Determinants of Capital Structure: Does Liquidity Matter?

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.