Unlocking the Nexus between Leverage and Financial Distress: The Dual Role of Operational Efficiency and Firm Size in Egypt

Purpose— This study investigates how financial leverage affects financial distress among non-financial companies listed on the Egyptian Exchange (EGX). It also examines the mediating role of operational efficiency and the moderating role of firm size in the Egyptian economic context.
Design/methodology/approach – The study utilizes a dynamic panel data technique, employing the Generalized Method of Moments (GMM) on a dataset comprising 684 firm-year observations of Egyptian non-financial companies from 2013 to 2024.
Findings— The results indicate that financial leverage has a significant and negative impact on financial distress, supporting the trade-off theory. Companies deliberately utilize debt to optimize their capital structure and reduce financial vulnerability. Furthermore, operational efficiency mediates this effect, as companies with efficient operations exhibit greater resilience. The study also reveals that firm size moderates the relationship; larger companies can more easily manage financial responsibilities due to better access to capital markets and economies of scale.
Research implications— This study provides implications for financial institutions, government authorities, and corporate executives. Regulators are urged to tailor leverage policies based on company characteristics and support operational efficiency in credit risk assessment. It is also recommended that companies adopt context-specific capital structure strategies and invest in AI-driven credit risk tools.
Originality/value— This paper contributes to research on financial leverage and financial distress in developing countries, particularly Egypt. Its uniqueness lies in integrating operational efficiency as a mediating factor and firm size as a moderating factor to understand how company-specific factors influence the relationship between financial leverage and financial distress.