Does Being Islamic or Shariah-compliant affect Capital Structure? Evidence from Real-estate Firms in the Gulf Cooperation Council States

This paper examines how compliance to Shariah principles may be associated with a firm's capital structure choice. Shariah compliant real estate firms measured by those listed on the Dow Jones Islamic Index and Islamic real estate firms measured by firms with an internal Shariah board have significantly lower leverage than general real estate firms in the Gulf Cooperation Council. Furthermore Islamic and Shariah compliant real estate firms are different from general real estate firms however these differences do not explain previous findings. Firm characteristics are controlled for and a fixed effect regression is employed, results explaining differences in leverage is significant at the 1% level for Islamic real estate firms and inconclusive for Shariah compliant firms.Empirical findings in this paper show that it may be over-simplistic to assert that Shariah-compliant and Islamic real estate firms have less leverage than their general counterparts. After controlling for firm characteristics and fixed effect on each firm, results of lower leverage remain persistent in Islamic real estate firms. Differences in lower leverage by Islamic real estate firms is explained by poor access to the debt market and the unwillingness of Islamic real estate growth firms to explore leverage as a source of capital.