The Relationship Between Firm-Level Factors and Capital Structure: The Moderating Effect of the Arab Spring and 2016 Currency Floatation

Purpose: Despite the significant impact of the Arab Spring (AS) and the 2016 Egyptian pound (EGP) floatation on Egyptian firms, scholars paid less attention to their impact, particularly on the Capital Structure (CS) decision and their possible moderating impact on its determinants. This makes their influence on CS vague in the Egyptian context. Accordingly, this study aims to fill the literature gap by examining their influences on CS decisions to help firms’ decision-makers adjust their financing policies to cope with the different periods of instability.
Design/Methodology/Approach: This study uses a quantitative approach to examine the impact of the AS and 2016 EGP floatation on CS and their moderating impact on the association between tangibility, firm size, liquidity, profitability, business risk, asset growth, tax effect, and non-tax shield and CS in 128 listed companies in the Egyptian stock market from 2007 to 2019 using System-Generalized Method of Moments (SYS-GMM).
Results: The study’s findings revealed that first, Egyptian-listed firms increased their dependency on Short-Term Debt (STD) during the AS while they decreased their Long-Term Debt (LTD) during and after the AS and after the 2016 EGP floatation. Second, the determinants of STD and LTD changed across periods, and both instabilities had different effects on debt maturity determinants. Third, the major difference between the two periods is that the AS mainly affected the determinants of LTD, whereas the 2016 EGP floatation predominantly affected the determinants of STD. Profitable firms with high liquidity and the non-debt tax shield increased their LTD during the AS, while after the AS, the only reason for acquiring LTD was that the firms had growth assets. Furthermore, profitable Egyptian firms did not depend on STD, and that negative association was even stronger during the AS. In contrast, the 2016 EGP floatation had a minimal impact on LTD determinants; it mainly affected the STD determinants. Negative associations developed between firm size, liquidity, and STD, while a positive association developed between asset growth and STD.