Capital structure and public corruption among non-financial firms in the MENA region: The impact of the Arab spring

This study investigated the determinants of financing decisions of firms from the Middle East and North Africa (MENA) region, particularly the effect of public corruption on financing decisions and the effect of disorder following the Arab Spring on public corruption-financing structure relationship. The study encompasses a total of 800 business entities from 14 different countries, spanning the time frame of 2005-2018. Data is analyzed through the application of static fixed effects and dynamic GMM-System models. Results indicate that large, tangible companies prefer debt, whereas profitable companies with more room for growth choose equity. Less corruption is associated with increased corporate debt. The use of debt decreased because of the Arab Spring, and corruption's effect on leverage became weaker. The speed of adjustment to the target leverage is comparatively slow for book leverage, while it is significantly greater for market leverage. These outcomes are consistent with the pecking order behavior resulted from increasing information asymmetry, but the tradeoff theory has some support as well. The implications of this study entail the need for enhancing investor protection, strengthening control measures, increasing transparency, and fostering the overall growth of the financial system to facilitate enterprises' use of debt financing, particularly in the post-Arab Spring era. This paper provides fresh empirical evidence demonstrating the effect of the Arab Spring on capital structure and on the relationship between country corruption and capital structure in the MENA region. The paper also expands the body of research on capital structure and corruption across countries by providing empirical findings from a region that has been relatively overlooked in previous scholarly works.