Dynamic Capital Structure and Country Level Corruption: Evidence from the MENA Region

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Hakawati, Ayat
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Ayat A. Hakawati
This thesis aims to investigate the determinants of capital structure and to provide new evidence and shed the light on the impact of corruption on firm’s financial decision in Middle East and North Africa region. Firm specific characteristics as well as country level determinants were examined to provide new evidence on the role of both levels of determinants of capital structure from this region. The two levels of variants were examined according to the three main theories; tradeoff, pecking order, and agency theory. Throughout the achievement of previous goals; this thesis examined the speed of adjustments by which the non-financial firms in MENA region adjust back to the target capital structure. The sample consists of 861 non-financial firms in the period of 2005-2018. The results show that the financial decision is driven by both firm and country specific factors. The results reveal that profitable firm and firm with higher growth opportunity uses less debt to finance its assets. While a positive relationship between tangibility and size, from one side, and leverage ratio, from the other, is observed. For country level determinants GDP and inflation are found to positively affect the firm’s leverage on long run while corruption as a focal determinant has negative impact on firm leverage. Because the Corruption Perception Index (CPI) – an annual index on a scale of 0 to 100 with higher values indicating lower levels of corruption. Showes a positive relation but negative impact. Negative impact means the higher the corruption level in a country; the lower level of leverage used by firms as source of financing. The results also show that firms place a target capital structure at which they adjust gradually. However, slow speed of adjustment was recognized when using book leverage as proxy for capital structure. On the other hand speed of adjustment increases when the market leverage is used. It can be concluded that trade-off, agency and pecking order theories are all explain the capital structure decision of non financial firms. Furthermore, non-financial firms in MENA region use mix of internal and external resources of financing. In addition firm and country level independent variables appear to contribute to adustment towred target capital and corruption is one of these variables. The study recommend for further reseearch on MENA region using more detailes in mesuring proxies for capital structure and firms leverage. In addition to consider the development of financial markets when explaining the capital structure of the MENA region. And to add more macroeconomic factors as determinants of capital structure.
Dynamic Capital Structure and Country Level Corruption: Evidence from the MENA Region