The determinants of capital structure: Evaluation between Shariah-compliant and conventional companies

Abstract

Islamic financial markets are still at infant stage in Malaysian economy, thus have created dual financial systems; Shariah-compliant and conventional financial system. Capital structure determinants of Shariah-compliant (SC) and conventional companies (CC) might be different due to restriction placed on capital structure and business activities of an SC. The aim of this research is to disclose the influential factors of capital structure of SC and CC. By using multiple regressions, we examined seventy SC and fifty CC listed on Main Market of Bursa Malaysia from year 2005–2010. We found that the SC's debt ratio was significant with profitability, size and tangibility but insignificant with non debt tax shield. The CC's debt ratio was significant with profitability, size and non debt tax shield but tangibility was insignificant. This has suggested both SC and CC have different factors to be considered in deciding the capital structure.