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

• Published in: Emerging markets review Vol. 39; pp. 50 - 67
• Main Authors: Alnori, Faisal, Alqahtani, Faisal
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-06-2019
• Subjects: Capital structure; Islamic finance; Saudi Arabia; Sharia compliance; Speed of adjustment; Saudi Arabia; Sharia compliance; F61; G30; G33; G32; Islamic finance; Speed of adjustment; G39; Capital structure
• ISSN: 1566-0141; 1873-6173
• DOI: 10.1016/j.ememar.2019.03.008

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.
•Compares the capital structure of sharia and non-sharia in the Saudi Arabia.•Uses both book and market measures of capital structure.•Sharia-compliant firms have significantly lower levels of leverage and slower speed of adjustment.•Sharia-compliant firms suffer from a finance gap in the supply side due to financial restrictions.