The document provides a literature review on theories and determinants of capital structure. It discusses Modigliani-Miller propositions, trade-off theory, pecking order hypothesis, asymmetric information models and signaling theory. It also analyzes how factors like firm size, profitability, liquidity, growth opportunities and tangibility influence capital structure decisions. Finally, it discusses some unique aspects of the Saudi Arabian regulatory environment that may impact capital structure choices for companies, including the lack of income tax and concentrated ownership structures.
Study of the Static Trade-Off Theory determinants vis-à-vis Capital Structure...inventionjournals
This paper investigates the application of the Static Trade-Off theory regarding the capital structure of the Pakistani Chemical Industry. We have used panel data analysis for the sample of 31 listed chemical firms from the period 2005 to 2013. The study is unique in its type as unlike to Shah & Hijazi (2005) who studied many industrial sections, this study only focuses on the listed Chemical Firms. We used five independent variables such as Profitability (P), Tangibility (T), Liquidity (L), Firm Size (FS) and Total Assets Growth (TAG) to study the effect on independent variable Financial Leverage (FG). The results confirmed the relationship of Profitability, Liquidity and Firm Size. However the results were not confirmed for Tangibility and Firm Assets Growth. Even though the results for Tangibility were positive, however the significance of the coefficients failed to support the hypothesis. This study hold a unique position for researchers for future research and also has significance for the investors helping them to make wise investment decisions when investing in Pakistani Chemical Industry since this industry holds a major portion of industrial GDP of the country
A superior new replacement to traditional discounted cash flow valuation models
In the aftermath of the financial meltdown, the models commonly used for discounted cash flow valuation have become outdated, practically overnight. To meet the demand for an authoritative guidebook to the new economy, internationally recognized expert Kenneth Hackel has written Security Valuation and Risk Analysis.
Study of the Static Trade-Off Theory determinants vis-à-vis Capital Structure...inventionjournals
This paper investigates the application of the Static Trade-Off theory regarding the capital structure of the Pakistani Chemical Industry. We have used panel data analysis for the sample of 31 listed chemical firms from the period 2005 to 2013. The study is unique in its type as unlike to Shah & Hijazi (2005) who studied many industrial sections, this study only focuses on the listed Chemical Firms. We used five independent variables such as Profitability (P), Tangibility (T), Liquidity (L), Firm Size (FS) and Total Assets Growth (TAG) to study the effect on independent variable Financial Leverage (FG). The results confirmed the relationship of Profitability, Liquidity and Firm Size. However the results were not confirmed for Tangibility and Firm Assets Growth. Even though the results for Tangibility were positive, however the significance of the coefficients failed to support the hypothesis. This study hold a unique position for researchers for future research and also has significance for the investors helping them to make wise investment decisions when investing in Pakistani Chemical Industry since this industry holds a major portion of industrial GDP of the country
A superior new replacement to traditional discounted cash flow valuation models
In the aftermath of the financial meltdown, the models commonly used for discounted cash flow valuation have become outdated, practically overnight. To meet the demand for an authoritative guidebook to the new economy, internationally recognized expert Kenneth Hackel has written Security Valuation and Risk Analysis.
Nearly 900 investors from 700 VC firms responded to the mid-2016 survey covering Deal Sourcing, Investment Decisions, Valuations, Deal Structures, Post-Investment Value Adds, Exits, Org Structures of VCs, LP Relationships.
This document describes the results.
The following report by the Credit Suisse
Research Institute explores several important
aspects of the connection between sound governance
and improved business performance. It provides
new data to support the growing investor
interest in governance-related rules and practices
and introduces innovative ways to assess corporate
performance, such as the HOLT governance scorecard,
to support more effective governance-oriented
decision making. Moreover, our experts identify specific
company types and sectors, in which governance
can serve as a particularly robust investment
strategy instrument. Corporate governance is further
likely to contribute to investment decisions in
emerging economies, for instance when firm-level
structures actively compensate for the possible
absence of country-level governance provisions.
Shareholder Activism in the United States: Managing Shareholder InterventionsStephen Bainbridge
This is a presentation I gave at the University of Auckland Faculty of Law on May 19, 2014. It is based on my paper Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013), which is available at SSRN: http://ssrn.com/abstract=2298415.
