Capital structure in a tax-free economy: evidence from UAE

2017 ◽  
Vol 10 (1) ◽  
pp. 102-116 ◽  
Author(s):  
Yomna Abdulla
Keyword(s):  
Capital Structure ◽  
United Arab Emirates ◽  
Structure Theory ◽  
Comprehensive Overview ◽  
Content Type ◽  
Listed Firms ◽  
Financial Firms ◽  
Main Determinants ◽  
Free Environment ◽  
The Capital Structure

Purpose This paper aims to investigate the determinants of capital structure for non-financial listed firms in the United Arab Emirates (UAE) for the period 2004-2010. The contradiction between the different capital structure theories, limited literature on UAE and its distinctive characteristic of tax-free environment were the motivation for this paper. Design/methodology/approach The authors used two panel data techniques to estimate the regression models, and a series of robustness checks. Findings The authors find that growth opportunities, size, profitability and liquidity are the main determinants of leverage. The results support the argument of the inadequacy of one capital structure theory, although the results are more inclined toward the pecking-order level. Practical implications The results provide a comprehensive overview of the capital structure in the UAE; this information will be of use to managers, shareholders and lenders. Originality/value The findings of this paper contribute to the debate of the dominance of capital structure theories. The results also add to the strand of literature on the capital structure of firms in the Middle East, as the authors provide a comprehensive investigation of the determinants of capital structure in UAE non-financial firms.

The capital structure decision of Islamic and conventional banks: empirical evidence from Malaysia

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Moncef Guizani ◽  
Ahdi Noomen Ajmi
Keyword(s):  
Capital Structure ◽  
Decision Criterion ◽  
Content Type ◽  
Leverage Ratio ◽  
Distributed Lag ◽  
Long Run ◽  
Short Run ◽  
Main Determinants ◽  
Conventional Banks ◽  
The Capital Structure

PurposeThe purpose of this paper is to investigate how Islamic banks (IBs) and conventional banks (CBs) in Malaysia choose their capital structure and what are the most significant factors that affect their decisions regarding their capital structure.Design/methodology/approachThis study applies the autoregressive distributed lag (ARDL) approach for a sample of 54 Banks listed on Malaysian stock market over the period 2010–2018.FindingsThe study findings show that the capital structure of IBs appears to be driven by similar factors to those previously found in the corporate finance literature. They also provide evidence of the existence of a long-run and short-run relationship between leverage and its main determinants for Islamic and CBs. However, the results show that various independent variables on the capital structure do exhibit different effects (in magnitude of the coefficient) among Islamic and CBs. Moreover, we find that IBs slowly adjust their capital structure toward the desired leverage ratio than CBs.Research limitations/implicationsThis research contributes to the theory in re-validating capital structure theories on IBs. It helps understand the capital structure of IBs in comparison with CBs. If in conventional finance, the standard presiding decisions of an economic agent is optimizing the risk-return ratio, this standard is not the only or the primary decision criterion in the Islamic finance context where spiritual and theological considerations are taken into consideration.Practical implicationsThis research can contribute to managers in understanding the choice of capital structure for IBs within the bound of Sharia requirement. Such an understanding provides managers with applied knowledge of determining their appropriate capital structure to compete locally and globally in which IBs operate.Originality/valueThis paper offers some insights on the determinants of capital structure by investigating Islamic and CBs. It explores the implication of relevant Islamic principles on capital structure. Moreover, it analyses the determinants of capital structure using ARDL method that permits to identify the short-run and long-run relationships between capital structure and its main determinants.

“Peer effects” in capital structure decision of Chinese firms-empirical investigation based on Chinese a-share listed firms

2018 ◽  
Vol 9 (3) ◽  
pp. 289-315 ◽  
Author(s):  
Tianli Zhong ◽  
Tianyu Zhang
Keyword(s):  
Capital Structure ◽  
Peer Effects ◽  
Management Practices ◽  
Structure Theory ◽  
Outcome Variable ◽  
Content Type ◽  
Financial Decisions ◽  
Listed Firms ◽  
Social Multiplier ◽  
Peer Firms

