Cash Flow Volatility and Debt Maturity Structure: Role of Macroeconomic Factors

Abstract

This study investigated the moderating role of macroeconomic factors in the relationship between CFV and DMS by considering a sample of 380 listed non-financial firms of Pakistan over a period from (1999-2018). For empirical analysis, advanced econometric techniques have been used in this study such as ordered probit regression, two-way fixed effect, and generalized method of moments (GMM). In addition, this study analyzed the conditional effects of cash flow volatility on debt maturity structure at different levels of macroeconomic factors. The results of the study highlight that the role of macroeconomic factors weakens the CFV relationship with DMS. The results of conditional effects indicate that when inflation, money supply, and interest rate move from a low to higher level, cash flow volatility inversely affects the maturity structure of debt. However, when GDP growth moves from a low to higher level, cash flow volatility positively affects the debt maturity structure. Based on the estimated results, this study suggests the subsequent recommendations: firstly, when firms face a variation in the earning level, they may mitigate their financial distress and cost of bankruptcy by choosing short-term maturity debts. Secondly, financial managers should consider the role of macroeconomic factors in the decision-making process as it effects the firms’ DMS. Finally, non-financial firms, banks, financial institutions, if face high CFV, they may reduce their risk of non-performing loans by limiting their financing.