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

Faisal Alnori and Faisal Alqahtani

Emerging Markets Review, 2019, vol. 39, issue C, 50-67

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.

Keywords: Capital structure; Saudi Arabia; Sharia compliance; Islamic finance; Speed of adjustment (search for similar items in EconPapers)
JEL-codes: G30 F61 G32 G33 G39 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.ememar.2019.03.008

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