National culture and capital structure of the Shariah compliant firms: Evidence from Malaysia, Saudi Arabia and Pakistan

Purpose This study aims to compare capital structure determinants' effect on the leverage levels of Shariah-compliant (SC) and noncompliant (NC) firms in Pakistan. This study also estimates and compares the capital structure adjustment speed for both firm types. Design/methodology/approach Based on the Karachi Meezan Index screening criterion, a balanced panel of 117 SC and 68 NC firms listed on the Pakistan Stock Exchange from 2008 to 2018 was constituted. This study used the generalized method of moments to identify the significant determinants of capital structure and estimate the speed of adjustment. In addition, the F-test was used to check whether the effect of the determinants on the leverage is same for SC and non-SC firms. Findings The authors found that different determinants affect both firm types' leverage levels (book and market) differently. The authors also found that the adjustment speed of SC firms toward their target leverage ratio is slower than their NC peers. Lastly, significant variation was observed in the results under different screening criteria. Research limitations/implications This study fills the literature gap by providing a comprehensive comparison of the capital structure decisions of the SC and non-SC firms. Because this study is limited to Pakistan, generalizability would be an issue. Practical implications This study will guide the management of SC and non-SC firms about which factors are reliably important in choosing their capital structure. The findings also call for bringing harmony in the different Shariah screening criteria being in practice. Originality/value To the best of the authors’ knowledge, this is the first comparative study that identifies the significant capital structure determinants for SC and NC firms and investigates their effect on the leverage of both firm types. By testing joint hypotheses of same relationship, this study seeks to determine if, because of Shariah restrictions, the capital structure determinants of SC firms are similar to NC firms or they exhibit different behavior. The authors also repeat their analysis using other prominent screening criteria to assess the consistency of their results.

Section: Resultssupporting

confidence: 91%

Section: Theoretical Background and Hypotheses Developmentmentioning

confidence: 70%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Capital structure dynamics of Shariah-compliant vs noncompliant firms: evidence from Pakistan

Akbar

Khan

Haq

et al. 2022

“…Previous studies such as Claessens and Horen (2012) and Pelletier (2018) also examined influence of home and host country variables on foreign bank performance using OLS. Other studies that examined macroeconomic factors such as Rashid et al (2020) also used OLS. These show that OLS is still relevant in examining the influence of home and host country variables on the performance of banks.…”

Section: Methodsmentioning

confidence: 99%

Ownership in Islamic banks: how home country development influences the performance of foreign Islamic banks

Saw

Law²,

Jubilee³

et al. 2022

Purpose This study aims to assess the performance of domestic and foreign Islamic banks as well as the influence of foreign banks’ home country development influence on the performance of foreign banks. Design/methodology/approach This study uses data of 17 domestic Islamic banks and 11 foreign Islamic banks from Bahrain, Malaysia and Pakistan from 2010 to 2018. Pooled ordinary least square is used to investigate the relationship between home country development and performance of foreign Islamic banks. Findings Results from this paper suggest domestic Islamic banks in Malaysia have higher performance than their foreign counterparts while foreign Islamic banks from Pakistan have higher performance than their domestic counterparts. However, as a whole, the performance of domestic and foreign Islamic banks is not significantly different from one another. Development of foreign banks’ home country measured by gross national income per capita and gross domestic product per capita show significant positive influence on the performance of foreign Islamic banks. Originality/value Higher level of development of the home country of foreign banks appears to influence the performance of foreign banks in the host country.

“…Financing decision is one of the weighty strategic decisions of any company that drives their survival, support growth and pay for current operation (Modigliani and Miller, 1958; Rashid, Johari, and Izadi, 2020). The choice of debt versus equity is primarily fuelled by cost of debt and cost of equity (Ke hereinafter) that are closely connected to corporate performance (AlHares, 2019; Abdeljawad and Nor, 2017).…”

Section: Introductionmentioning

confidence: 99%

Voluntary disclosure-cost of equity nexus and the moderating role of corporate governance: evidence from an extremely politically unstable context

Alia

Abdeljawad

Jallad

et al. 2022

Self Cite

Purpose Higher degree of and commitment to voluntary disclosure (VD) and corporate governance (CG) helps contain information asymmetry, leading to lower cost of equity (Ke). This study provides evidence on the nexus among VD, CG, and Ke from a context characterized by extreme political instability. Design/methodology/approach This study uses all non-bank companies listed with the Palestine Exchange during 2009–2018. The level of VD was estimated by using a checklist of 35 items modified for the context of Palestine. A second checklist with 19 items was used to measure the commitment of the Palestinian companies with CG requirements. Five proxies for Ke were tested: three ex-ante Capital Asset Pricing Model-like proxies and two ex-post realized return proxies. Findings The findings state that the VD negatively impacted Ke. Interaction effect of CG and VD helps reduce the Ke. As such, for firms with better CG, the increase in VD decreases the Ke more than their standalone effect. For control variables, leverage, size and growth of firms exhibited positive impacts on Ke, whereas quality of auditors found a negative connection. Practical implications Managers in similar context, like Palestine, may prefer flexibility of smaller size and adopt conservative growth strategies to cope with adverse events. Firms adopt CG and VD as complementary forces to tackle instability and market expectation. Originality/value Studies connecting VD-CG-Ke nexus from similar context are rare. Results of this study forward that emphasis on disclosure and governance practices will help boost the confidence of the investors, reduce the Ke and create an incentive for more investment.