The Impact of Earnings, Operating Cash Flow Volatility on the Cost of Capital in Crisis and Stability Periods: The Moderating Role of Political Connections

Purpose: This study examines the impact of earnings volatility, operating cash flow volatility on the cost of capital in crisis and stability periods. Additionally, the moderating role of political connections on the relationship between earnings volatility and operating cash flow volatility and the cost of capital in crisis and stability periods.
Methodology: The study uses a quantitative approach to assess the impact of political connections on the relationship between earnings volatility, operating cash flow volatility and the cost of capital in crisis and stability periods for a sample of (34) firms in (7) sectors representing (18.48%) of the total number of all firms listed on the Egyptian Stock Exchange from 2008 to 2021 with (476) firm-year observations. The multiple linear regression analysis and the Kruskal-Wallis test are used to test the hypotheses.
Findings: The results resented that the impact of earnings volatility on the cost of capital varied according to crisis and stability periods, where there was a negative impact of earnings volatility on the cost of capital in the financial crisis period and not in other periods. The impact of operating cash flow volatility on the cost of capital varied according to crisis and stability periods, where there was a negative impact of operating cash flow volatility on the cost of capital in crisis periods at a level of significance of 1% and in a stability period at a level of significance of 5%. There was insignificant impact of political connections on the relationship between earnings volatility and the cost of capital in crisis and stability periods. The impact of political strength varied on the relationship between operating cash flows volatility and the cost of capital in crisis and stability periods, where political strength had a positive impact on the relationship between operating cash flow volatility and the cost of capital in financial and political crisis periods, as it leads to a weak of a negative impact of operational cash flow volatility on the cost of capital. There was a variance in the impact of political connectivity on the relationship between cash flow volatility and the cost of capital in crisis and stability periods. Where political connectivity had a negative impact on the relationship between operating cash flow volatility and the cost of capital in the Corona crisis, as it leads to an increase of a negative impact of operational cash flow volatility on the cost of capital. Finally, the results show significant differences between crisis and stability periods regarding earnings volatility, political strength, and political connectivity, and the absence of significant differences between those periods regarding operating cash flow volatility and the cost of capital.
Originality/value: The study contributes to the literature by investigating both the positive and negative effects of political connections on the relationship between earnings volatility, operating cash flow volatility, and the cost of capital in crisis and stability periods in order to identify appropriate financing sources for the implementation of investments and future plans, which leads to an increase in the ability of companies continuity and growth in the future, especially in times of crisis.