Even though the primacy of the board of director primacy is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.
There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.
This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.
This paper proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.
This research investigates the determinants of the capital structure of firms listed service sector on BIST(Borsa Istanbul) and the adjustment process towards this target. The econometric analysis employs the Generalized Method of Moments estimators (GMM-Sys, GMM difference) techniques that controls for unobserved firm-specific effects and the endogeneity problem. The findings of the paper suggest that firms have target leverage ratios and they adjust to them relatively fast. Consistent with the predictions of capital structure theories and the findings of the empirical literature, the results of this paper suggest that size, assets tangibility, profitability, growth opportunity except earnings volatility have significant effects on the capital structure choice of hotels and restaurants.The capital structure or leverage is measured by total debt ratio. Analysis results indicates that firms with high profits, sizable, high fixed assets ratio and high total sales and more growth opportunities tend to have relatively less debt in their capital structures.
Nearly 900 investors from 700 VC firms responded to the mid-2016 survey covering Deal Sourcing, Investment Decisions, Valuations, Deal Structures, Post-Investment Value Adds, Exits, Org Structures of VCs, LP Relationships.
This document describes the results.
The following report by the Credit Suisse
Research Institute explores several important
aspects of the connection between sound governance
and improved business performance. It provides
new data to support the growing investor
interest in governance-related rules and practices
and introduces innovative ways to assess corporate
performance, such as the HOLT governance scorecard,
to support more effective governance-oriented
decision making. Moreover, our experts identify specific
company types and sectors, in which governance
can serve as a particularly robust investment
strategy instrument. Corporate governance is further
likely to contribute to investment decisions in
emerging economies, for instance when firm-level
structures actively compensate for the possible
absence of country-level governance provisions.
Shareholder Activism in the United States: Managing Shareholder InterventionsStephen Bainbridge
This is a presentation I gave at the University of Auckland Faculty of Law on May 19, 2014. It is based on my paper Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013), which is available at SSRN: http://ssrn.com/abstract=2298415.
Even though the primacy of the board of director primacy is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.
There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.
This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.
This paper proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.
This research investigates the determinants of the capital structure of firms listed service sector on BIST(Borsa Istanbul) and the adjustment process towards this target. The econometric analysis employs the Generalized Method of Moments estimators (GMM-Sys, GMM difference) techniques that controls for unobserved firm-specific effects and the endogeneity problem. The findings of the paper suggest that firms have target leverage ratios and they adjust to them relatively fast. Consistent with the predictions of capital structure theories and the findings of the empirical literature, the results of this paper suggest that size, assets tangibility, profitability, growth opportunity except earnings volatility have significant effects on the capital structure choice of hotels and restaurants.The capital structure or leverage is measured by total debt ratio. Analysis results indicates that firms with high profits, sizable, high fixed assets ratio and high total sales and more growth opportunities tend to have relatively less debt in their capital structures.
Capital Structure Determination, a Case Study of Sugar Sector of Pakistan Fa...inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
This paper scrutinizes Determinants of Capital Structure: A study on some selected corporate firms in Bangladesh. We have taken 10 out of 37 listed companies of DSE dividing into two sectors i.e. Pharmaceuticals and chemicals and Tannery sector, five years data from 2013 to 2017 has been collected from respective annual reports. Total number of observations was 50. There are different factors that affect a firm's capital structure decision. We use leverage (D/E ratio) as dependent variable and independent variables are profitability, tangibility, tax, size, growth, non-debt tax shield (NDTS) and financial costs. By using Descriptive Statistical Analysis, Correlation Analysis and Regression Analysis tools we find that Tangibility, size, NDTS, and financial costs are positively related with leverage and Profitability, tax, and growth are negatively related with leverage. In our analysis we see profitability, tangibility of asset, growth and non-debt tax shield have significant association. So when we take capital structure decision of the above firms we should consider profitability, tangibility of asset, growth and non-debt tax shield because other independent variables are insignificant in the context of Bangladesh economy.
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
This SWOT analysis examines BYD's strengths, weaknesses, opportunities, and threats as it competes in the fast-changing automotive and energy storage industries.
Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
Initially manufacturing gasoline-powered vehicles, BYD focused on plug-in hybrid and fully electric vehicles, leveraging its expertise in battery technology.
Today, BYD is the world’s largest electric vehicle manufacturer, delivering over 1.2 million electric cars globally. The company also produces electric buses, trucks, forklifts, and rail transit.
On the energy side, BYD is a major supplier of rechargeable batteries for cell phones, laptops, electric vehicles, and energy storage systems.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
US Economic Outlook - Being Decided - M Capital Group August 2021.pdf
Literature analysis of sudia arabia companies - assignment - www.topgradepapers.com
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The analysis of the Saudi Arabian companies, with respect to their capital structure follows a
standard format. Firstly, the emphasis was on the hypothesis development based on literature
review (theoretical review), after that meta analysis was done which is basically the prior
empirical research studies, and lastly the research methods were determined and research was
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conducted to support the results and come up with latest reviews.
Literature Review
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Over the past decades, research on different topics of finance has been conducted and different
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theories have taken form, all of them try to explain major factors behind financial concepts in
their own unique way. Some of the theories related to capital structure and financing policy are
discussed below:
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1. Modigliani and Miller propositions
When reviewing the theoretical literature related to capital structure, it is always beneficial to
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start with the work of Modigliani and Miller (1958). The major assumption to derive the
propositions was: capital market is perfect.
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The Proposition I (Modigliani and Miller, 1958) emphasizes on the fact that each firm has its
own capital structure and each firm’s sales, revenues, and performance, in short, are independent
of its capital structure. Because performance would be the same irrespective of the source of
funds, whether they are generated internally as equity finance or externally as debt finance.
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Therefore, there is no optimal capital structure that maximizes the value of the firm.
Consequently, this is evident from the theory provided above that in a perfect world; the value of
the levered firm is equal to the value of unlevered firm.
The Proposition II (Modigliani and Miller, 1958) emphasizes that the rate of return required by
shareholders increases with the increase of debt financing because it makes the firm more
vulnerable and risky to operate with fix payments to make each term. In another word, any
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benefits from using debt would be offset by the corresponding higher cost of equity so ultimately
the value of the firm calculated with any method will be the same at any combination of debt and
equity financing.
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However, in reality, this assumption is not reliable to base a whole theory on that, because in this
real world it is impossible to have a perfect market. Issues such as taxes, financial distress,
asymmetric information, regulatory bodies and conflicts between economic agents have an effect
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on the firm’s capital structure. So one cannot rely solely on the results of this theory, work has
been done to come up with some more reliable theories.
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2. Models based on trade-off theory:
Trade off theory was presented by Myers (1984) to extend the work of M & M propositions, it
assumes that there are benefits and costs associated with the use of debt as against equity and
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firms consequently chose an optimal capital structure that trades off the marginal benefits and
costs of debt, same argument which was made clear in proposition II or M & M theory. At first,
the theory was limited to the trade off between the tax advantages of debt and the bankruptcy
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costs associated with the use of debt; then benefits and costs associated with the use of debt in
removing the conflicts among the major groups of a firm were also included in the analysis.
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The impact of tax on capital structure
In the initial form of trade off theory of capital structure, the trade off between tax advantage of
debt and the costs of financial distress are used to come up with the optimal level of debt that
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maximizes the value of the firm, but later other factors were also added to the discussion and the
theory was extended to the further level of analysis to come up with reliable results; the other
factors were related to perception, bankruptcy, and other costs.
Figure below shows a graphical representation of the theory; here the value of the firm rises as
the firm uses more debt up to a level market as optimum level of debt, where the benefits of
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additional debt with the increase in the present value of tax shield are offset by the costs due to
the increased in the present value of costs of financial distress.
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Figure: The traditional static trade-off theory
Source: Myers (1984), The Capital Structure Puzzle, Journal of Finance
The first theory that inculcated the effect of tax into account was the Modigliani and Miller
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(1963) work on their previously documented propositions and took them in further details by
inculcating tax rate to that. The authors recognized that their perfect capital markets assumptions
need modifications to bring in a form that will bring out reliable results with the usage of
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corporate tax in their propositions. The main argument is: debt offers a tax shelter because
interest is deducted before taxable profit is calculated. So in the presence of corporate taxes the
value of the firm increases by an amount equal to the interest savings and the net of other relative
costs associated.
