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Ethical investing and capital structure

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  • Narayan, Paresh Kumar
  • Phan, Dinh Hoang Bach
  • Liu, Guangqiang
  • Ibrahim, Mansor

Abstract

We test the relevance of the trade-off, pecking order, and market timing theories of capital structure from the point of view of a stock's religious orientation. Using a unique sample of Islamic stocks, we discover the leverage speed of adjustment (SOA) to be faster compared to that in the literature on conventional stocks, consistent with trade-off theory. We hypothesize that this result is due to the risk-sharing principal of Islamic investments that substantially reduces market imperfections. The inclusion of variables belonging to other theories of capital structure does not change the SOA, implying the importance of the trade-off theory.

Suggested Citation

  • Narayan, Paresh Kumar & Phan, Dinh Hoang Bach & Liu, Guangqiang & Ibrahim, Mansor, 2021. "Ethical investing and capital structure," Emerging Markets Review, Elsevier, vol. 47(C).
    • Handle: RePEc:eee:ememar:v:47:y:2021:i:c:s1566014118304643
    DOI: 10.1016/j.ememar.2020.100774
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