August 2023 issue contents

Hussien Ahmed, Dr. Sherif El-Halaby, NourhanBoushra, Dr. ImanElarabi


Purpose– This study has three objectives. (1) We investigate the impact of capital structure (CS) on financial performance (FP); (2)We measure the impact of CS on financial distress (FD). (2) We investigate the dynamic adjustments in FP and CS in response to financial distress (FD) shock. Design/ Methodology/ Approach– We use data from listed corporations on the Egyptian stock markets. We utilized four measures as proxies for financial performance and three measures as proxies for capital structure as well as used a Z-score to measure a firm’s financial distress score. We adopted OLS, random effects, fixed effects, and GMM models, which contain yearly data for 97 firms over a 6-year span (2017-2022). Findings– The results reveal that total debt to total equity ratiohasa positive relationshipwithfirms’ financial performance (ROE, ROCE, and EPS) and market performance (PV). While the short-term debt as total assets will be affected negatively.Moreover, we find empirical evidence that there is a negativeassociation between capital structure decisions and financial distress. Moreover, with respect to the price volatility, FP responds negatively to the financial distress shock.Furthermore, our results show no response for other financial performance indicators for distressed firms. Practical implications- This study suggests that as debt financing can have a significant adverse effect on firm performance. Consequently, managers should make appropriate decisions for capital structure components in order to maximize firm performance. Indeed, as debt is costlier than equity, managers should keep debt levels lower and instead focus financing at the margin on internal sources, such as retained earnings and new equity, using external funding only as a last resort. In the context of times of financial distress, managers should rely more on equity than debt financing to alleviate the negative consequences of FP. Managers can improve firm performance by lowering the level of financial leverage, especially in firms with higher financial distress risk. Egyptian regulators and policymakers should response to financial crises by prohibiting firms to use excessive loans. Originality/value – This study –As far as we know- is one of the first to investigate the association between CS, FP and FDshock in an emerging market which contributes to the accounting and finance literature.