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The impact of financial and economic crisis on leverage: the case of Icelandic private firms

The impact of financial and economic crisis on leverage: the case of Icelandic private firms The purpose of this paper is to provide empirical insight into the impact of a financial crisis on capital structure of private firms. Specifically, the authors use the example of the systemic Icelandic financial crisis from 2008 to 2010 and analyze the influence of internally generated funds on leverage during the financial crisis compared to the non-crisis period.Design/methodology/approachThe authors use a fixed-effects dynamic model to examine the impact of internally generated funds – measured as cash flow – with a data set that includes non-listed Icelandic firms. In addition, generalized method of moments is used to address potential endogeneity issues.FindingsThe authors find that internally generated funds have a different effect on capital structure during the financial crisis compared to the non-crisis period. While cash flow has an overall negative association with leverage, a positive relationship appears to exist during the crisis. However, when analyzing changes in cash flow from one year to the other, the sample firms appear to rely more on internally generated funds to adjust leverage during the financial crisis than in the non-crisis period.Originality/valueAnalyzing the extreme case of the Icelandic financial crisis allows us to shed light on capital structure effects in situations when both debt financing and internal financing opportunities are heavily curtailed. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Managerial Finance Emerald Publishing

The impact of financial and economic crisis on leverage: the case of Icelandic private firms

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References (83)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1743-9132
DOI
10.1108/ijmf-01-2019-0019
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to provide empirical insight into the impact of a financial crisis on capital structure of private firms. Specifically, the authors use the example of the systemic Icelandic financial crisis from 2008 to 2010 and analyze the influence of internally generated funds on leverage during the financial crisis compared to the non-crisis period.Design/methodology/approachThe authors use a fixed-effects dynamic model to examine the impact of internally generated funds – measured as cash flow – with a data set that includes non-listed Icelandic firms. In addition, generalized method of moments is used to address potential endogeneity issues.FindingsThe authors find that internally generated funds have a different effect on capital structure during the financial crisis compared to the non-crisis period. While cash flow has an overall negative association with leverage, a positive relationship appears to exist during the crisis. However, when analyzing changes in cash flow from one year to the other, the sample firms appear to rely more on internally generated funds to adjust leverage during the financial crisis than in the non-crisis period.Originality/valueAnalyzing the extreme case of the Icelandic financial crisis allows us to shed light on capital structure effects in situations when both debt financing and internal financing opportunities are heavily curtailed.

Journal

International Journal of Managerial FinanceEmerald Publishing

Published: Jun 3, 2020

Keywords: Financial crisis; Leverage; Capital structure; Icelandic private firms; Internally generated funds; G31; G32; G34

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