The Effect of COVID-19 Pandemic on Capital Structure Speed of Adjustment

This research investigates the effect of the COVID-19 pandemic on capital structure adjustment speed and compares its intensity in industries with low and high impact of the COVID-19. To test the research hypotheses, this paper has used the data for firms listed in the Tehran Stock Exchange during 2002-2022 in an unbalanced panel format (3’342 observations) and has applied the partial adjustment approach with a system generalized method of moments estimator. The research results show that the COVID-19 pandemic has increased the speed of adjustment at firms’ level. Furthermore, the research findings show that the speed of adjustment has increased more in industries that have been more affected by COVID-19, and COVID-19 exacerbated their financial deficits more than the others. In most countries (including Iran), COVID-19 has weakened the macroeconomic conditions, increased the business environment’s uncertainty, and increased the costs of adjustment. Therefore, it is expected that this issue has slowed down the speed of adjustment; however, empirical evidence contradicts this prediction. This research contributes to the emerging literature that explores the impact of COVID-19 on various aspects of business units.