The impact of liquidity on capital structure in UAE-based companies listed on the Dubai financial market

Purpose This study aims to examine the impact of liquidity on the capital structure of firms listed on the Dubai financial market (DFM). This study analyzes the influence of liquidity ratios, specifically the current ratio (CR) and quick ratio (QR), on leverage metrics over a 13-year period using a random-effects generalized least squares (GLS) regression analysis. Regression analysis was conducted using STATA version 12. Design/methodology/approach A panel dataset of 20 United Arab Emirates (UAE)-listed firms across multiple sectors was analyzed over a 13-year period. Financial ratios were computed from company financial statements. The study employed random-effects GLS regression using STATA to investigate the relationship between liquidity and leverage, including short-term and long-term debt ratios. Findings The results show that the CR is significantly and negatively associated with the debt/equity ratio and long-term debt levels. The QR, while also negatively correlated with leverage, showed statistically insignificant effects. Liquidity has limited influence on short-term liabilities. These findings support the pecking order theory and suggest that DFM-listed firms prioritize liquidity preservation and financial flexibility over aggressive leverage. Research limitations/implications This study focuses solely on firms listed on the DFM, limiting the generalizability of findings to other regions or exchanges within the UAE. It does not account for macroeconomic variables, industry-level differences or corporate governance factors that may influence capital structure decisions. The use of only quantitative data excludes managerial perspectives and qualitative insights. Future research should incorporate sectoral segmentation, expand the geographic scope and include variables such as interest rates, inflation and ownership structure to offer a more comprehensive understanding of liquidity-capital structure dynamics in emerging markets. Practical implications The findings offer valuable guidance for corporate finance managers in emerging markets, particularly in the UAE. Firms with higher liquidity levels are shown to prefer lower leverage, especially in long-term debt, highlighting the importance of maintaining strong liquidity buffers to enhance financial flexibility. Policymakers and regulators may use these insights to design frameworks that promote sustainable capital structures. Investors can also assess firms' liquidity positions as an indicator of conservative debt management strategies, especially in volatile market environments. The study reinforces the need for liquidity-based risk assessment in corporate financing decisions. Social implications By highlighting the role of liquidity in capital structure decisions, this study indirectly supports broader financial stability within emerging markets. Firms that maintain prudent liquidity management are less likely to experience financial distress, which can reduce the risk of layoffs, creditor losses and systemic shocks. For the UAE, fostering financially resilient companies contributes to national economic diversification goals and long-term sustainability. Improved capital structure decisions also enhance trust among investors, lenders and other stakeholders, promoting responsible corporate behavior and aligning with regional visions for economic growth and social development. Originality/value This paper contributes to the limited empirical literature on liquidity and capital structure in Middle Eastern markets. By focusing on the UAE, it highlights region-specific financial strategies and provides actionable insights for policymakers, investors and corporate managers operating in emerging economies.