Capital Structure and Firm Performance for Non-Financial Saudi Firms: COVID-19 Crisis

Abstract

The relationship between capital structure and firm performance has been extensively investigated in the recent decades. However, only a few studies investigate this relationship during the Sanitary Crisis. The paper investigates the relationship between company performance and firm specific characteristics; investment, free cash flow, and sales revenue. To our knowledge, this study is the first to investigate the simultaneous impact of indicators, drawn from multiple theories, on firms' performances during the coronavirus pandemic. The investigation has been performed based on a sample of 138 Saudi companies listed on the Saudi Stock exchange Tadawul over two specific periods of the COVID-19 pandemic; the pre-pandemic (2016-2019), and the pandemic (2020-2022). The research findings suggest that the crisis had a negative impact on firms with greater sensitivity to aggregate demand and international trade. Additionally, the study found a positive correlation between sales revenues and financial performance indicators, while leverage was linked to lower financial performance. Moreover, increased investment during a crisis was found to create agency problems and a free-rider problem, leading to decreased financial performance. On the other hand, Free Cash Flow was found to be positively associated with firm market performance, supporting agency theory.