Abstract
Capital structure choice is vital in corporate financial management due to its effect on both investors' risk and return. Despite the various research that has investigated factors affecting the capital structure of companies, only a few studies have started to examine the capital structure of Shari'ah-compliant companies, especially in the MENA region. Indeed, the screening requirements for which shari'ah-compliant must adhere can affect their capital structure determinants. Hence, under those conditions, this study aims to determine the factors influencing the capital structure of a shari'ah-compliant listed firm in five MENA region countries. The importance of investigating shariah-complaint companies capital structure emanates from the financial constraints on their debt capital structure. Accordingly, this study utilizes static panel data techniques on a sample consisting of Shari'ah-compliant firms over the period 20102018. The findings of this study were consistent with several previous studies as well as the theoretical background of capital structure determinants mainly, the trade-off and the pecking order theory. Our results give insight to managers on what determines their capital structure under shari'ah screening methodologies. However, more insight can be drought from the capital structure of shari'ah-compliant firms by extending the research into industry specifics.
Highlights
The theory of capital structure is vastly debated in the corporate finance literature as it presents a crucial managerial challenge on how to choose the optimal capital structure
Its leverage defines the capital structure of a firm; that is a mix of debt and equity financing, which is subject to different financial difficulties
Empirical results indicate that profitability, liquidity, growth and inflation have a significant relationship with the debt financing decision of SC companies in the MENA region
Summary
The theory of capital structure is vastly debated in the corporate finance literature as it presents a crucial managerial challenge on how to choose the optimal capital structure. Various authors like Myers (1984) and Fama & French (2002) revealed the impact of taxation on the capital structure and on the value of the firm, bringing forth the idea of asymmetry and cost agency into the capital structure framework. This theorem is questioned when other factors are considered. The company adjusts its current level of debt to an optimal ratio This level is reached when the marginal gain of an additional unit of debt is equal to its marginal cost
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