Capital structure and speed of adjustment in non-financial firms: Does sharia compliance matter? Evidence from Saudi Arabia

Alnori, Faisal; Alqahtani, Faisal

doi:10.1016/j.ememar.2019.03.008

Cited by 74 publications

(123 citation statements)

References 61 publications

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“…The author emphasizes that the issuance of Sukuk in Saudi Arabia is suffering from heavy regulation and supervision drawbacks, which need to be identified in order to resolve the problems of regulation and insufficiency of supervision. This argument aligns with Alnoria and Alqahtani [3], who state that because of its complexity, firms are discouraged from issuing a Sukuk or at least making it their first option.…”

Section: Tests Of Pecking Order Of Islamic Financial Instrumentssupporting

confidence: 65%

“…The authors document that capital structure decisions for SC and NSC firms are better explained by the pecking order for book leverage and by the trade-off theory for market leverage. In the same token, Alnoria and Alqahtani [3] investigate the effect of Sharia-compliance status on firms' capital structure decisions in non-financial firms in the KSA market. They find that SC firms have significantly lower levels of leverage and slower speeds of adjustment than NSC firms.…”

Section: The Empirical Findings Of the Pot: Conventional Versus Islammentioning

confidence: 99%

“…Table 8 provides the results for the full sample using Book-based debt and Market-based debt as independent variables. The conventional regressions before the deficit variable addition are provided in columns (1) and (3). The estimated coefficients on tangibility, the market-to-book ratio, firm size and profitability have the usual signs.…”

Section: Tests Of Conventional Leverage Regressionsmentioning

confidence: 99%

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Testing the pecking order theory of capital structure: the case of Islamic financing modes

Guizani

2020

Futur Bus J

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The purpose of this paper is to examine whether or not the basic premises according to the pecking order theory provide an explanation for the capital structure mix of firms operating under Islamic principles. Pooled OLS and random effect regressions were performed to test the pecking order theory applying data from a sample of 66 Islamic firms listed on Kingdom of Saudi Arabia stock market over the period 2006–2016. The results show that sale-based instruments (Murabahah, Ijara) track the financial deficit quite closely followed by equity financing and as the last alternative to finance deficit, Islamic firms issue Sukuk. In the crisis period, these firms seem more reliant on equity, then on sale-based instrument and on Sukuk as last option. The study findings also indicate that the cumulative financing deficit does not wipe out the effects of conventional variables, although it is empirically significant. This provides no support for the pecking order theory attempted by Saudi Islamic firms. This research highlights the capital structure choice of firms operating under Islamic principles. It explores the implication of the relevant Islamic principles on corporate financing preferences. It can serve firm executive managers in their financing decisions to add value to the companies.

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Section: Tests Of Pecking Order Of Islamic Financial Instrumentssupporting

confidence: 65%

Section: The Empirical Findings Of the Pot: Conventional Versus Islammentioning

confidence: 99%

Section: Tests Of Conventional Leverage Regressionsmentioning

confidence: 99%

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Testing the pecking order theory of capital structure: the case of Islamic financing modes

Guizani

2020

Futur Bus J

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“…Funding restrictions faced by Islamic companies will have an impact on the level of capital structure. Due to the low level of leverage, capital structure of companies that comply with sharia is much lower compared to non-sharia companies (Alnori and Alqahtani, 2019). The results of Alnori and Ahqahtani's research (2019) confirm the results of previous studies that found evidence that companies that comply with sharia have lower leverage compared to non-sharia companies (Farooq and Tbeur, 2013;Naz et al, 2017;Naz et al, 2017;Farooq & Tbeur, 2013).…”

Section: H4: There Is a Mediating Effect Of Investment Efficiency In supporting

confidence: 65%

Financial Constraints and Cost of Equity: Empirical Study of Shariah Compliant Firms in Indonesia

Syarif¹,

Wahyudi²,

Pangestuti³

2019

RWE

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This study is to investigate the relationship between financial characteristics and the cost of equity capital from sharia-based companies, which tend to be financially constrained. Using 276 observations, the results of this study indicate that financial constraints which are proxied by free cash flow have a role in influencing the cost of equity capital. This study also builds an indirect relationship of free cash flow and capital costs by proposing investment efficiency as a mediator variable. By using the causal step approach from Baron and Kenny, the test results show that investment efficiency mediates the effect of free cash flow on the cost of equity capital with an indirect effect that is stronger than the direct effect. This study also found evidence that leverage has no role in strengthening the effect of free cash flow on the cost of equity capital.

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“…In addition, the literature documents that Shari'ah compliant firms are able to raise debt financing at cheaper costs given the captive markets observed in Malaysian capital markets [10,11]. Further contention can also be found in a recent study where the nature of compliance restricts firms' ability to borrow, which in turn acts as an impediment to adjusting to target levels [12].…”

Section: Introductionmentioning

confidence: 99%

Sustainability of Leverage Levels in Response to Shocks in Equity Prices: Islamic Finance as a Socially Responsible Investment

et al. 2019

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This study looks at how firms react to shocks in equity prices based on a classification which arises from social pressures rather than the financial objective of maximizing shareholders’ wealth. In order to meet the objective of the study, a sample of Malaysian firms from the period of 2003 to 2018 was utilized to evaluate the relationship between market and book debt ratios based on a social distinction. The study is based on the theoretical expectation that managers are inclined to adjust book debt ratios to converge with market debt values which arise from changes in equity values over time. We introduce a unique institutional setting into the relationship which is readily observable in the Malaysian capital market given the existence of Shari’ah and non-Shari’ah compliant company classifications on the stock exchange (Bursa Malaysia), as screened by the Securities Commission. The classification forms the basis for distinguishing Socially Responsible Investment options for investors. The findings reveal the existence of asymmetries in how both categories of firms adjust towards shocks in equity prices. The findings document that both compliant and non-compliant firms decrease book debt ratios in line with increases in firms’ equity values. Compliant firms, on the other hand, are more likely to increase book debt ratios during periods of decreases in equity values. Non-compliant firms do not significantly alter book debt ratios during periods of declining equity prices. The findings indicate that whilst firms tend to decrease debt levels in the presence of future growth potential, the response is asymmetric during periods of suppression of share prices. Thus, the screening of compliant versus non-compliant firms allows investors to distinguish sustainable firms in the long run, which further allows diversification when holding socially responsible investment portfolios. Our conclusions have wide reaching implications on a global scale for the development of sustainable capital markets.

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Capital structure and speed of adjustment in non-financial firms: Does sharia compliance matter? Evidence from Saudi Arabia

Cited by 74 publications

References 61 publications

Testing the pecking order theory of capital structure: the case of Islamic financing modes

Testing the pecking order theory of capital structure: the case of Islamic financing modes

Financial Constraints and Cost of Equity: Empirical Study of Shariah Compliant Firms in Indonesia

Sustainability of Leverage Levels in Response to Shocks in Equity Prices: Islamic Finance as a Socially Responsible Investment

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