Interest rate changes and corporate debt strategy: The moderating effect of firm size among Saudi listed firms

In an emerging market setting with minimal tax advantage and an underdeveloped debt market, such as Saudi Arabia, it’s crucial to understand the drivers behind the firm’s capital structure decisions. Therefore, this study investigates the impact of interest rate changes on the level of debt among Saudi listed firms, moderated by firm size. A panel threshold regression model is applied to test the non-linear relationship under study over the period from 2010 to 2021 for a sample of 71 listed Saudi firms. The findings reveal the existence of a single threshold level, dividing the sample firms into small-size and large-size firms. (Alabdulkarim et al., 2024) The results show that interest rate changes negatively and significantly affect the debt level of small-size firms, whereas the impact becomes positive among large-size firms. The high volatility of interest rates during the COVID-19 crisis affects the behavior of Saudi listed firms toward debt acquisition. The results should help financial managers, market regulators, investors, and researchers better understand how the unique setting of the Saudi market, with low development of the debt market and no government taxes, can increase the variation of debt among Saudi listed firms due to interest rate changes, and the importance of firm size in this relationship.