Do financial crises alter the dynamics of corporate capital structure? Evidence from GCC countries

We study the impact of the 2008 financial crisis on the capital structure of GCC firms. We employ a dataset covering a 10-year period from eight sectors to investigate patterns in corporate leverage before and after the crisis and identify changes in debt financing. Our results indicate that leverage ratios were negatively and significantly impacted by the 2008 crisis due to lack of debt supply by lenders. We also find that the demand for debt by firms is the main driver of leverage before the crisis whereas the demand for debt by firms and the supply of debt by lenders are both important determinants of leverage after the crisis. Moreover, we find that firms adjust their leverage ratios toward the target leverage much slower after the crisis. Our results also indicate that the impact of the crisis on the capital structure is different across industries and across countries. These results are of paramount importance for stakeholders to understand and mitigate the impact of crises on capital structure.