Purpose : This study aimed to examine the effect of the COVID-19 pandemic and firm-specific factors on the capital structure choices among listed manufacturing companies in Vietnam.

Design/Methodology/Approach : Pooled ordinary least squares, fixed effects, and dynamic generalized method of moments estimators were applied to account for unobserved company characteristics, possible endogeneity problems, and leverage persistence. Additionally, a continuous linear time trend was included to separate the effects of the pandemic from other general macroeconomic trends.

Findings : The results indicated that the COVID-19 pandemic shock led to a substantial decrease in debt; it suggested that the uncertainty of the economic condition prompted firms to reduce their use of financial leverage as a precautionary measure. In addition to being positively correlated with firm size and growth opportunities, the findings indicated that there were negative associations between firm leverage and profitability, asset tangibility, and liquidity. Overall, the study supported incorporating principles of both trade-off and pecking order theories.

Practical Implications : During a crisis, corporate managers should establish counter-cyclical liquidity reserves and decrease their debt load. The deleveraging caused by a crisis can be seen by investors as a form of proactive risk management. Establishing stable channels by policymakers for transmitting liquidity and increasing the size of the corporate bond market are necessary to minimize potential refinancing risks.

Originality/Value : This study offered novel longitudinal empirical support for the way that firms dynamically adjust their capital structures by isolating an exogenous crisis shock from secular macroeconomic trends in the manufacturing sector.

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