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3. Models based on asymmetric information:
Asymmetric information is another dimension of the capital structure theories; it is generally
considered that there is information gap between the management and outside investors. There
are two main approaches that have been developed in the literature of asymmetric information.
Firstly, Myers and Majluf (1984) and Myers (1984) argued that the capital structure is designed
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to mitigate inefficiencies in the firm’s investment decisions that are caused by information
asymmetry. In the second approach, Ross (1977) and Leland and Pyle (1977) asserted that a
firm’s capital structure choice is used as a means to signal to outside investors the information
held by insiders.
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4. Pecking order hypothesis:
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Myers (1984), Myers and Majluf (1984) provided a theoretical findings that firms prefer to use
internally generated funds as a financing source and turn to externals funds only if the need for
funds was unavoidable and cannot be fulfilled by internal financing. The main reason is the
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floating and financing cost of the funds generated externally which make this funding more
expensive.
5. Signaling with proportion of debt:
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According to this approach, the choice to get debt from the outside sources delivers a message to
the outsiders regarding the private information of management. In this model, Ross (1977)
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assumed two types of firms (high quality with high leverage and low quality with low leverage)
that have different prospects and that these are known by management but not by outsiders.
Managers benefit if the company’s securities are more highly valued by the market but are
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penalized if the firm goes bankrupt because of their stakes in the firm. Under such
circumstances, the level of debt the company managers choose serves as a signal about the
quality of the company, a signal sent from the managers as insider information keepers towards
outside investors. Since lower quality firms have higher marginal expected bankruptcy costs for
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any debt level, managers of low quality firms do not imitate higher quality firms by issuing more
debt. Therefore as a result higher leverage is a good signal in this model by keeping in view both
of the perspectives discussed above.
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The Determinants of Capital Structure: A Literature Review
The empirical research and results suggest a number of factors which influence the financial
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structure of companies as a major determinant. As discussed by Titman and Wessels (1988) and
Harris and Raviv (1991) that the choice of the underlying explanatory variables with respect to
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the dependent variables is selected with difficulty because they are the major determinants of the
research results. This is why different researchers have considered different key variables in their
respective studies because explanatory variables are totally different for each researcher.
However, most of the studies considered company size, profitability, liquidity, asset tangibility
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and firm growth prospects as possible determinants of the capital structure choice.
1. Company Size
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Company size is a major determinant for a firm to select a optimum capital structure. Larger
firms tend to be more diversified and less prone to bankruptcy (Rajan and Zingales, 1995), they
are also expected to incur lower costs in issuing debt or equity because of reach and collaborators
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who can help in getting finances. As a result, large firms are expected to hold more debt in their
capital structures than small firms and smaller firms tend to have less long term debt because of
shareholder lender conflicts (Titman and Wessels, 1988).
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2. Profitability
Another major determinant of capital structure is the profitability factor of a firm which is
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calculated through the ratios. Due to the tax deductibility of interest payments, it is argued that
highly profitable companies tend to have high levels of debt (Modigliani and Miller, 1963)
because of the higher figure of tax benefits compared to the firms with lower debt level.
3. Liquidity
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Liquidity is also one of the major factors which must be taken into account for firms to take
capital structure decision; the major decision is about the level of debt financing. Liquidity
matters for all the public companies to show favorable results to shareholders, so companies by
keeping in view the liquidity level of the firm calculated by the corresponding liquidity ratios.
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The thirst to keep the liquidity funds like cash or equivalents in balance, companies decide about
the level of debt financing.
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4. Tangibility
The capital structure of a firm also depends on the ratio of the fix assets to the total assets of a
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firm. Because greater the ration, greater would be the assets to put as collateral against debt, so
greater the ratio the greater possibilities of debt inclusion in the capital structure of a firm.
5. Growth Opportunities
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Higher the growth opportunities of a firm are, higher the potential will be for that firm to go for
debt financing because definitely the return from the investment will be way higher than the
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cheaper option debt financing. The main reason is attributed in this way that higher the growth
opportunities of a firm are, higher would be the cash needs of that firm to finance new and
lucrative projects to take on.
