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Capital structure and speed of adjustment in non-financial firms: Does sharia compliance matter? Evidence from Saudi Arabia

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  • Alnori, Faisal
  • Alqahtani, Faisal

Abstract

This study investigates the effect of sharia compliance status on firms' capital structure decisions and speed of adjustment in non-financial firms in the Saudi Arabian market from 2005 to 2016. It finds that sharia compliance plays a significant role in determining capital structure decisions. Specifically, sharia-compliant firms have significantly lower levels of leverage and slower speeds of adjustment as measured by both book and market proxies of capital structure than non-sharia-compliant firms, owing to the multiple restrictions to which they are subject, which limits their financing channels. To the best of our knowledge, this study is the first to compare the effect of sharia compliance on firms' capital structure speed of adjustment towards the trade-off theory target leverage ratio.

Suggested Citation

  • Alnori, Faisal & Alqahtani, Faisal, 2019. "Capital structure and speed of adjustment in non-financial firms: Does sharia compliance matter? Evidence from Saudi Arabia," Emerging Markets Review, Elsevier, vol. 39(C), pages 50-67.
    • Handle: RePEc:eee:ememar:v:39:y:2019:i:c:p:50-67
    DOI: 10.1016/j.ememar.2019.03.008
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    7. Faisal Alnori & Moid U. Ahmad, 2022. "Herd Mentality Amongst Equity Investors During COVID-19: Evidences from Saudi Arabia," International Journal of Economics and Financial Issues, Econjournals, vol. 12(4), pages 40-46, July.
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    12. Narayan, Paresh Kumar & Phan, Dinh Hoang Bach & Liu, Guangqiang & Ibrahim, Mansor, 2021. "Ethical investing and capital structure," Emerging Markets Review, Elsevier, vol. 47(C).
    13. Bajaj, Yukti & Kashiramka, Smita & Singh, Shveta, 2021. "Economic policy uncertainty and leverage dynamics: Evidence from an emerging economy," International Review of Financial Analysis, Elsevier, vol. 77(C).
    14. Bugshan, Abdullah, 2022. "Oil price volatility and corporate cash holding," Journal of Commodity Markets, Elsevier, vol. 28(C).
    15. Moncef Guizani, 2020. "Testing the pecking order theory of capital structure: the case of Islamic financing modes," Future Business Journal, Springer, vol. 6(1), pages 1-12, December.
    16. Uddin, Md Hamid & Kabir, Sarkar Humayun & Hossain, Mohammed Sawkat & Wahab, Nor Shaipah Abdul & Liu, Jia, 2020. "Which firms do prefer Islamic debt? An analysis and evidence from global sukuk and bonds issuing firms," Emerging Markets Review, Elsevier, vol. 44(C).
    17. Muncef Guizani, 2020. "The Capital Structure of Islamic-Compliant Firms: Is There a Financing Hierarchy?," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 16(2), pages 123-144.
    18. Mohammed Jerbeen & Faisal Alnori, 2020. "Corporate Geographical Location and Capital Structure: Evidence from an Emerging Market," International Journal of Economics and Financial Issues, Econjournals, vol. 10(3), pages 174-186.
    19. Hafezali Iqbal Hussain & Janusz Grabara & Mohd Shahril Ahmad Razimi & Saeed Pahlevan Sharif, 2019. "Sustainability of Leverage Levels in Response to Shocks in Equity Prices: Islamic Finance as a Socially Responsible Investment," Sustainability, MDPI, vol. 11(12), pages 1-16, June.
    20. Diana Hashim Syarif & Sugeng Wahyudi & Irene Rini Demi Pangestuti, 2019. "Financial Constraints and Cost of Equity: Empirical Study of Shariah Compliant Firms in Indonesia," Research in World Economy, Research in World Economy, Sciedu Press, vol. 10(3), pages 371-381, December.
    21. Kabir Hassan, M. & Chiaramonte, Laura & Dreassi, Alberto & Paltrinieri, Andrea & Piserà, Stefano, 2021. "The crossroads of ESG and religious screening on firm risk," Research in International Business and Finance, Elsevier, vol. 58(C).
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    More about this item

    Keywords

    Capital structure; Saudi Arabia; Sharia compliance; Islamic finance; Speed of adjustment;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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