Purpose The purpose of this paper is to identify if peer firms’ capital structure decision plays a role in determining focal firms’ capital structure decision, despite the fact that correlated effects can also lead to co-movement of financing behavior among firms from the same industry (i.e. industry-specific capital structure). Design/methodology/approach Instead of using relative measurement (of individual outcome variable over industry variable) as in previous work, this paper borrows the linear-in-means model and, after controlling for potential endogeneity problems, directly identifies the existence of peer effects with coefficient estimation. To deal with correlated effects, additional empirical investigations such as test of heterogeneity in direction and scale, social multiplier identification test and instrumental regression test based on another instrumental variable (that is less influenced by correlated effects) are performed. Findings Using data from Chinese listed firms, this paper, for the first time, identifies the presence of peer effects in capital structure and debt maturity decision. Further investigations show that first, focal firms react asymmetrically to peer firms’ debt adjustment of different direction and scale. Second, social multiplier, a unique attribute of peer effects, is identified in the leverage choices. Third, the significant correlation of capital structure decision remains even if we use another “correlated effects-immune” instrument. All these results point to the fact that peer effects, rather than correlated effects, play a significant role in determining capital structure. Practical implications The empirical results of this paper provide strong evidence that firms, driven by motivations such as either learning or competition, will actively react to peers’ financial decisions. As the bridge between individual firms and the industry, social multiplier can be fully taken advantage of to induce positive spillover of good management practices and prohibit inefficient decisions from spreading. Originality/value This paper theoretically and empirically introduces peer effects – a well-acknowledged social concept – into capital structure decision of Chinese listed firms, thus both complementing the traditional capital structure theory and providing an empirical paradigm for peer effects research.

Determinants of capital structure of Islamic and conventional commercial banks

2017 ◽  
Vol 10 (1) ◽  
pp. 24-41 ◽  
Author(s):  
Nadeem Ahmed Sheikh ◽  
Muhammad Azeem Qureshi
Keyword(s):  
Capital Structure ◽  
Commercial Banks ◽  
Fixed Effects ◽  
Stock Exchange ◽  
Ordinary Least Squares ◽  
Annual Reports ◽  
Content Type ◽  
Earnings Volatility ◽  
Financial Firms ◽  
The Capital Structure

Purpose The purpose of this paper is to investigate how conventional and Islamic commercial banks in Pakistan choose their capital structure and what are the most significant factors that affect their choice of capital structure. Design/methodology/approach The authors collected the data from the annual reports of commercial banks listed on Karachi Stock Exchange Pakistan during 2004-2014. Panel data techniques, namely, pooled ordinary least squares, fixed effects and random effects, were used to estimate the relationship between book leverage and bank-specific variables such as profitability, size, growth, tangibility and earnings volatility. Findings Descriptive statistics indicate that conventional commercial banks are more levered than Islamic commercial banks. Moreover, conventional commercial banks are larger, profitable and have relatively safe earnings than Islamic commercial banks. In contrast, Islamic commercial banks have relatively more fixed operating assets and growth in total assets compared to the conventional commercial banks. Regression results indicate that profitability, growth and tangibility are negatively, whereas bank size and earnings volatility are positively, related to book leverage of conventional commercial banks. On the other hand, only three variables, namely, profitability, bank size and tangibility, have material effects on capital structure choice of Islamic commercial banks. Profitability and tangibility are negatively while bank size is positively related to book leverage of the Islamic banks. In sum, results of the study indicate that Islamic and conventional commercial banks have their own way to choose the capital structure than the non-financial firms; however, their choice is affected by the similar variables as identified for non-financial firms in Pakistan. Practical implications Results of this study provide support to bank managers to understand the effects of bank-specific variables on capital structure and make them able to determine a balanced capital structure considering the regulations framed by the central bank of the country. Originality/value This is the first study that investigates the factors that affect the capital structure of conventional and Islamic commercial banks in Pakistan. Moreover, findings of this study lay some foundation upon which a more detail analysis of capital structure of banks could be based.

Application of capital structure theories: a systematic review

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yukti Bajaj ◽  
Smita Kashiramka ◽  
Shveta Singh
Keyword(s):  
Capital Structure ◽  
Industrial Sector ◽  
Structure Theory ◽  
Content Type ◽  
The Status ◽  
Almost All ◽  
Structure Domain ◽  
Structure Research ◽  
The Capital Structure ◽  
Research Studies

