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

Abstract

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.

Does Shariah compliance affect corporate cash holdings and cash adjustment dynamics? Evidence from Malaysia

“…This is because, as the study explains, the financing restrictions imposed on SC firms that create a finance supply gap and higher adjustment costs. A contemporary study conducted by Guizani (2020) reveals that internally generated funds are the preferred financing option for SC firms.…”

“…In spite of the fast-growing sector of Islamic finance, a limited number of prior scholarly articles have been conducted in the area of Islamic corporate finance (Yildirim et al, 2018;Alnori and Alqahtani, 2019;Guizani, 2020). However, these studies have not investigated corporate cash holdings of SC firms.…”

Moderating effect of bank size on nexus between internal equity capital and financial performance of lower tier commercial banks in Kenya

“…The financing pattern was leaning more towards the basic pecking order model where internal equity is more preferred. Guizani (2020), while testing the application of pecking order theory finds no evidence to support the preference of internal financing sources over other external sources. The study was based on an analysis of firms operating under Islamic principles.…”

Fundamental Factors of Financial Ratios and Discretionary Accruals in Influencing the Companies’ Fixed-Asset Investment Decisions

“…When an entity requires funds for investment or business development, there are three alternatives: internal funding sources, debt, and equity. POT, developed by Myers (1984), reveals the level of the management preferences in choosing the source of funds to fund company activities (Guizani, 2020;Qayyum & Noreen, 2019). Based on the POT, companies prefer funding from internal sources because the costs are cheaper from external sources, and there is no need to disclose other company information (Guizani, 2020).…”

“…POT, developed by Myers (1984), reveals the level of the management preferences in choosing the source of funds to fund company activities (Guizani, 2020;Qayyum & Noreen, 2019). Based on the POT, companies prefer funding from internal sources because the costs are cheaper from external sources, and there is no need to disclose other company information (Guizani, 2020). Previous researchers used POT in explaining debt and capital policies, where the emphasis of this theory is on internal funding (see Guizani, 2020;Simatupang et al, 2019;Rodrigues et al, 2017;De Jong et al, 2011).…”