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Decisions on capital structure in aZakat environment with prohibition ofriba: The case of Saudi Arabia

Jasim Al-Ajmi, Hameeda Abo Hussain and Nadhem Al-Saleh

Journal of Risk Finance, 2009, vol. 10, issue 5, 460-476

Abstract: Purpose - The purpose of this paper is to assess and explain the leverage of Saudi companies (53 companies) during the period 2003-2007. Design/methodology/approach - This paper reviews two different classical capital structure theories, namely tradeoff theory and pecking order theory, to formulate testable propositions concerning the determinants of debt levels of Saudi companies. It develops a number of regression models (pooled OLS and panel techniques) to test the study's hypotheses. Findings - The results suggest that a firm's capital structure is positively affected by profitability, size, growth opportunities, and institutional ownership. It is negatively impacted by tangibility, government ownership, family ownership, business risk, dividend payment, and liquidity. Practical implications - Cost of capital is one of the pillars of corporate competitive advantage. Knowing which factors have the potential to influence capital structure can be essential to minimizing the cost of capital. Originality/value - This is the first study of the determinants of capital structure in Saudi Arabia that considers dividend payment, ownership structure (as a proxy for agency problems), and risk. This work also contributes to the current debate regarding theories of competitive capital structure.

Keywords: Capital structure; Islam; Saudi Arabia (search for similar items in EconPapers)
Date: 2009
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