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

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