. The results affirmed pecking order theory of corporate financing and it reveals the incidence of asymmetric information problem between the firm and its financiers. Besides, the results imply a need to further develop South African capital market in order to reduce information asymmetry costs associated with raising external finance. Moreover, evidence of trade-off theory is also presented in the results which suggest that the dynamic nature of firms’ capital structure decision deserves attention. Keywords: Capital structure; debt ratio; cash flow; pecking order theory; panel GMM; South Africa

Debt financing and importance of fixed assets and goodwill assets as collateral: Dynamic panel evidence

This article analyses the effect of fixed assets and goodwill assets on South African firms' debt ratios. The difference and system generalized method of moment estimation results reveal that fixed assets and goodwill assets have significant and positive relationship with firms' debt ratios. To secure long-term debt, fixed assets and goodwill assets are required as collateral by creditors. Our results show firms' adjust to long-run optimal debt level, but at a slow adjustment rate. Our results suggest there are costs preventing South African firms from adjusting faster to their long-run optimal debt level. The practical implication of the paper is that policy makers should promote policies that encourage further development of the capital market. Moreover, firms need both fixed assets and goodwill assets as collateral to raise the desired optimal debt that maximizes firm value

The impact of monetary policy on bank lending rate in South Africa

The pass-through of the policy rates to bank lending rate is an important subject matter because it measures the effectiveness of monetary policy to control inflation or stabilize the economy. This study investigates the long-run interest rate pass-through of the money market rate to the bank lending rate and asymmetric adjustment of the bank lending rate. The study applies the momentum threshold autoregressive and asymmetric error correction models. The asymmetric error correction results reveal that bank lending rate adjusts to a decrease in the money market rate in South Africa. The findings suggest that the South African commercial banks adjust their lending rate downward but the lending rate appears rigid upward, which supports the customer reaction hypothesis