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Capital structure and speed of adjustment in non-financial firms: Does sharia compliance matter? Evidence from Saudi Arabia

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  • Alnori, Faisal
  • Alqahtani, Faisal

Abstract

This study investigates the effect of sharia compliance status on firms' capital structure decisions and speed of adjustment in non-financial firms in the Saudi Arabian market from 2005 to 2016. It finds that sharia compliance plays a significant role in determining capital structure decisions. Specifically, sharia-compliant firms have significantly lower levels of leverage and slower speeds of adjustment as measured by both book and market proxies of capital structure than non-sharia-compliant firms, owing to the multiple restrictions to which they are subject, which limits their financing channels. To the best of our knowledge, this study is the first to compare the effect of sharia compliance on firms' capital structure speed of adjustment towards the trade-off theory target leverage ratio.

Suggested Citation

  • Alnori, Faisal & Alqahtani, Faisal, 2019. "Capital structure and speed of adjustment in non-financial firms: Does sharia compliance matter? Evidence from Saudi Arabia," Emerging Markets Review, Elsevier, vol. 39(C), pages 50-67.
    • Handle: RePEc:eee:ememar:v:39:y:2019:i:c:p:50-67
    DOI: 10.1016/j.ememar.2019.03.008
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    More about this item

    Keywords

    Capital structure; Saudi Arabia; Sharia compliance; Islamic finance; Speed of adjustment;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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