The Effect of Cash Flow Risk on Capital Structure Decisions

Mehmet Akarã‡ay and Ersan Ersoy

Fiscaoeconomia, 2023, issue 1

Abstract: The purpose of this study is to investigate the effect of cash flow risk on decisions of capital structure in companies included in the BIST 100 Index (excluding financial institutions). In this study, quarterly financial data of 61 companies between the periods of 2004 and 2018 were used. By using panel regression method, in the study a negative correlation between cash flow risk and leverage ratios and profitability ratios, and a positive and statistically meaningful correlation between leverage ratios and Market to Book Value ratio and firm size were found. No statistically significant relationship was found between the leverage ratio and the ratio of tangible assets to total assets and expected inflation. According to the results of the analysis, cash flow risk is one of the determinants of the capital structure and is a factor to be considered in decisions regarding the capital structure. When there is an increase in cash flow risk, firms tend to use less debt, and therefore, the increase in cash flow risk causes a change on decisions of capital structure in favor of equity. As growth opportunities (Market to Book Value ratio) increase, firms borrow more, in other words, they prefer financial debt for financing new investments. Firms prefer financing with equity when there is an increase in profitability ratios, and financing with debt when there is a decrease in profitability ratios. If the size of the firms increases, their debt usage levels of the firms increase.

Keywords: Cash Flow Risk; Capital Structure; Leverage (search for similar items in EconPapers)
JEL-codes: C21 E31 G30 G32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:fis:journl:230111

DOI: 10.25295/fsecon.1158992

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