Determinants of corporate capital structure: evidence from an emerging economy

Abstract

Purpose This research paper aims at examining the determinants of corporate leverage in Egypt according to the assumptions of three theories of capital structure: tradeoff, pecking order, and free cash flow. Design/methodology/approach The methodology utilizes the benefits of the partial adjustment autoregressive model to measure the speed of adjusting long‐term and short‐term debts to a target level. Findings The results indicate that companies use both long‐term and short‐term debt to adjust the leverage with a relative dependence on long‐term debt; the tradeoff‐related determinants of capital structure are taxes, debt/equity ratio and bankruptcy risk; the pecking order‐related determinants of capital structure are growth and profitability; borrowing decisions are not affected by the assumptions of free cash flow. Overall, the explanatory powers of the three regression equations are high and significant which indicate that the model construction is quite indicative. Originality/value The paper contributes to the literature in that it shows that the determinants of capital structure conform to those reported by other related studies in emerging markets as well as developed markets which supports the general conclusion that the determinants of capital structure in emerging and developed markets are converging.