Capital Structure Dynamics of Shariah-Compliant vs Non-Compliant Firms: Evidence from Pakistan

Akbar, Saeed and Khan, Shehzad and Haq, Z. U. and Khan, Muhammad Ibrahim (2022) Capital Structure Dynamics of Shariah-Compliant vs Non-Compliant Firms: Evidence from Pakistan. International Journal of Islamic and Middle Eastern Finance and Management, 16 (2). pp. 366-383. ISSN 1753-8394

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Abstract

Purpose
This study aims to compare capital structure determinants' effect on the leverage levels of Shariah-compliant (SC) and noncompliant (NC) firms in Pakistan. This study also estimates and compares the capital structure adjustment speed for both firm types.

Design/methodology/approach
Based on the Karachi Meezan Index screening criterion, a balanced panel of 117 SC and 68 NC firms listed on the Pakistan Stock Exchange from 2008 to 2018 was constituted. This study used the generalized method of moments to identify the significant determinants of capital structure and estimate the speed of adjustment. In addition, the F-test was used to check whether the effect of the determinants on the leverage is same for SC and non-SC firms.

Findings
The authors found that different determinants affect both firm types' leverage levels (book and market) differently. The authors also found that the adjustment speed of SC firms toward their target leverage ratio is slower than their NC peers. Lastly, significant variation was observed in the results under different screening criteria.

Research limitations/implications
This study fills the literature gap by providing a comprehensive comparison of the capital structure decisions of the SC and non-SC firms. Because this study is limited to Pakistan, generalizability would be an issue.

Practical implications
This study will guide the management of SC and non-SC firms about which factors are reliably important in choosing their capital structure. The findings also call for bringing harmony in the different Shariah screening criteria being in practice.

Originality/value
To the best of the authors’ knowledge, this is the first comparative study that identifies the significant capital structure determinants for SC and NC firms and investigates their effect on the leverage of both firm types. By testing joint hypotheses of same relationship, this study seeks to determine if, because of Shariah restrictions, the capital structure determinants of SC firms are similar to NC firms or they exhibit different behavior. The authors also repeat their analysis using other prominent screening criteria to assess the consistency of their results.

Item Type:	Article
Identification Number:	10.1108/IMEFM-06-2021-0239
Dates:	Date Event 20 June 2022 Accepted 15 July 2022 Published Online
Uncontrolled Keywords:	capital structure, speed of adjustment, Shariah compliant, non-compliant, Pakistan
Subjects:	CAH17 - business and management > CAH17-01 - business and management > CAH17-01-07 - finance
Divisions:	Faculty of Business, Law and Social Sciences > College of Accountancy, Finance and Economics Faculty of Business, Law and Social Sciences > College of Business, Digital Transformation & Entrepreneurship
Depositing User:	Khan Muhammadibrahim
Date Deposited:	29 Aug 2023 14:26
Last Modified:	20 Jun 2024 12:05
URI:	https://www.open-access.bcu.ac.uk/id/eprint/14684

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