The influence of religion on the determinants of capital structure: the case of Saudi Arabia

Somaiyah Alalmai, Abdullah M. Al-Awadhi, M. Kabir Hassan and Arja Turunen-Red

Journal of Islamic Accounting and Business Research, 2020, vol. 11, issue 2, 472-497

Abstract: Purpose - This study aims to investigate whether a religious environment affects a firm capital structure. Design/methodology/approach - The authors use data from Saudi Arabia with a highly Islamic religious environment. The authors use an extreme bounds analysis (EBA), which provides a reliable analysis of the determinants of capital structure and aids the process of selecting explanatory variables when there is model uncertainty. Findings - The authors find that firms in such an Islamic environment are relatively less leveraged compared to firms in a non-Islamic environment. The authors also find that firms located in an Islamic environment have different determinants of capital structure than firms located in a non-Islamic environment. Specifically, the Islamic society creates decision makers who are more risk averse, thus leading to a preference for corporate financing using internal funds. Practical implications - The results imply a potential challenge for growth-seeking firms located in religious Islamic societies. Originality/value - This study is one of the first to examine the determinants of corporate capital structure in Saudi Arabia using EBA.

Keywords: Saudi Arabia; Islamic finance; Capital structure; Zero interest rate; Islam (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jiabrp:jiabr-03-2018-0043

DOI: 10.1108/JIABR-03-2018-0043

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