Non-Traditional Debt (NTD) instruments, particularly innovative instruments, have been the most preferred choice of firms in capital structure financing. This paper attempts to examine the effect of presence of non-traditional debt on the financial risk of a firm with the determinants of capital structure as control variables. The determinants of capital structure, identified from the literature include operating leverage, volatility of earnings, value of collateral assets, non-debt tax shield, profitability, firm size, firm size relative to economy, interest coverage ratio, bankruptcy cost and cash constraint. The results show that firms with NTD have higher leverage and presence of NTD has a positive influence on financial leverage.
It also shows that the relationship is robust in controlling determinants of leverage and accounting, since NTD increases the ability of the model to explain cross-sectional leverage. The analysis shows that results are robust considering three different measures of leverage for the transition and post-transition period. The firms with NTD have low volatility of earnings, low non-debt tax shield, low profitability, low market to book ratio, low cash constraint, high volatility of collateral assets, large firm size and high bankruptcy cost in comparison to firms without NTD. The findings of the study confirm the pecking order hypotheses.
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