Financing through Crisis: Empirical Evidence of How Covid-19 Reshaped the Capital Structure Choices in Emerging Economy
Sadia Afroze
Department of Accounting, University of Dhaka, Bangladesh.
Shawrin Ahmed Khan *
Department of Accounting, University of Dhaka, Bangladesh.
Arpan Saha Joy
Department of Accounting, University of Dhaka, Bangladesh.
*Author to whom correspondence should be addressed.
Abstract
Purpose: This research aims to explore the factors influencing capital structure and the effect of the COVID-19 pandemic on leverage decisions. Due to the disruptions caused by COVID-19, this study identifies the impact of pandemic on the capital structure choices and their determinants, as well as the adjustment dynamics, among listed companies of pharmaceutical and chemical in Bangladesh.
Design/Methodology/Approach: To perform the study has undertaken 196 firm year observation sample extending from 2015 to 2024 and a panel data from listed firms in the Pharmaceuticals and Chemicals sector on the Dhaka Stock Exchange (DSE) in Bangladesh. A fixed effects panel regression model, incorporating a lagged dependent variable, is estimated to account for dynamic adjustments while controlling for unobserved, time-invariant firm-specific effects. A comparative analysis of pre-post covid impact on the capital structure has been also analyzed. For examining the stationarity of the variables, the Fisher-type Augmented Dickey-Fuller (ADF) panel unit root test is utilized in this study.
Findings: The findings of the study reveal that lagged leverage and firm size have a significant impact on all the measures at 5% level of confidence interval which confirms the path dependency nature of capital structure decisions. In oppose to that tangibility and profitability shows insignificant while liquidity reveals a weak negative effect which interprets conservative liquidity management during the periods of crisis. However, The COVID-19 dummy variable shows negative impact on leverage, highlighting a shift towards internal financing. In addition to that pre- and post-pandemic analysis reveal increased leverage persistence and a greater importance of firm size, along with a diminished role of liquidity as firms prioritize cash reserves. Overall, capital structure decisions in Bangladesh are influenced more by institutional constraints and risk aversion than by traditional collateral-based mechanisms, providing partial support for both trade-off and pecking-order theories.
Originality/Value: The article adds to the body of knowledge on capital structure by providing sector-specific insights and examining capital structure during crises in an under-researched emerging market, thereby expanding the discourse on dynamic capital structure to include Bangladesh.
Keywords: Capital structure, leverage, COVID-19, dynamic panel data, pharmaceutical industry, Bangladesh