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Other Major Factors are:
Productivity
Tax
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Dividends
Free Cash Flows
Age of Firms
Government
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All of these factors mentioned above are somehow related to the determination of leverage of
companies; these factors are always taken into consideration when analyzing the capital structure
of a company or proposing an optimal structure to a company.
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Saudi Environmental Framework of Companies
It seems that all the companies must be having the same capital structure around the globe
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because of the globalization effects, all the companies are almost operating in more than one
country without regard of their national identity. But the empirical research has shown that all
the countries are capital structure specific even within G-7 countries’ companies have somehow
different capital structure depending upon their country specific attributes, although firms have a
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fairly similar capital structure across the G-7 countries, there were several institutional
characteristics that affect capital structure choice of those companies.
Saudi Arabia is an Islamic country. It is governed by the Islamic Law (Shari’ah), which is
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derived from the holy book of Islam (Qur’an) and the prophet (PBUH) guidance (Sunnah). The
institutional characteristics and socio cultural factors that are derived from the system mentioned
above and are expected to have influence on the determinants of the capital structure of Saudi
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companies are discussed below:
1. Central bank
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According to Saudi Arabia Monetary Agency (SAMA) official web sit (www.sama.gov.sa), the
top of Saudi Arabia’s financial system is SAMA, the central bank of the Kingdom of Saudi
Arabia. Since Its establishment in 1952, SAMA’s functions as defined by its charter issued in
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1952 and amended in 1957 include the following:
Issuing and strengthening the Saudi currency and stabilizing its internal and external value
Dealing with the banking affairs of the government
Regulating commercial banks
2. Capital Markets
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In Saudi Arabia, the specialized financial institutes do not exist. The capital market in Saudi
Arabia consists of the bond and the stock markets.
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2.1 Saudi Stock Market (SSM)
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Stocks remain the first choice for financing among listed companies whenever they are looking
for finances. Rajan and Zingales (1995) suggested that a good measure to determine the
importance of the stock market is the ratio of stock market capitalization to the gross domestic
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product (GDP). Rajan and Zingales (1995) compared the ratio of market capitalization to GDP
(62.3%) with the ratio of bank claims on the private sector to GDP (28.5%), and suggested that
equity is more important than private financing (bank debt).
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2.2 Bond market
The debt market consists of government bond market and corporate bond market. Bonds include
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treasury bills, which range from one week to one month in maturity; floating rate notes with
maturities at five years and seven years; and government development bonds (GDB) with
maturities at two, three, five, seven, and ten years; on the other hand, the corporate bond market
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has a short history because there is no well established market for bonds.
The Saudi bond market corporate bond market, in short, is negligible in the primary market.
Bonds are not liquid due to the non existence of secondary bond markets; this would suggest that
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bank loans are the main debt financing instrument in Saudi Arabia.
3. Legal system
One can say by looking at many research judgments of Saudi economy that the Saudi legal
system suffers from weak law and from weak enforcement of this law. These weaknesses as a
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result would make the debt an expensive source of finance as the banks’ requirements become
more restrictive in lending to firms in such restrictive and unsecure legal system.
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4. Tax system
The main distinguishing feature of Saudi’s economy is the absence of income tax on citizens.
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Instead, there is one form of tax that is called Zakat, which is generally based on a payers’ net
worth not on performance. In Saudi Arabia, the government department of Zakat and Income
Tax (DZIT) is responsible to manage the religious obligation of Zakat and tax collection. The
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Zakat on the individual's annual income from any legal source amounts to 2.5%, a Saudi
company also pays 2.5%1 of the Zakat base. According to the department of Zakat and Income
Tax, Zakat base includes the share capital, retained earnings or accumulated deficit, long-term
loans, notes payable and advances if they are used to finance fixed assets. Furthermore, the
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adjusted net income for Saudi Income Tax and Zakat purposes is added to the Zaka base.
