Macroeconomic shocks and capital structure dynamics: Evidence from Mongolia

Abstract

This study investigates how macroeconomic factors shape corporate capital structure decisions in Mongolia across different economic phases, pre-COVID, COVID-19, and post-crisis recovery. Using a balanced panel of 907 firm-year observations from 91 non-financial companies listed on the Mongolian Stock Exchange between 2015 and 2024, the research applies the System Generalized Method of Moments (System GMM) to address endogeneity in dynamic leverage behavior. The analysis incorporates firm-specific, macroeconomic, and capital-market variables to capture both internal and external determinants of leverage. The findings indicate that leverage persistence intensified during the pandemic, while profitability, liquidity, and short-term liabilities became dominant determinants under heightened uncertainty. GDP growth positively affected leverage, inflation had a negative influence, and unemployment showed a strong positive association, reflecting firms’ increased reliance on debt during downturns. Capital market development contributed to financing stability during the recovery phase. The pandemic reshaped Mongolian firms’ capital structure, underscoring financial strength, flexibility, and macroeconomic stability as key elements of resilience. Strengthening capital-market infrastructure, diversifying financing beyond bank credit, and adopting counter-cyclical policies are crucial to sustain liquidity and mitigate systemic risks. Further, the results guide managers and investors in designing adaptive, evidence-based, and risk-aware financing strategies suited to volatile emerging economies.