The Determinants of Capital Structure: Evidence from GCC and UK Real Estate Sectors

Abstract

This paper investigates the determinants of capital structure in the context of the Gulf Cooperation Council (GCC) and United Kingdom (UK) real estate sectors. The results of a bivariate analysis indicate that leverage in the UK is much higher than in GCC countries. This may be attributable to UK companies facing a lower cost of debt, which would facilitate their raising of debt capital from the market. In addition, UK real estate firms tend to be larger and have higher levels of tangibility and retained earnings compared with GCC firms, while GCC firms tend to be more profitable and have more growth opportunities. The results of panel and Tobit regression analyses support both trade-off and pecking order theories; for instance, company size was found to have a significant positive impact on different types of debt measurements (market and book debt ratios), which is consistent with the trade-off theory, while profitability and retained earnings to total assets exhibited a significant negative impact for GCC and UK real estate firms, which is consistent with the pecking order theory. Importantly, these results hold true regardless of whether the regressions are estimated using an OLS, random effects, fixed effects panel estimation or a Tobit model.

Moderating Effect of Firm Size on Capital Structure Determinants: Evidence From Indian Food Processing Industry

“…Long-term debts are usually secured by pledging fixed assets with banks because of large amount and longer repayment period. Higher proportion of fixed assest (termed as Tangibility) facilitates debt raising for companies (M'ng, Rahman & Sannacy, 2017;Sathyanarayana et al, 2017;Yousef, 2019). On the contrary, ACT (Ross, 1977) supports negative relationship between tangibility and debt ratio.…”

“…Besides, growing firms prefers debt as compared to equity to avail favorable financial leverage hence growth has positive impact on debt ratio (Rani et al, 2016;Sathyanarayana et al, 2017;Mayuri & Kengatharan, 2019). On the contrary, TOT and ACT proposed negative relation between growth and debt financing as growing firms are more exposed to losses in case of financial distress (Yousef, 2019) due to their instable earnings (Bauer, 2004). Based on the research output of emerging economies, positive relationship has been assumed between growth and borrowings.…”

Impact of Internal and External Determinants on Capital Structure in Russian Companies

“…Researches conducted by Yousef [ 13 ], Ramli, Latan and Solovida [ 9 ], Fedorova and Persidskaya [ 2 ] showed a positive correlation between leverage and company size, however Deari, Matsuk and Lakshina [ 1 ] did not reveal a relationship between capital structure and company size. The study conducted by Pepur, Ćurak and Poposki [ 6 ], on the contrary, showed a negative correlation.…”

“…On contrary, the pecking order theory assumes that foremost companies prefer using internal sources of funding and external sources are second priority. That is explained by the fact that company’s main objective is to minimize the capital costs and that internal ways of financing are cheaper compared to external [ 13 ]. Study performed by Fedorova and Persidskaya [ 2 ] shows a positive correlation between company’s profitability and leverage, while finding from Yousef [ 13 ] indicates a negative connection.…”

Corporate characteristics and leverage: evidence from Gulf countries

“…Therefore, the cost of borrowing increased tremendously as the accessibility of liquidity decreased and banks created tighter credit policies, which affected firms' performance negatively (Ellaboudy, 2010). While the majority of prior evidence on the relationship between corporate characteristics and leverage comes from capital structure determinants in both developed and developing countries, empirical research in this area did not specifically concentrate on the GCC countries (El-Khatib, 2017;Sbeiti, 2010;Twairesh, 2014). Further, the ambiguous results related to the relationship of corporate characteristics and leverage have motivated the present study to be conducted to investigate this relationship.…”