The impact of financial distress on capital structure following Egypt's currency flotation: the moderating role of board characteristics and ownership structure

Purpose This study examines how financial distress affects the capital structure of Egyptian firms following the 2016 currency flotation, examining the moderating roles of board characteristics and ownership structure. Design/methodology/approach Utilizing data from non-financial companies listed on the Egyptian Stock Exchange from 2017 to 2022, we apply two-stage least squares (2SLS) and propensity score matching (PSM) to address endogeneity and selection bias. Findings Our findings indicate that financially distressed firms tend to increase their debt burden, but robust governance mechanisms, such as higher board independence, larger boards and strong blockholder and institutional ownership, significantly mitigate this effect. Managerial ownership shows a stabilizing influence during distress, while chief executive officer duality does not significantly impact leverage decisions. These findings underscore how robust corporate governance promotes more conservative capital structure decisions during economic volatility. Research limitations/implications Our study focus, country and period could limit the generalizability of our findings to other regions or sectors. Practical implications Investors and policymakers are advised to focus on firms with effective governance structures to mitigate distress-induced leverage increases. Governance reforms that enhance board effectiveness and ownership structure, e.g. increasing board independence requirements and promoting greater institutional investor participation, can further stabilize capital structure during downturns. Managers, in turn, should diversify financing and adopt prudent debt strategies to reduce overreliance on leverage. Originality/value In contrast to most studies, this research reverses the lens by exploring how financial distress shapes capital structure decisions in an emerging market context, specifically post-Egypt’s 2016 currency flotation. Employing both 2SLS and PSM to address endogeneity and selection bias, the study highlights the mitigating role of governance mechanisms, which can buffer firms against heightened debt reliance under economic volatility.