Corporate deleveraging. Lessons from the Polish experience (2006-2017)

Purpose – How long do firms need to reduce their debt level? We know from literature that this process cannot be completed rapidly and could be justified by the need to ensure financial flexibility or by the will to maintain a target leverage ratio. The purpose of this paper is to observe the behaviour of Polish firms in this process and the time needed (if any) to get back to the lower level in terms of debt. Our focal point is determining whether there are differences between firms in terms of size and sectors which could influence capital structure theories. Design/methodology/approach – The debt level defined is the net debt ratio, observed over 12 years (from 2006 to 2017) with a trough level estimated at the median of the ratio over that period for a sample of 50 496 firms per year (average). We also analyse the evolution of two other ratios, net debt/fixed assets and operational cash-flow/net debt, to obtain greater precision in our observations. Findings – In line with previous studies, we find that the process of getting back to the trough does not proceed very rapidly. However, this article is original because we find significant differences between firms in terms of size (3.27 years for small firms compared to 5.13 years for medium-sized firms and 3.77 years for large firms) and in terms of sectors. The trade-off theory could explain some patterns for small firms, whereas a more flexible version of the trade-off theory should be applied to large firms. For medium-sized firms, we should look for another explanation. Originality/value – Our findings are consistent with a capital structure theory which focuses on differences between firms in terms of size and sectors regarding the behaviour of some firms with respect to debt. Models which deal with capital structure should not stick to a stationary target leverage ratio for explaining capital structure choices, and should segment their observations and explanations to make them more efficient.