Asymmetric capital structure speed of adjustment, equity mispricing and Shari’ah compliance of Malaysian firms

Hafezali Iqbal Hussain, Mohsin Ali, M. Kabir Hassan and Rwan El-Khatib

International Review of Economics & Finance, 2023, vol. 86, issue C, 965-975

Abstract: Traditionally, equity mispricing has been documented as an important determinant of speed of adjustment to target leverage levels. More recently, the impact of Shari’ah compliance has been shown to significantly affect capital structure decisions. In this paper, we explore the effect of equity mispricing in Shari’ah compliant (vs. non-compliant) firms. We conduct our study on a comprehensive sample of Malaysian firms from year 1998–2016. We show that established findings in the dynamic trade-off theory do not hold for Shari’ah compliant firms. Shari’ah compliant firms increase their reliance on equity financing at greater levels than non-compliant firms when they are above target levels and equities are overpriced. In contrast, for Shari’ah compliant firms below target levels and where equity is under-priced, the rate of adjustment is slower than non-compliant firms. Our findings suggest that managers of Shari’ah compliant firms are inclined to time the equity market when above target levels to capture the impact of lower costs of equity during periods of over-valuation of equity. However, those managers tend to be reluctant to resort to debt financing when below target leverage even in the presence of equity under-pricing.

Keywords: Capital structure; Speed of adjustment; Dynamic trade-off theory; Equity mispricing; Shari’ah compliance; Islamic capital markets; Malaysian firms (search for similar items in EconPapers)
JEL-codes: G15 G30 G32 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056020302458
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:86:y:2023:i:c:p:965-975

DOI: 10.1016/j.iref.2020.10.017

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().