Title: Is debt governance structure relevant to firm operating performance in Egypt? A dynamic approach

Authors: Tarek Ibrahim Eldomiaty, Ehab K.A. Mohamed

Addresses: Finance Department, Faculty of Business Administration, Misr International University, P.O. Box 1 – Heliopolis 11341, Cairo, Egypt. ' College of Commerce & Economics, Sultan Qaboos University, P.O. Box 20, AlKhod 123, Muscat, Oman

Abstract: This paper examines the association between firms| debt financing structure and operating performance. The paper focuses on debt as the firms| loans from banks, which is the general trend of debt financing in Egypt. Firms| operating performance is measured by three operating measures. The methodology utilises the properties of the partial adjustment model. The results show that short-term borrowing is preferred and in most cases is renewed at multiple points in time on a long-term basis. Regarding firms| operating performance, the results show the following: (1) In the high-debt firms, most of the changes in firms| assets are associated with the changes in short-term and long-term debt respectively. In addition, neither short-term debt nor long-term debt (as indigenous determinants) has significant effects on operating performance; (2) In the medium-debt firms, both short term and long-term debt help adjust the three performance measures to a target level; and (3) In the low-debt firms, long-term debt in particular has a negative effect on operating income/sales. In general, a relatively high association between debt financing and operating performance is realised, which insures that debt structure has a governance role on firms| operating performance. A general conclusion is that the premises of the agency theory of debt are highly likely transferable from developed markets to transitional markets.

Keywords: corporate governance; debt financing; debt structure; banks; operating performance; Egypt; short-term borrowing; agency theory.

DOI: 10.1504/IJAF.2008.020304

International Journal of Accounting and Finance, 2008 Vol.1 No.2, pp.216 - 249

Published online: 15 Sep 2008 *

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