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Capital structure and profitability in a tax-free country: evidence from the UAE

Author

Listed:
  • Imen Tebourbi
  • Irene Wei Kiong Ting
  • Qian Long Kweh
  • Harith Ali Hamood Al Huseini

Abstract

The balance between debt and equity is a key factor explaining profitability. This study examines how capital structure affects the profitability of firms listed on stock exchanges in the United Arab Emirates (UAE), a country that does not have a federal corporate income tax regime. The proxies of capital structure used include total, short-term, and long-term debt ratios, while those of profitability are return on assets and return on equity. Over a 2001-2016 sample period, this study documents a significantly negative association between capital structure and profitability. This study finds that the negative association is mainly found in companies with a high level of debts. The results of this study not only imply that information asymmetry exists, they also highlight how capital structure and profitability are associated in the context of a corporate tax-free country.

Suggested Citation

  • Imen Tebourbi & Irene Wei Kiong Ting & Qian Long Kweh & Harith Ali Hamood Al Huseini, 2020. "Capital structure and profitability in a tax-free country: evidence from the UAE," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 10(3), pages 430-444.
    • Handle: RePEc:ids:afasfa:v:10:y:2020:i:3:p:430-444
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