Determinants of capital structure for firms in an Islamic equity index: comparing developed and developing countries

Abstract

PurposeThe paper aims to identify the differences between developed and developing country firms with respect to firm-specific and country-level determinants of their capital structure. For this purpose, all constituent firms in one of the oldest Islamic equity indices, Dow Jones Islamic Market World Index (DJIM), are considered and the Muslim-majority status of each firm's domicile country is recognized.Design/methodology/approachThe study employs Hausman–Taylor random effects regression with endogenous covariates to explain the debt ratios of firms in DJIM by separating them into developed and developing country subsamples in an unbalanced panel data setting. Developing country subsample is further split into two based on the Muslim-majority status of each firm's domicile country.FindingsConsistent with the previous literature, this study finds that firm-specific characteristics are the main determinants of their capital structure. Additionally, the paper shows that country-level characteristics have an impact on the debt ratio, however, the types of factors vary across developed and developing countries. Debt ratios in developing country firms are lower than those in developed country firms, largely due to the significantly smaller leverage ratios of firms in Muslim-majority countries. Although the debt ratios of DJIM firms are higher in “non-Muslim” countries, the set of firm-level capital structure determinants are not statistically explained by operating in a “Muslim” country. The study also documents that, before the global financial crisis of 2008, companies in developing countries have gradually become less leveraged worldwide.Originality/valueThis paper provides a new perspective into the differences between developed and developing country firms' capital structures by focusing on a relatively homogeneous data set restricted by leverage screening rules of an Islamic equity index and recognizing the Muslim-majority status of each firm's domicile country.

Income Diversification and Capital Structure: International Banks Evidence

“…In general, when viewed from the effect of GROW on STD, H4 is accepted. These results are in line with research conducted by Al-Hunnayan (2020); Czerwonka and Jaworski (2021); Kahya et al (2020). However, some researchers have found that GROW can have a negative effect ( (Alipour et al, 2015;Chandra et al, 2019;Sheikh & Qureshi, 2017), even Bolarinwa and Adegboye (2020); Dawar and M. Hull (2014) found that GROW had no significance to the debt structure.…”

“…The greater the size of the company will increase the agency cost due to the asymmetric information that arises. This result contradicts the findings of Al-Hunnayan (2020); Bukair (2019); Etudaiye-Muhtar and Abdul-Baki (2020); Guizani and Ajmi (2021); Kahya et al (2020); Khan et al (2020), stating that in Islamic banking in the Middle East and developing countries, SIZE had a positive and significant effect. In this study, the Non-debt tax shield (NDTS) had no significant effect on STD.…”

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“…Researchers who raise the issue of capital structure in Islamic finance are still limited, even though this issue is very interesting to study. The Islamic financial system has its own uniqueness because it follows sharia principles, so that it is free from Maysir, Gharar and Riba (Kahya et al, 2020). This uniqueness should also create a difference between the Islamic capital structure and the conventional capital structure.…”

Determinants of Capital Structure from Shariah-Compliant Firms in Travel, Leisure and Hospitality Sector in Malaysia

“…Researchers have been particularly interested in the evolution of theory and the validity of contemporary finance theory. Furthermore, one of the essential aspects of corporate finance is capital structure (Kahya et al, 2020) Corporate finance and capital structure refer to the mix of debt and equity that companies employ to support their operations and development (Cheema et al, 2017). As a result, finance managers must choose the optimum financing strategy, whether debt or equity, to increase their company's performance (Daud et al, 2016).…”