Working capital efficiency and capital structure decisions in Egypt: the effect of foreign currency exchange risk exposure under IAS 21

Purpose This research aims to test the impact of working capital efficiency (WCE) on capital structure decisions (CSD) in Egypt and investigate the moderating role of foreign currency exchange risk exposure under IAS 21 in this relationship. Design/methodology/approach This research relies on data obtained from the financial reports of a sample consisting of 65 listed firms on the Egyptian stock exchange from 2012 to 2022, where the data is processed using the generalized method of moments (GMM). Findings The results reveal that the Egyptian industrial firms with higher WCE rely more on total debt finance (TDF) and long-term debt finance (LODF) and depend less on short-term debt finance (SHODF). Furthermore, the results indicated that foreign currency exchange gains (EXCG) strengthen the positive effect of high WCE on TDF and LODF. Conversely, foreign currency exchange losses (EXCL) weaken this positive effect. Furthermore, EXCL weakens the negative effect of WCE on SHODF. Moreover, the additional analysis yielded evidence regarding the influence of WCE’s components on CSD. Research limitations/implications This research has some limitations. First, the relatively small sample size. Second, foreign currency exchange gains or losses under IAS 21 may not fully capture all aspects of currency risk exposure. Practical implications This research provides valuable insights for firms operating in emerging markets which face unique challenges related to financing, liquidity and foreign currency exposure. Also, it contributes to the development of more efficient and sustainable financial markets in emerging economies. Furthermore, it offers insights for policymakers and regulators in emerging markets regarding the implications of IFRS adoption, specifically IAS 21. Originality/value This research contributes to the limited existing literature that has explored the influence of WCE on CSD in developed economies. Additionally, it expands the body of knowledge concerning CSD in emerging markets, as the investigation of the relationship between WCE and CSD remains an under-researched area. Moreover, this research empirically analyzes the moderating impact of foreign currency exchange risk exposure under IAS 21 on the relationship between WCE and CSD, which has not been previously examined.