Deduction from the zakat base include net fixed assets and properties under construction,
dividends distributed during the year not to exceed retained earnings at the beginning of the year,
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investment in other Saudi companies and Saudi government bonds, and adjusted deficits. If the
Zakat base is negative or lower than the adjusted net income for the year, Zakat is imposed on
the adjusted net income. If both are negative, no Zakat is due.
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Barakat and Rao (2004) argued that in the non-tax Arab countries the debt usage is no different
from the equity usage as the payout on both is treated the same in the absence of tax advantages
of debt for the corporation, so the tax advantages of debt suggested by the trade off theory are
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expected to be minimal among Saudi firms.
5. Ownership pattern
La Porta, R., Florencio L. and Shleifer, A. (1999) found a relationship between legal protection
and ownership concentration in which countries with weak protection for investors tend to have
1
Department of Zakat and Income Tax Saudi Arabia
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higher ownership concentration and firms are typically controlled by families or the State.
Therefore, it is not surprising to find that company ownership is highly concentrated and mainly
controlled by families or the government in Saudi Arabia.
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Capital Structure of Saudi Companies
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The capital structure for major industries of Saudi companies is regressed by taking into account
the major determinants; we will discuss the capital structure of them with respect to major
industries.
Industrial Sector
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Sulaiman (Sulaiman A Al-Sakran, 2001) has mentioned the major factors in the paper and have
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come up with the capital structure determinants for the major industries. The companies with the
capitalization of more than 7 billion Saudi riyals were included, and for these industries interest
free short term loans were also provided by SIDF that’s why for the last half a decade they have
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shown equal long term and short term debt ratio otherwise it must have been very low compared
to the industries of other countries. This shows the relationship between the growth and the
capital structure as being a determinant. These industries have 21% (Sulaiman A Al-Sakran,
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2001) debt to capital ratio, although short term funds were provided at very favorable rates, this
ratio is lower as compared to the ratio of the industries of other contries.
Cement Sector
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From the last ten years, this sector has been showing higher growth rate compared to other
sectors of Saudi economy because of radical increase in demand. From the paper it is clearly
evident that the debt rate increased from 0% to almost 10% for this industry (Sulaiman A Al-
Sakran, 2001) as a result of higher growth rate and profitability, so it clarifies the correlation of
this determinant. This debt rate is substantially lower than the industry in other countries even in
other Arab countries.
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Electricity Sector
This sector is highly leveraged in Saudi Arabia because this is the only sector which is operated
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by Government of Saudi Arabia, so as being a subsidized industry this has got very high leverage
ratio of 60 % for last decade. If this would have not been so, the ratio would have been quite
lower as other industries have shown, because there is not a single feasible mechanism for debt.
Agriculture Sector
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The agricultural sector is the unique one in Saudi Arabia because of the lowest growth rate and
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profitability index when calculated for the last decade. Because of its unique attributes it is also
seen that the debt ratio for the last decade for this sector has been negligible, this is the sector
with lowest debt ratio compared to other sectors discussed above.
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Services Sector
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This is the sector with the highest growth rate in Saudi economy, but the debt ratio was not that
high because of lack of fix assets inclusion on the balance sheets of these companies, another
reason might be the unorganized debt market.
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Capital Structure in Other Countries and Determinants
As discussed above the capital of all the countries differ substantially, because the determinants
are country specific; all the economies are not alike and all capital structures differ in real sense.
The determinants can be considered same for whole of the countries but structure itself deviates
substantially if compared among countries. This is specifically for Saudi companies because they
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are very low in correlation with others (Rajan and Zingales, 1995), we can make comparison of
the international companies with the Saudi companies now.
In general, the indebtedness of Saudi companies is very low compared to the level of debt of the
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companies in other countries found in previous studies. If compared to the international data, the
Saudi listed firms can be regarded as significantly under levered in term of total debt. The 10.9%
of total debt (Rajan and Zingales, 1995) is far below the 37%, 52%, 39%, 46%, 46%, 29%, and
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39% for United States, Japan Germany, France, Italy, United Kingdom, and Canada respectively.
To further confirm this fact, Figure below (Rajan and Zingales, 1995) provides a comparison
between the debt level components of the Saudi listed firms and their UK counterparts based on
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1997 data:
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Source: Figure made from the data provided in the Journal of Fianance of Rajan and Zingales
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(1995)
From this figure, it appears that there is a significant difference in financing preferences between
Saudi and UK companies in terms of total liabilities ratio. While this ratio constitutes 48.94% of
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the total assets of UK companies, it forms 27.2% of the total assets of Saudi companies.
