Determinants of capital structure of banks: evidence from the Kingdom of Saudi Arabia

Abstract

Purpose The purpose of this study is to investigate the most important factors that affect the capital structure of commercial banks in the Kingdom of Saudi Arabia. Design/methodology/approach This study uses annual data of 11 Saudi commercial, national banks listed on the tadawul Saudi stock exchange for the period 2010–2017. Data was collected from the banks financial statements, tadawul annual publications and Saudi Arabian Monetary Authority. By constructing a balanced panel, this study uses pooled ordinary least squares regression along with fixed effects and random effects to examine the relationship between the bank’s book leverage as the dependent variable and bank-specific explanatory variables that include profitability, tangibility, earnings volatility, growth opportunities and bank size, while controlling for macroeconomic conditions. Findings The findings of this study suggest that banks in Saudi Arabia are highly leveraged, endorsing the fact that the nature of banks’ business is different from non-banking firms. Earnings volatility, growth and bank size show positive and significant relations with book leverage. Profitability and tangibility are negatively related to the book leverage. Empirically, the explanatory variables profitability, earnings volatility, tangibility, growth and bank size have material effects on the capital structure decisions of Saudi commercial banks. In summary, the determinants of capital structure for Saudi banks are the same as those of non-financial firms but are distinctive in nature. Research limitations/implications An extensive study on all the banks operating in Gulf Cooperation Council (GCC) countries is suggested. Practical implications The findings have practical implications for bank managers, which will help them to identify the bank-specific factors affecting the capital structure and choose the values enhancing optimal capital structure. The results of this study can assist regulatory agencies to formulate an effective regulatory framework. Moreover, the findings lay a foundation for the development of financial sector under the umbrella of the Vision 2030 program in the Kingdom. Originality/value To the best of the authors’ knowledge, this is the first study to explore the factors affecting the capital structure choices of commercial banks operating in the Kingdom of Saudi Arabia. Moreover, the findings of the study would prove useful in detailed studies of capital structure in the GCC countries as well.

Income Diversification and Capital Structure: International Banks Evidence

“…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.…”

“…Thus, H1 is generally accepted. In most studies on capital structure in the banking sector, researchers find that the level of profitability has a negative effect on the capital structure (Al-Hunnayan, 2020;Ghosh & Chatterjee, 2018;Guizani & Ajmi, 2021;Kahya et al, 2020;Khan et al, 2020). However, several studies have found that the profitability of banking companies has a positive and significant effect on their debt structure (Etudaiye-Muhtar& Abdul-Baki, 2020).…”

“…From a different point of view, proponents of pecking order theory state that when a company makes a profit, the company tends to reduce its debt portion and prefers to use the company's available internal funds, such as retained earnings (Al-Hunnayan, 2020;Ghosh & Chatterjee, 2018;Guizani & Ajmi, 2021;Khan et al, 2020;Myers & Majluf, 1984;Titman & Wessels, 1988). Given that the characteristics of banking sector companies simultaneously provide capital and require capital, banking companies naturally need debt as the main component in their operations.…”

“…Furthermore, there are regulatory limits from the government regarding the minimum limit of banking equity (capital adequacy ratio), banking product variants, funding decisions for debtors, etc. (Guizani, 2020;Khan, Bashir, & Islam, 2020;Sheikh & Qureshi, 2017;Titman & Wessels, 1988). more and more space to find the optimal capital structure.…”

Factors Shaping Capital Structure: Evidence From Private Commercial Banks in Bangladesh

“…There existed some mixed outcomes regarding this area of the stated determinant. Some shreds of evidence uncovered a noteworthy positive association between size and leverage (Al-Hunnayan, 2020;Amidu, 2007;Anarfo, 2015;Bukair, 2019;Heider & Gropp, 2008;Khan et al, 2020;Kuč & Kaličanin, 2020;Manos & Ah-Hen, 2003;M'ng et al, 2017;Oino, 2014;Režňáková et al, 2010;Shah & Jam-e-Kausar, 2012;Sheikh & Qureshi, 2017;Ukaegbu & Voulgaris et al, 2004), conversely, there existed some significant negative impacts of size on leverage (Güner, 2016;Handoo & Sharma, 2014;Kayo & Kimura, 2011;Khan et al, 2020;and Sharif & Muhammad, 2019). In addition, some studies uncovered that there were no significant impacts of size on leverage (Islam, 2016;and Ullah et al, 2017).…”