The impact of capital structure on corporate outcomes: the moderating roles of financial flexibility and accounting conservatism

Abstract

This study examines how capital structure influences the financial outcomes of Egyptian listed firms during 2010–2024 and investigates the complementary moderating roles of financial flexibility and accounting conservatism, rather than their joint effect, in shaping the capital structure–performance relationship. Using panel data from 68 non-financial firms on the Egyptian Exchange, the study assesses the direct and interactive effects of leverage (DTA), equity financing (EQA), financial flexibility (proxied by cash holdings) and accounting conservatism on performance measures – ROA, ROE and Tobin’s Q. Fixed effects, system GMM and IV (2SLS/IV-GMM) techniques are applied to address endogeneity and ensure robustness. The results show that leverage negatively affects accounting performance but positively influences market valuation. Financial flexibility and accounting conservatism exhibit complementary and channel-dependent effects: they do not consistently offset the adverse impact of leverage on profitability, while their effects on market valuation are generally positive. This study provides novel evidence from an emerging market that financial flexibility and accounting conservatism play complementary moderating roles in the capital structure–performance relationship, with differential effects across accounting and market outcomes rather than uniform risk mitigation.