Drought Risk, Capital Structure, and Adjustment Speed: The Moderating Role of Operating Cash Flows

Document Type : Research Paper

Authors

1 Ph.D. Candidate, Department of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran.

2 Associate Prof., Department of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran.

3 Assistant Prof., Department of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran.

10.22059/acctgrev.2025.381351.1009004

Abstract

Objective
Drought, as one of the natural disasters, has economic, social, and environmental impacts on various aspects of human life. One of its economic consequences is its impact on corporate capital structure decisions. Since drought risk is part of overall business risk and due to significant changes in the business environment, the diverse strategies adopted by managers determine the company's future, and therefore play an important role in the firm's future value. This study aims to determine the impact of drought risk across different Iranian provinces on the capital structure of companies, the speed of capital structure adjustment, and the moderating role of operating cash flows.
Methods
The hypotheses of this study were tested using a sample of 151 companies listed on the Tehran Stock Exchange from 2011 to 2022, employing multivariate regression models and panel data analysis. This study is applied in terms of purpose and falls within the scope of descriptive-correlational research in terms of hypothesis inference. To measure drought in various provinces of Iran, the Standardized Precipitation Index (SPI) was used, based on data provided by the National Drought and Crisis Management Center, which reports figures by province.
Results
The findings of this research show that drought has a significant negative effect on capital structure and the speed of capital structure adjustment. Also, operating cash flows, as a moderating variable, have a significant positive impact on the effect of drought on capital structure. However, this moderating variable does not have a significant effect on the intensity of drought’s impact on the speed of capital structure adjustment.
Conclusion
Since drought risk is part of overall business risk and is one of the main causes of the water crisis and global warming, it can affect company operations. According to the static trade-off theory, elements such as opportunity costs arising from deviation from optimal capital structure and the associated bankruptcy risk are important in determining capital structure and the speed of its adjustment. Therefore, drought has a significant negative impact on capital structure and its adjustment speed. In addition, the higher the operating cash flows of companies, the lower the uncertainty in cash flows and the less the need to obtain loans, which in turn reduces the negative impact of drought on capital structure under conditions of high operating cash flows. Thus, operating cash flows mitigate the effect of drought on capital structure. However, they do not moderate the negative effect of drought on the speed of capital structure adjustment. This may be due to corporate caution and conservatism in reducing debt and adjusting capital structure toward the target leverage. Managers may doubt the continuity of increased operating cash flows in the coming years, which in turn slows down the pace of capital structure adjustment.

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References

 
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Accounting and Auditing Review
Volume 32, Issue 3
2025
Pages 432-458

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