Effects of Financing and Institutional Constraints on Capital Structure of Firms in Select African Countries

We analyse the corporate capital structure of firms in seven select African economies, along the lines of firms’ financing dependence. We particularly examine the relative importance of firm-specific and country-level institutional factors in firms’ financing decision. Our results show that both firm-specific and country-level factors are important in firms’ financing decision in Africa. However, despite African countries’ notorious inadequacy of institutional infrastructure, firm-specific factors appear to be more directly influential on capital structure decisions than institutional factors, which mainly influence financing decisions in an intermediated way, via firmspecific variables. Moreover, effectiveness of ‘investor rights and protection’ is the only key institutional factor that influences firms’ financing decisions both directly and indirectly. Overall, therefore, while firms focus on known firm-specific drivers of their capital structure, governments must work on provisioning important institutional variables, the lack of which could have unwelcomed effects on financing decisions, and by extension, the efficiency of production.