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Decisions on capital structure in a Zakat environment with prohibition of riba The case of Saudi Arabia

Decisions on capital structure in a Zakat environment with prohibition of riba The case of Saudi... 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

Decisions on capital structure in a Zakat environment with prohibition of riba The case of Saudi Arabia

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Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
1526-5943
DOI
10.1108/15265940911001376
Publisher site
See Article on Publisher Site

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.

Journal

The Journal of Risk FinanceEmerald Publishing

Published: Nov 6, 2009

Keywords: Capital structure; Islam; Saudi Arabia

References