The influence of religion on the determinants of capital structure: the case of Saudi Arabia

Abstract

PurposeThis study aims to investigate whether a religious environment affects a firm capital structure.Design/methodology/approachThe authors use data from Saudi Arabia with a highly Islamic religious environment. The authors use an extreme bounds analysis (EBA), which provides a reliable analysis of the determinants of capital structure and aids the process of selecting explanatory variables when there is model uncertainty.FindingsThe authors find that firms in such an Islamic environment are relatively less leveraged compared to firms in a non-Islamic environment. The authors also find that firms located in an Islamic environment have different determinants of capital structure than firms located in a non-Islamic environment. Specifically, the Islamic society creates decision makers who are more risk averse, thus leading to a preference for corporate financing using internal funds.Practical implicationsThe results imply a potential challenge for growth-seeking firms located in religious Islamic societies.Originality/valueThis study is one of the first to examine the determinants of corporate capital structure in Saudi Arabia using EBA.