An empirical test of the agency problems and capital structure of South African quoted SMEs

Abstract

The agency theory suggests that the separation of ownership and control in firms creates conflicts of interest between the firm’s shareholders and managers. This is mainly because managers have the opportunity to use the resources of the firm in ways that benefit themselves personally to the detriment of shareholders’ wealth maximisation. This study examines the relationship between agency factors and the capital structure decisions of Small and Medium Enterprises quoted on the Johannesburg Stock Exchange. The results indicate that firms with one major institutional blockholder are able to monitor the opportunistic behaviour of management more effectively than those with more than one institutional blockholders. Effective monitoring could result in more debt being used by management to increase shareholder value. Also firms with high growth potentials tend to exhibit high debt ratio than those with low growth opportunities. With the exception of the number of institutional blockholders and growth opportunities, the associations between the other factors and capital structure were not significant.

Key Words:

• agency cost
• capital structure
• debt
• SMEs
• South Africa