ANTECEDENTS TO THE SPEED OF ADJUSTMENT TOWARDS OPTIMAL LEVERAGE: A CASE OF BAGHDAD STOCK EXCHANGE

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Keywords:

Adjustment speed, Capital structure, optimal leverage, Iraq

Abstract

The main objective of the study is to examine the antecedents to speed of adjustment towards optimal leverage of non-financial firms listed in Baghdad Stock Exchange Iraq. The factors which ascertain the debt of an organization, are under the focus of studies concerned with financial behaviors of a firm.  There are three types of factors that determine the corporate debt, these factors are: (i) firm specific factors, (ii)industry specific, (iii) and country specific. Although, the firm specific factors are considered crucial in decision making for a capital structure, but the empirical results do not provide a significant deduction for debt decisions. Firm and industry specific determinants were the center of attention for earlier empirical studies. The data of non-financial firms listed on Baghdad stock exchange over the period of 6 years from 2015 to 2020 chosen as final sample. The static and dynamic panel data is used to answer the research questions. The findings of this study suggest that the financial managers avoid using debt if theirearnings are not stable and have high amount of cash available. Firms having high growthin assets are using more debt in Iraq. Results of this study are largely consistent with the available empirical findings from other countries and are explained by the existing theories of capital structure. In answering the first question of the adjustment speed of Iraqi firms towards target debt, the study finds that the speed depends upon the proxy of debt used.  Given this finding, financial managers may reevaluate the decision of using debt to finance their growth, as it might lead to bankruptcy. Since the findings of this study are based onthe historical data, the managers can rethink on the factors they have been considering inthe past in making adjustment towards target debt and using the level of debt. They canreconsider their past choices and justify that their choices have maximized the value ofthe firm.

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Published

2021-06-12