Cash flow volatility and debt maturity structure: Evidence from the Gulf Cooperation Council countries

Download This Article

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

This study aims to investigate the impact of cash flow volatility on the debt maturity structure choices of corporations in the Gulf Cooperation Council (GCC) countries, a region with large gross domestic products (GDPs), negligible corporate taxes, and bank-based economies. The study uses a four-year rolling standard deviation of cash flows as a proxy for volatility and examines its impact on the use of long-term debt by applying the two-stage least square estimator. In addition, the study constructs a categorical debt maturity variable and applies the ordered probit regression to analyze the impact of volatility on the probability of having long-term debt. The findings of this study show that both the proportion of long-term debt relative to total debt and the probability of having long-term debt decrease significantly with volatility. These findings suggest that volatility limits GCC firms’ use of long-term borrowing which has implications for their private investments. Other findings indicate that firm size, asset tangibility, asset maturity, and leverage have a positive impact on debt maturity while growth opportunities have a negative impact, which suggests that GCC firms use short-term debt to reduce agency and liquidity costs.

Keywords: Debt Maturity, Cash Flow Volatility, Agency Costs, Information Asymmetry, Liquidity Risk, Categorical Dependent Variable, Emerging Markets, GCC Countries

Authors’ individual contribution: Conceptualization — G.T.; Methodology — G.T.; Software — G.T. and F.A.; Validation — G.T. and F.A.; Formal Analysis — G.T.; Investigation — G.T.; Data Curation — G.T. and F.A.; Writing — Original Draft — G.T.; Writing — Review & Editing — F.A.; Visualization — G.T.; Supervision — G.T.; Project Administration — G.T.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G21, G30, G32

Received: 16.03.2023
Accepted: 26.10.2023
Published online: 30.10.2023

How to cite this paper: Tayem, G., & Altwal, F. (2023). Cash flow volatility and debt maturity structure: Evidence from the Gulf Cooperation Council countries. Journal of Governance & Regulation, 12(4), 113–123. https://doi.org/10.22495/jgrv12i4art11