Decisions on capital structure in a Zakat environment with prohibition of riba

Jasim Al‐Ajmi · Hameeda Abo Hussain · Nadhem Al‐Saleh

55 citations0/0 files storedThe Journal of Risk Finance

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Corporate Finance and Governance Islamic Finance and Banking Studies Financial Analysis and Corporate Governance

Abstract

Purpose The purpose of this paper is to assess and explain the leverage of Saudi companies (53 companies) during the period 2003‐2007. Design/methodology/approach This paper reviews two different classical capital structure theories, namely tradeoff theory and pecking order theory, to formulate testable propositions concerning the determinants of debt levels of Saudi companies. It develops a number of regression models (pooled OLS and panel techniques) to test the study's hypotheses. Findings The results suggest that a firm's capital structure is positively affected by profitability, size, growth opportunities, and institutional ownership. It is negatively impacted by tangibility, government ownership, family ownership, business risk, dividend payment, and liquidity. Practical implications Cost of capital is one of the pillars of corporate competitive advantage. Knowing which factors have the potential to influence capital structure can be essential to minimizing the cost of capital. Originality/value This is the first study of the determinants of capital structure in Saudi Arabia that considers dividend payment, ownership structure (as a proxy for agency problems), and risk. This work also contributes to the current debate regarding theories of competitive capital structure.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 2021Econometric Analysis of Panel Data 1958The Cost of Capital, Corporation Finance and the Theory of Investment 1977Determinants of corporate borrowing 1996Agency costs of free cash flow, corporate finance, and takeovers 2008The cost of capital, corporation finance and the theory of investment

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2020Public family firms and capital structure: A meta‐analysis 2016The Determinants of Capital Structure: Evidence from Selected Listed Companies in Sri Lanka 2018Exploring stakeholders’ views on a corporatized zakat institution’s management performance 2014A REVIEW ON LITERATURES OF ZAKAT BETWEEN 2003-2013 2018Firm Level Determinants of Capital Structure: Evidence From Egypt 2020

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