Cash flow volatility and capital structure in MENA and Africa: the moderating role of fixed assets

Abstract

This paper investigates the direct association between cash flow volatility and capital structure (i.e. debt ratio). This study further examines the moderating role of fixed assets on the association between cash flow volatility and capital structure in the Middle East and North Africa (MENA) and African markets. This study applies a two-step system generalized method of moment regression as the main estimation technique to minimize endogeneity concern. The data consist of non-financial listed firms in 20 MENA and African countries covering 2011 to 2020. The results reveal that cash flow volatility is significantly and positively related to capital structure of MENA and African firms. The results also reveal that fixed assets have a negative moderating impact on the relationship between cash flow volatility and the capital structures of MENA and African firms. The results are robust to different estimation techniques. The findings inform managers to consider cash flow stability as a major factor in corporate risk management and strategic decision making and consider fixed asset investment decisions and the quality of fixed assets as a significant factor in debt choice. Moreover, policymakers should formulate efficient capital structure policies that consider cash flow stability factors and encourage fixed asset investments.

Impact statement

This study investigates the direct impact of cash flow volatility on capital structure (i.e., debt ratio) and examines the moderating impact of fixed assets on the link between cash flow volatility and capital structure of listed firms in 20 Middle East and North Africa (MENA) and African countries spanning 2011 to 2020 applying the panel two-step system generalized method of moment as the main estimation method. The findings reveal that cash flow volatility increase debt ratio in the firms’ capital structure while the fixed assets negatively moderate the positive link between cash flow volatility and debt ratio in the firms’ capital structure. The findings suggest that managers should consider cash flow stability and fixed assets quality as important factors in corporate risk management and debt choice. Besides, policymakers and investors should encourage capital structure and investment policies that consider cash flow stability and quality of fixed assets to mitigate risk of financial distress that can reduce investment value.

Keywords:

• Capital structure
• cash flow volatility
• system-GMM
• developing markets
• pecking-order theory

REVIEWING EDITOR:

• David McMillan, University of Stirling, United Kingdom of Great Britain and Northern Ireland

SUBJECTS:

• Corporate Finance
• Macroeconomics
• Microeconomics
• Econometrics

JEL CLASSIFICATIONS:

• C23
• G32
• G33

Authors’ contributions

The authors confirm contribution to the paper as follows: study design and conception: Abdulrahman Naser, Bolaji T. Matemilola, and Bany-Ariffin A.N collect the data: Abdulrahman Naser analyse and interpret the results. Abdulrahman Naser and Bolaji T. Matemilola draft the manuscript. Abdulrahman Naser, Bolaji T. Matemilola, and Bany-Ariffin A.N prepare the final draft. All authors reviewed the results and approved the final version of the manuscript.

Data availability statement

The data that supports the study results are available from the corresponding author, Abdulrahman Naser, upon reasonable request.

Disclosure statement

Following Taylor & Francis policy, the authors certify there is no involvement or affiliations to any organizations with any non-financial or financial interests; and no competing interests to declare.

Additional information

Funding

The authors do not receive any direct funds to conduct this research.

Notes on contributors

Abdulrahamn Naser

Abdulrahman Naser is currently a PhD Candidate at School of Business and Economics, Universiti Putra Malaysia. He holds B.Sc. Degree in Finance from GUST (2013) and MBA degree majoring finance from IUM (2017) with experience as a finance lecturer. His research interest in areas of corporate finance, capital structure and debt structure and his publication appeared in Cogent Business and Management.

A. N. Bany-Ariffin

Dr. A. N. Bany-Arifn is a Professor at the Universiti Putra Malaysia and the Dean of the School of Business and Economics. His publications appear in Journal of International Financial Markets, Institutions, and Money, Studies in Economics and Finance, International review of Financial Analysis, Emerging Markets Review, Research in International Business and Finance, Managerial Finance, and International Journal of Managerial Finance. His research interest in areas of corporate finance and international finance.

Bolaji Tunde Matemilola

Dr. Bolaji Tunde Matemilola is an Associate Professor at the Universiti Putra Malaysia (UPM) and he teaches finance courses. He holds a PhD (specialization in Financial Economics) from UPM and a certification in ‘Becoming an Entrepreneur’ from the Massachusetts Institute of Technology (MIT). His papers have been published in Emerging Markets Review, Journal of International Financial Markets, Institutions, and Money, Research in International Business and Finance, and Journal of Business Economics and Management. His research interest is in areas of corporate finance and public debt sustainability.