The influence of religion on the determinants of capital structure: the case of Saudi Arabia

Abstract

Purpose This study aims to investigate whether a religious environment affects a firm capital structure. Design/methodology/approach The authors use data from Saudi Arabia with a highly Islamic religious environment. The authors use an extreme bounds analysis (EBA), which provides a reliable analysis of the determinants of capital structure and aids the process of selecting explanatory variables when there is model uncertainty. Findings The authors find that firms in such an Islamic environment are relatively less leveraged compared to firms in a non-Islamic environment. The authors also find that firms located in an Islamic environment have different determinants of capital structure than firms located in a non-Islamic environment. Specifically, the Islamic society creates decision makers who are more risk averse, thus leading to a preference for corporate financing using internal funds. Practical implications The results imply a potential challenge for growth-seeking firms located in religious Islamic societies. Originality/value This study is one of the first to examine the determinants of corporate capital structure in Saudi Arabia using EBA.

The Impact of Financial Ratios and Growth Opportunity on Capital Structure A Moderation Role of Firm Size

“…The activities of distributors as a party that supplies goods from producers to consumers do not guarantee their fixed assets for debt financing as their business capital. This result is in line with the results of previous research conducted by Zaheer et al (2021), Alalmai et al (2020), Gharaibeh &Al-Tahat (2020), andKyissima et al, (2020) who found that tangibility does not affect capital structure.…”

“…Therefore, companies prefer to use retained earnings. This result is in line with the results of previous research conducted by Oliveira & Raposo (2021), Zaheer et al (2021), Alalmai et al (2020), and Gharaibeh & Al-Tahat (2020) who found that profitability has a negative effect on capital structure.…”

“…Companies that have large retained earnings will use them as capital, so large retained earnings will improve the company's capital structure and reduce capital from external funds (Brigham & Houston, 2018). Previous research conducted by Oliveira & Raposo (2021), Zaheer et al (2021), Alalmai et al (2020), andGharaibeh &Al-Tahat (2020) state that profitability has a negative effect on capital structure. Based on the results of the description and previous research, the hypothesis is proposed as follows:…”

The heterogeneous effect of leverage on firm performance: a quantile regression analysis

“…Following previous studies, leverage is measured by various proxies (Farooq, 2015; Sheikh and Qureshi, 2017; Poursoleiman et al , 2020; Uz Zaman et al , 2020; Alalmai et al , 2020; Uz Zaman et al , 2022). First, we use the ratio of total debts to total assets (TL) to proxy the firm’s total leverage.…”

Islamic Religious Atmosphere and Audit Pricing: Evidence from Iran

“…Previous studies (e.g., Conroy & Emerson, 2004; Iannaccone, 1998; Su, 2019) have recognized religion as a strong predictor of the economic and social behaviors of individuals. Furthermore, religion is considered an important institution affecting the economic behavior of firms and business practices of both developed and developing countries in the Middle East and North Africa (MENA) region (e.g., Alalmai et al., 2020; Jamali et al., 2020; Leventis et al., 2018; McGuire et al., 2012). Prior accounting and auditing research (Dyreng et al., 2012; Leventis et al., 2018) has revealed that religiosity significantly influences corporate reporting irregularities (McGuire et al., 2012), tax compliance (Wang & Lu, 2020), earnings management (Kanagaretnam et al., 2015), accounting conservatism (Ma et al., 2020), and audit going‐concern opinions (Omer et al., 2018).…”