Document Type : Original Article

Author

• Mahdieh Rezagholizadeh

university of Mazandaran

Abstract

The increase in business bankruptcies following the 2008 financial crisis has highlighted the importance of examining corporate financial fragility and its sensitivity to economic factors. This study investigates the impact of exchange rates and financial leverage on the financial fragility of automotive and parts manufacturing sector listed on the Tehran Stock Exchange over the period 2011 to 2022. Additionally, considering the role of exchange rates in altering corporate financial structures, the interaction effect between exchange rates and financial leverage is also assessed. To measure financial fragility, the Altman Z-Score index is employed, and the relationships between variables are estimated using the two-step generalized method of moments (GMM). The results indicate that, during the study period, increases in financial leverage and exchange rate fluctuations significantly contributed to the rise in corporate financial fragility. The interaction effect between financial leverage and exchange rates shows that higher financial leverage, combined with exchange rate fluctuations, has a more pronounced negative impact on corporate financial fragility, particularly for companies with higher leverage. The findings also suggest that a company’s financial history significantly influences its financial fragility, with past financial difficulties serving as a predictor for future financial crises.

Keywords

• Financial fragility
• Exchange rate
• Financial leverage
• Generalized Method of Moments (GMM)
• Altman Z-Score index

Main Subjects

• Economics