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The purpose of this paper is to use a dynamic model to investigate capital structure determinants for 178 firms listed on the Johannesburg Stock Exchange for the period 1998‐2008. The sample of firms is also used to examine the cost and speed of adjustment towards a target debt ratio.

A target adjustment model is estimated using a generalized method of moments technique to examine the cost and speed of adjustment towards a target debt ratio. The determinants of target capital structure for South African listed firms are also examined.

The results show that South African firms adjust relatively fast towards a target leverage level. It is also found that asset tangibility, growth, size and risk are positively related to leverage, while profitability and tax are negatively related to leverage. The results also suggest that capital structure decisions of South African listed firms follow both the pecking order and trade‐off theories of capital structure.

The sample chosen focused on listed firms, thus the results cannot credibly be generalized to all South African firms (listed and unlisted). Also, whilst a lot can be gleaned from the results, they may not be readily applicable to firms in other African countries.

The issue of dynamic adjustment towards a target or optimal debt ratio has not received sufficient attention in developing economies. Using data from an emerging economy, this paper attempts to fill this gap in the literature. A target adjustment model is estimated using a generalized method of moments technique.