PurposeThe present study aims to analyse the literature on capital structure theories for the last 21 years to identify the existing gaps and themes for prospective researchers in this domain.Design/methodology/approachA sample of 183 articles published from 1999 to 2019 in the Scopus database using “capital structure theory” and “leverage” as keywords was analysed on various basis. A citation analysis was also performed to recognize impactful authors and papers.FindingsThe findings revealed that though the capital structure research studies were highly focussed on developed economies, with time, research studies in developing markets are increasing. Further, the capital structure research studies were largely conducted by considering all the industries together, whereas the focus on a particular industrial sector was meagre. Almost all the studies were empirical, thus providing scope for primary research. Various forms of regression were popular econometric techniques used in this area of late. This review highlighted the dominance of trade-off theory to elucidate the capital structure of firms, irrespective of the status of the economy. The comprehensive review uncovered the existing gaps and identified major themes evolving in the capital structure domain.Originality/valueUnlike a traditional review paper, this study classifies sample articles based on several parameters and depicts a graphical presentation of the findings to cover research gaps, avenues, evolving themes, key aspects, impactful authors and their papers, etc. in the capital structure domain. It provides ready-made information available for prospective research studies in this field.

scholarly journals The capital structure of Chinese listed firms: is manufacturing industry special?

2014 ◽  
Vol 40 (5) ◽  
pp. 469-486 ◽  
Author(s):  
Chin-Bun Tse ◽  
Timothy Rodgers
Keyword(s):  
Capital Structure ◽  
Manufacturing Industry ◽  
Business Environment ◽  
Structure Theory ◽  
Content Type ◽  
Listed Firms ◽  
Leading Role ◽  
Financial Characteristics ◽  
Industry Membership ◽  
Special Case

Purpose – The purpose of this paper is to examine whether or not industry membership can explain the leverage of Shanghai listed firms prior to the 2007 financial crisis. In view of the central role that manufacturing industry played in China's rise as a global economic power, the authors are particularly interested in whether or not manufacturing is a special case. Design/methodology/approach – The paper undertakes a comparative study of leverage differences between manufacturing and non-manufacturing industry firms on both a cross-section and time-series basis. This is supplemented by a pooled regression analysis that models the factors determining leverage on an industry-by-industry basis. Findings – The authors find that leverage levels differ across industries because of industry-based differences in financial characteristics. It is also found that, despite playing a leading role in China's economic development, there is no evidence to suggest that manufacturing is a special case. Across all sectors borrowing-power-related variables were identified as being important determinants of leverage and, contrary to the expectations, factors relating to profitability were largely insignificant. Research limitations/implications – The trade off and pecking order capital structure theories found to be commonly applicable to firms in the western business environment do not appear to adequately explain capital structure in China. Originality/value – The paper identify evidence to suggest that China needs to be treated as a “special case” in the context of capital structure theory due to the unique cultural and business environment.

Role of Credit Rating in determining Capital structure: Evidence from Non-Financial sector of Pakistan

2020 ◽  
Vol 38 (3) ◽  
Author(s):  
Shoaib Ali ◽  
Imran Yousaf ◽  
Muhammad Naveed
Keyword(s):  
Capital Structure ◽  
Credit Rating ◽  
Least Square ◽  
Annual Data ◽  
Leverage Ratio ◽  
Financial Decisions ◽  
Financial Firms ◽  
High Level ◽  
The Impact ◽  
The Capital Structure

This paper aims to examine the impact of external credit ratings on the financial decisions of the firms in Pakistan.  This study uses the annual data of 70 non-financial firms for the period 2012-2018. It uses ordinary least square (OLS) to estimate the impact of credit rating on capital structure. The results show that rated firm has a high level of leverage. Moreover, Profitability and tanagability are also found to be a significantly negative determinant of the capital structure, whereas, size of the firm has a significant positive relationship with the capital structure of the firm.  Besides, there exists a non-linear relationship between the credit rating and the capital structure. The rated firms have higher leverage as compared to the non-rated firms. The high and low rated firms have a low level of leverage, while mid rated firms have a higher leverage ratio. The finding of the study have practical implications for the manager; they can have easier access to the financial market by just having a credit rating no matter high or low. Policymakers must stress upon the rating agencies to keep improving themselves as their rating severs as the measure to judge the creditworthiness of the firm by both the investors and management as well.

scholarly journals Determinants of Capital Structure within the Context of Corporate Governance in Egypt

2018 ◽  
Vol 13 (8) ◽  
pp. 26 ◽  
Author(s):  
Hanaa A. El-Habashy
Keyword(s):  
Corporate Governance ◽  
Capital Structure ◽  
Emerging Economy ◽  
Managerial Ownership ◽  
Listed Firms ◽  
Western Countries ◽  
Specific Factors ◽  
The Impact ◽  
The Capital Structure

