The Effect of Earnings Volatility on Capital Structure: A Case of Oligopolistic Banking Sector

The article investigates the impact of earnings volatility on the South African bank’s capital structure using a sample of registered banks from 2012 to 2021. None of the research on this relationship has examined the oligopolistic market of the banking sector, which stands as a structurally distinctive economic segment. Using the generalized method of moments (GMM) model, the results show a negative and significant effect of earnings volatility on leverage. These findings help finance professionals understand the oligopolistic banking sector’s leverage dynamics and earnings volatility within the context of unexpected economic shocks. Thus, the central banks should require banks to diversify in a bid to minimize earnings variance, thereby providing them with financing flexibility. Bank executives and regulators will find the findings pertinent, providing them with perspectives for making well-informed decisions regarding the capital structure based on the degree of earnings variability.