Determinants of Capital Structure: Does Liquidity Matter?
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Abstract
This paper aims to investigate the effect of liquidity on banks’ capital structure
using a sample of banks registered in South Africa from 2012 to 2021. The study uses
the bank liquidity mismatch index (BLMI), current ratio (CR), and liquidity coverage
ratio (LCR) to measure liquidity. Total debt ratio (TDR), long-term debt ratio (LTDR),
and short-term debt ratio (STDR) are used to measure capital structure. Despite a large
body of literature on the subject, few notable studies have looked into this phenomenon
in the banking industry despite banks being the primary creators of liquidity. Using
the generalised method of moments (GMM) model, the researchers found positive
but significant effects of BLMI and CR on capital structure. The study also reveals a
significant positive link between LCR and TDR. Thus, banks’ capital structure increased
with liquidity. High liquidity gave banks leverage to increase gearing. The findings show
a negative but insignificant connection between LCR and LTDR. More studies should
interrogate this phenomenon using BLMI as the primary liquidity measure. Furthermore,
the cointegration and causality association between liquidity and bank capital structure
should be investigated.
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