This study aims to investigate the characteristics of corporate governance that impact the capital structure decisions in listed firms in Egypt, to test the efficiency of the research results conducted in the developed Western countries in an emerging economy. A sample of 240 observations from the most active non-financial companies collected in the period 2009-2014 was used for hypothesis testing. Multiple regression models (OLS) were used for data analysis. Seven variables are used in measuring the attributes of corporate governance; they are the managerial ownership, institutional shareholding, shares owned by a large block, board size, board composition, separation of CEO/Chair positions and audit type. Four ratios were calculated for measuring the capital structure, they are long-term and short-term debt to assets, total debt to assets and debt to equity. The results suggest that corporate governance attributes have a significant impact on the capital structure decisions of listed Egyptian companies. In addition, firm-specific factors such as profitability, tangibility, growth opportunities, corporate tax, firm size and non-debt tax shields influence the choice of capital structure in Egypt. The results showed the same relationship with what was obtained in developed Western countries. The paper offers some contribution in the literature and helps to understand the impact of corporate governance on Egypt's capital structure as an emerging economy.

Interest on equity and capital structure in the Brazilian context

2014 ◽  
Vol 10 (1) ◽  
pp. 39-53 ◽  
Author(s):  
João Zani ◽  
Eduardo Tomedi Leites ◽  
Clea Beatriz Macagnan ◽  
Márcio Telles Portal
Keyword(s):  
Capital Structure ◽  
Capital Market ◽  
Empirical Literature ◽  
Published Data ◽  
Net Income ◽  
Initial Sample ◽  
Content Type ◽  
Tax Benefits ◽  
Main Determinants ◽  
The Impact

Purpose – The interest paid on own capital can benefit companies in the Brazilian capital market as it can be considered a business expense and is, therefore, deductible as a corporate tax. The purpose of this paper is to assess the impact of interest on equity (IOE) on capital structure decisions. Design/methodology/approach – The initial sample consisted of 524 publicly traded companies from different industries in the Brazilian capital market that were listed on Bovespa. Companies in the finance, insurance and funds industries were excluded from the sample due to the unique features of these financial intermediaries. Some companies in the initial sample were excluded due to a lack of published data, inactivity during the sample period, etc. Thus, the paper excluded those companies that did not have valid observations or failed to publish them. The final sample included 370 companies and covered the nine-year period from 1998 through 2006. Findings – To this end, the authors identified the main determinants of capital structure and analyzed, through panel data, the relationship of IOE in addition to other determinants of capital structure, such as size, profitability, investment opportunities, risk, sales growth, real interest rate and real exchange rate, in corporate debt. The novel contribution of this study is the inclusion and analysis of the IOE in studies on the determination of capital structure of Brazilian companies. A new capital structure scenario was created when Law No. 9.249/95 required changes in legislation, ceasing the restatement of balance sheets and allowing companies to compensate their stockholders through IOE. Before this change, companies could only benefit from the tax benefits of debt, using debt capital. Now, they can also benefit from the use of equity because, by requiting equity through the IOE, deductions of income tax and social contributions on net income are allowed by tax law because the IOE may be considered a financial expense. Originality/value : The authors were not able to find any other publication of a similar study in a review of the extant empirical literature.

Capital structure puzzle and banks: need for a unique approach?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ashish Pandey
Keyword(s):  
Capital Structure ◽  
Banking Industry ◽  
Methodological Approach ◽  
Theory Model ◽  
Argumentation Theory ◽  
Future Research ◽  
Content Type ◽  
Unique Approach ◽  
The Capital Structure

Purpose This study aims to examine some of the commonly proposed deviants associated with the banking industry in the context of the capital structure puzzle. The paper considers the role of guarantees, information asymmetry and other frictional factors in the context of modern financial markets and examines whether these factors deserve special consideration in solving the capital structure puzzle for banks. Design/methodology/approach The authors adopt the argumentation theory model proposed by Toulmin (1958) as the methodological approach in this paper. Findings The findings from this paper demonstrate that any solution to the capital structure puzzle, whenever available, will also solve the capital structure puzzle for banks without additional efforts. The focus of future research should be on solving the generic capital structure puzzle for a universal set of firms rather than focusing on the banking industry as a subset with unique features. Originality/value The paper adopts a novel methodological approach offered by argumentation theory to pursue the enquiry. To the best of the knowledge, this paper is the first paper in the finance literature that uses argumentation theory to develop a theoretical construct. The finding from this study offers guidance for the proliferation of research paradigms in the capital structure puzzle.

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