Temporal orientation in investment decisions and capital structure

Purpose Building on the pecking order theory of capital structure and financial flexibility arguments, this paper examines the relationship between a firm’s investment horizon and capital structure. The firm’s investment horizon is viewed as a measure of the firm’s temporal orientation and thus reflects the extent to which the resource-allocation process is long-term or short-term oriented. Design/methodology/approach We propose that firms with longer investment horizons rely more on external financing due to lower intermediate cash flows, but at a certain threshold, they rebalance their capital structure. Using panel data from 947,477 European firms (2018–2023), we test this hypothesis. Findings Results confirm a quadratic, inverted U-shaped relationship between investment horizon and financial leverage. The COVID-19 crisis influenced this relationship by shifting the rebalancing threshold. Practical implications Managers must balance long-term investment needs with financial flexibility, while policymakers should support firms in sustaining long-term strategies during economic downturns. Originality/value The paper extends classic corporate finance models of capital structure by integrating explicitly the importance for managers to maintain financial flexibility in the form of untapped debt capacity.