HOW DO WE EXPLAIN THE CAPITAL STRUCTURE OF SHARIAH-COMPLIANT FIRMS?

Abstract

The main objective of this study is to provide further evidence on the determinants of capital structure. A better understanding of this topic is important not only for the purpose of enriching empirical studies in this field but also for the purpose of industrial and cross-country comparison. The use of variable selection technique as well the data from the non-financial shariah-compliant firms is the unique contribution of this paper. The data for the final sample consists of 69 firms (1030 observations) and analyzed using the static panel data analysis technique. Consistent with the pecking order theory, the study finds that the capital structure of the firms is significantly and negatively affected by the profitability of firms. Unlike most of the previous studies, this research found there is no significant effect of liquidity and effective tax rate on capital structure of the firms. Although this paper provides interesting empirical evidence, several areas need to be refined with future empirical research. First, Stata command “vselect” was the only variable selection technique used in this research. The use of other techniques (or Stata command) might lead to a formation of a different set of models. Second, this paper has not taken into consideration the effect of using different data analysis techniques (such as GMM). Future studies might want to explore the use of other data analysis techniques in analyzing the data.