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Determinants of Capital Structure of Listed Saudi Arabian Companies - Dissertation Example

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Determinants of Capital Structure of Listed Saudi Arabian Companies

The main purpose of this study is to identify and describe the principal determinants of capital structure for Saudi Arabian firms, when the firms are classified as to their industry. Likewise, there are distinguishing features of Islamic finance that may well set it apart from conventional finance, and may possibly influence the decision of finance managers to adopt a particular level of debt capital over others. Specifically, Islamic finance does not permit the charging of interest or riba as creditors’ compensation for the use of borrowed funds. In the absence of interest cost, which is a fixed charge over a period of time, the financial leverage effect may not be as important a consideration in Sharia-compliant firms as it is in firms availing of conventional finance. Other than the effects of financial leverage, tax effects caused by borrowed funds may also be different without the recognition of interest as a tax-exempt cost, thereby modifying the basis of relied upon by management in making decisions about the level of debt it should avail of. ...
In the study, the independent variables identified were seven financial and economic firm indicators, while the dependent variable proxy for capital structure is the leverage or level of debt capital relative to the total capitalization of the firm. Multivariate regression modelling was employed in the assessment of which variables proved significant in determining capital structure, and in what direction it tended to influence the firm’s debt. The dissertation concludes that firm size is the most significant determinant across three of the five industrial sectors, followed by profitability which is a significant determinant for two sectors. Of the remaining, four factors were significant for one sector each. Manufacturing and industrial firms are significantly related to four determinants, the most of any other sector. Retail and services has two significant determinants, while the other three sectors have one each. Firm size relates to higher debt, while profitability relates to lower debt. Acknowledgements Table of Contents Abstract 2 Acknowledgements 4 Table of Contents 5 Chapter 1: Introduction 8 1.1Chapter overview 8 8 1.2 Background of the research problem 8 1.3 Research problem 10 1.4 Research objectives 10 1.6 Significance of the study 11 1.7 Scope and limitation 11 1.8 Chapter summary 11 Chapter 2: Literature Review 12 2.1 Chapter overview 12 2.2 Review of existing theories on capital structure policy determination. 12 2.3 Corporate control as a factor in capital structure determination 15 2.4 Evidence from different countries 16 2.5 Determinants of capital structure 20 2.6 Determinants of capital structure in Saudi Arabian companies 25 2.7 Chapter Summary 28 Chapter 3: Methodology 31 3.1 Chapter Overview 31 3.2 Research Design ...Show more


Determinants of Capital Structure of Listed Saudi Arabian Companies Abstract The capital structure is the relative proportion of borrowed capital in comparison to equity capital. The importance in the financing is of importance because it has direct impact on capital…
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