Financial Flexibility Prevalence Revisited with Evidence from South Africa

Philip Kotze (), Kunofiwa Tsaurai and Godfrey Marozva
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Philip Kotze: Department of Finance, Risk Management and Banking, University of South Africa, Preller Street, Muckleneuk, Pretoria 0003, South Africa
Kunofiwa Tsaurai: Department of Finance, Risk Management and Banking, University of South Africa, Preller Street, Muckleneuk, Pretoria 0003, South Africa
Godfrey Marozva: Department of Finance, Risk Management and Banking, University of South Africa, Preller Street, Muckleneuk, Pretoria 0003, South Africa

JRFM, 2024, vol. 17, issue 10, 1-14

Abstract: Financial flexibility occurs when companies borrow less than expected and is widely practiced. A commonly used model to establish the presence of financial flexibility is based on the determinants of the leverage model, which was developed some time ago and is composed of various factors that determine a company’s leverage use. Governmental borrowing and financial sector development in the meantime were shown to be key drivers of corporate borrowing. We add these two factors to the original model to establish how the prevalence of financial flexibility is affected by these inclusions into the model. South Africa is used as a locality for the study because of its relatively recent financial sector development and increased governmental borrowing. The results of the study show that financial flexibility is more prevalent when these factors are considered in a South African context. Previous studies have paradoxically shown a lower financial flexibility prevalence in South Africa when compared to a developed market such as the UK, which is contradictory to developing market debt conservatism. In this study, we show that when accounting for financial sector development and governmental borrowing, financial flexibility is widely prevalent in a South African context, at similar levels to that of a developed economy. The primary implication of the study’s findings is that financial flexibility may have been underreported in developed markets in prior studies.

Keywords: capital structure; financial flexibility; financial conservatism (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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