The Dynamics of Capital Structure and Heterogeneous Systematic Risk Classes in Egypt

International Journal of Emerging Markets, Vol. 3, No. 1, pp. 7-37, 2008

31 Pages Posted: 13 Apr 2010

See all articles by Mohamed Hassan Abdel-Azim

Mohamed Hassan Abdel-Azim

United Arab Emirates University (UAEU)

Tarek Ibrahim Eldomiaty

American University in Cairo

Date Written: 2008

Abstract

Purpose – The purpose of this paper is to examine firms’ strategies to change long- and short-term debt financing in Egypt. It aims to examine a list of capital structure determinants that include the basic assumptions of the three well-known theories of capital structure: tradeoff, pecking order, and free cash.

Design/methodology/approach – The paper utilizes the properties of partial adjustment model for three heterogeneous systematic risk classes: high, medium and low. The sensitivity analysis is carried out using the “extreme bound analysis”.

Findings – The results indicate that Egyptian firms adjust short- and long-term debt according to the class of systematic risk; long-term debt is a source of financing at all classes of systematic risk; firms have obvious tendency to extent short- to long-term one; medium risk firms adjust long-term debt according to the industry average debt, and depend heavily on long-term debt financing; firms depend significantly and constantly on the liquidity position to adjust short-term debt levels; and medium risk firms are relatively affected by the basic assumptions of free cash flow and low-risk firms are relatively affected by the assumptions of the pecking order theory.

Research limitations/implications – In general, the results provide evidence that the three theories have transitory effect from developed markets to transitional markets. In addition, the firm-specific variables (industry characteristic, size and time) provide an additional support to the robustness of the results.

Originality/value – Few, if any studies, have been carried out in Egyptian data.

Keywords: Capital structure, Financial risk, Debt financing, Developing countries, Egypt

Suggested Citation

Abdel-Azim, Mohamed Hassan and Eldomiaty, Tarek Ibrahim, The Dynamics of Capital Structure and Heterogeneous Systematic Risk Classes in Egypt (2008). International Journal of Emerging Markets, Vol. 3, No. 1, pp. 7-37, 2008, Available at SSRN: https://ssrn.com/abstract=1589074

Mohamed Hassan Abdel-Azim

United Arab Emirates University (UAEU) ( email )

P.O. Box 15551
Al-Ain, Abu Dhabi 00000
United Arab Emirates

Tarek Ibrahim Eldomiaty (Contact Author)

American University in Cairo ( email )

​AUC Avenue, P.O. Box 74 New Cairo 11835, Egypt
Management Department
Cairo, 11835
Egypt
+20226153361 (Phone)

HOME PAGE: http://https://www.aucegypt.edu/fac/tarek-ibrahim-eldomiaty

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