On the other hand, it can be seen from the data provided in the paper (Rajan and Zingales, 1995)
that there are insignificant differences between average total bank debt (TD) of Saudi companies
and the total bank barrowing of UK companies (10.9% versus 10.5%). In term of short term and
long-term bank debt, also there are insignificant differences observed as the figure demonstrate.
The securitized debt is found to forms about 44% of the long-term debt. Therefore, it is not
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surprise to observe lower long-term debt among Saudi companies since there is very weak
existence for bond debt.
Major Research Findings
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In the efforts to understand the incentives for a firm to use debt, finance scholars have developed
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various theories and models. Each theory has explained facts about one or more important
factors that might determine a firm’s capital structure. However, the findings of prior empirical
studies have resulted in confusing evidences related to the impact of these factors on the
formation of capital structure. Moreover, the majority of these studies have been conducted in
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western economies that have many institutional similarities like capital structure determinants
effects in the same way in all the selected English countries. Anyways, our knowledge of capital
structure within developing countries that often have different institutional characteristics
remains limited due to the lack of work that has been done in these countries especially in Saudi
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Arabia which has unique economic conditions.
Major findings about Saudi companies’ capital structure determinants
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The discussion below summarizes the main findings of the empirical research of Saudi
companies:
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The limited number of cross-country studies (e.g. Rajan and Zingales, 1995; Booth et al., 2001;
Giannetti, 2003; De Jong et al, 2007) confirms the importance of institutional factors in
explaining cross country capital structure differences, as economic factors which are totally
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different for each economy have direct effect on the capital structure determinants of a firm in a
specified country. The present study identifies a significant difference between the capital
choices of Saudi firms and firms in developed economies, and have resulted that Saudi firms
have substantially lower amounts of debt compared to other firms. The 10.9% total book-debt
level observed in listed companies is far below the figure in most developed countries. For
example, in 1991, the mean of total book-debt level in the G-7 countries was 41% (37% and 29%
in the United States and United Kingdom respectively) (Rajan and Zingales, 1995). It is also
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below the average of total book-debt level of 32% in Arab countries (Barakat and Rao, 2004).
The substantially low amount of debt reflects the fact that the Saudi listed companies are mainly
financed by share capital rather than debt financing. The data of listed companies shows that
equity constitutes 57% of their assets.
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The major findings can also be classified as leverage by sector and leverage by size:
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Leverage by Sector
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It is evident from the research finding of (Sulaiman A Al-Sakran, 2001), that the leverage ratios
can be segregated according to sectors, as electronics industry has highest leverage ratio because
that is subsidized by government otherwise services industry with the highest growth did not
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have higher leverage ratio. The major finding are related to the determinants of the capital
structure, that growth and profitability really matters as approved by the regression models of the
research done by many researchers.
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Leverage by Size
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This is evident from the paper (Sulaiman A Al-Sakran, 2001) that as the firm gets larger, the debt
ratio also follows the suite, and whatever the economic structure and condition is. So this
testifies the leverage determinants as being the true factor to regress the variables.
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Suggestion for future research
This discussion has suggested some topics for future research; the following is a summary of the
important issues that should be considered in future research.
The ignored different definitions in measuring both dependent and independent variables due
to time consideration or lack of data should be considered in future Meta analysis studies.
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The analysis has revealed that Saudi companies are missing an important debt instrument,
bond debt. This absence limits the financing choice for companies, which in turn may inhibit
their growth. Accordingly, it is strongly recommended that constraints related to bond
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issuance imposed on firms by company law should be considered for removal.
The potential success for such instruments is very promising since Islamic law provides
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alternative corporate bonds such as Sukuk Al Ijarah that are gaining popularity in other
Muslim countries (e.g. Malaysia, Qatar and United Arab emirates).
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The other recommendation is the establishment of a database containing data about Saudi
companies. The existence of such a database will encourage academics and other researchers
to conduct research not only in finance but in the business area in general.
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