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

Saeed Akbar, Shehzad Khan, Z. U. Haq, Muhammad Ibrahim Khan

    Research output: Contribution to journalArticlepeer-review


    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.
    Original languageEnglish
    Pages (from-to)366-383
    Number of pages18
    JournalInternational Journal of Islamic and Middle Eastern Finance and Management
    Issue number2
    Publication statusPublished (VoR) - 15 Jul 2022


    • capital structure
    • speed of adjustment
    • Shariah compliant
    • non-compliant
    • Pakistan


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