A comparative analysis of the implications of the Islamic religion on corporate capital structures of firms in emerging market countries

Abstract

Purpose– The purpose of this study is to examine the impact of the Muslim religion on firm capital structure.Design/methodology/approach– The authors compare financing patterns in Muslim versus non-Muslim countries using 658 firms in 16 countries covering a period of seven years.Findings– No significant differences between Muslim and non-Muslim countries were found in terms of total debt ratios. However, significant differences were found in the choice of short-term versus long-term debt, with firms in Muslim countries showing a strong preference for short-term debt.Research limitations/implications– The findings confirm existing theories on the impact of the Islamic religion on short-term versus long-term debt preferences. However, the findings concerning the lack of an impact of the Islamic religion on total debt preferences are surprising and contrary to existing theories.Practical implications– Firms in Muslim countries appear to have the flexibility to adopt overall leverage ratios comparable to those in non-Muslim countries. However, firms in Muslim countries may be disadvantaged in that there appear to be impediments to the use of long-term debt.Originality/value– This paper presents one of the first empirical studies of the impact of the Muslim religion on corporate financing choices across a large cross-section of firms in Muslim and non-Muslim countries.