The Impact of Bankruptcy Costs on Capital Structure Decisions in African Firms

Abstract

Abstract

This article explores the impact of bankruptcy costs on capital structure decisions among firms in Africa. Bankruptcy costs, including direct and indirect expenses, significantly influence how firms choose their financing mix. This study investigates how these costs affect leverage ratios, debt-equity choices, and overall financial stability in the context of African firms, where legal and financial infrastructure may exacerbate bankruptcy-related expenses. Using a quantitative approach, we analyze data from various African firms to assess the relationship between bankruptcy costs and capital structure decisions. The findings reveal that higher bankruptcy costs lead to a more conservative capital structure, with firms opting for lower leverage to mitigate the risk of financial distress. This has implications for financial strategy, firm stability, and policy recommendations aimed at improving the business environment in Africa. The study highlights the need for reforms to reduce bankruptcy costs and enhance access to financing, thereby supporting more optimal capital structure decisions.

Keywords: Bankruptcy Costs, Capital Structure, African Firms, Financial Stability, Leverage