Financial conservatism, economic sanctions and the dynamics of leverage adjustment: evidence from Iran
Reza Sajadpour, Farzaneh Nassirzadeh, Sara MohammadzadehPurpose
This study aims to examine how financial conservatism affects the speed of corporate leverage adjustment. This study further investigates how periods of heightened economic sanctions moderate this relationship.
Design/methodology/approach
Using 1,944 firm-year observations from firms listed on the Tehran Stock Exchange over the period 2011–2022, this study uses the generalized method of moments estimator.
Findings
The results of this study show that financially conservative companies adjust more quickly toward their target leverage. However, this advantage weakens during intensified economic sanctions, suggesting that severe external financing frictions reduce firms’ ability to actively rebalance their capital structures.
Practical implications
First, financially conservative firms may be viewed as lower-risk borrowers, potentially improving access to external financing during periods of economic instability. Second, the results highlight the importance of maintaining stable credit channels in financially constrained environments. Third, these findings may help managers and policymakers better understand firms’ financing behavior and develop more resilient financing strategies under persistent uncertainty.
Originality/value
This study contributes to the capital structure literature by providing new evidence on the relationship between financial conservatism and the speed of leverage adjustment within a sanctioned emerging market. By integrating macro-political shocks with corporate finance decisions, this study highlights how sanctions shape leverage adjustment behavior under persistent financial constraints, offering insights for policymakers and managers operating under sanctions.