The effects of economic crises on capital structure: Evidence from an emerging economy

Background: Economic crises have severely impacted firm capital structure throughout history. Companies rely on a balanced mixture of financing between debt and equity, in order to sustainably finance their investing and operating capital requirements. Recent economic crisis like the 2008 Global Financial Crisis (GFC) and the COVID-19 pandemic have challenged companies’ abilities to manage their capital structures. Aim: This study examines how two different crises affected JSE firms’ capital structures, identifies which firm-level factors mattered in each period, and assesses which capital structure theories best explain these crisis responses. Setting: The analysis was based on a sample of 234 firms listed on the JSE during the period 2004–2022. Method: The secondary firm-level data were obtained from financial data depositories, Integrated Real-Time Equity Systems and Thomson Reuters DataStream. The study made use of Estimated General Least Squares and random effects regression models. Results: After the 2008 crisis, firms deleveraged and liquidity became the key (negative) determinant of leverage, consistent with pecking order theory. During Covid-19, firms increased leverage, with profitability and growth negatively related to leverage and asset tangibility positively related, reflecting a mix of trade-off and pecking order behaviours. Conclusion: Different crises drive distinct financing behaviour: financial crises lead firms to prioritise liquidity and internal funds (pecking order), whereas operational crises push firms toward greater external borrowing despite weaker performance (trade-off). This distinction helps guide financial managers and policymakers in emerging markets when planning for future disruptions. Contribution: This study provides new evidence on how different types of economic crises uniquely shape the capital structure decisions of JSE-listed firms. By incorporating crisis-specific interaction terms over an extended panel (2004–2022), it isolates how firm-level determinants behave under financial versus operational shocks, offering clearer insights into crisis-driven financing behaviour in an emerging-market context.