Joint estimation of leverage thresholds in state-dependent capital structure dynamics: An (S,s) target zone framework for African firms

This study develops a joint-estimation framework for analysing state-dependent capital structure dynamics in African listed firms within an (S,s) target-zone setting. Unlike conventional speed-of-adjustment models that assume continuous convergence towards an optimal leverage ratio, the proposed framework allows firms to tolerate leverage drift within an inaction band and undertake refinancing only when upper or lower leverage thresholds are breached. The model jointly estimates target leverage, refinancing thresholds, and inaction-band width using dynamic panel techniques, constrained nonlinear estimation, and a state-dependent refinancing hazard with bootstrap-robust inference. The African setting provides a particularly suitable environment for investigating such dynamics because firms face episodic access to capital markets, exchange-rate and inflation shocks, shallow debt markets, and heterogeneous institutional environments that elevate refinancing frictions and encourage discontinuous adjustment behaviour. Empirical analysis is conducted using an unbalanced panel of listed non-financial firms from fifteen African stock exchanges over 1999–2024. The results reveal pronounced (S,s) behaviour characterised by wide periods of leverage inertia punctuated by discrete refinancing interventions. Inaction bands widen with firm-level volatility, financing deficits, and market-timing opportunities, but narrow significantly with liquidity, creditor-rights protection, governance quality, and market depth. Additional evidence indicates that upper-brink adjustments occur substantially more frequently than lower-brink adjustments, suggesting that deleveraging pressures dominate leverage-increasing episodes in African markets. Extensive Monte Carlo experiments, including misspecification tests against linear adjustment processes, demonstrate superior bias, RMSE (Root Mean Square Error), coverage, and classification performance relative to conventional alternatives while avoiding spurious threshold detection. The findings highlight the importance of institutional quality and financial-market development in shaping corporate refinancing behaviour and provide new evidence that leverage adjustment in African firms is inherently nonlinear, state dependent, and threshold driven.