The Capital Structure in Developing Countries: Saudi Arabia
Year: 2010
Type: preprint
Abstract: The study tried to investigate the determinants of the capital structure in the emerging countries particularly the Arab countries by taking Saudi Arabia, the largest capital market in term of capitalization in the said region, as a case. The paper employed different measure of the capital structure such as debt ratio, short term debt ratio, long term debt ratio and market-to-book long term debt ratio. Furthermore, we have examined the effect of the capital structure on firm value. The capital structure choice has long been examined in the corporate finance literature of the developed countries; few studies emerged to examine the capital structure in developing markets. Since the classic paper of the Modigliani and Miller (1958), many theories embarked a number of determinants that affect the capital structure of the firm, the most well known theory are the trade-off theory and the pecking order theory where a variety of variables that are potentially responsible for determining capital structure decisions in companies can be found in the literature. In this study, the selection of explanatory variables is based on the alternative capital structure theories and previous empirical work. The choice was sometimes limited, however, because of lack of relevant data. As a result, the final set of explanatory variables includes: assets structure, profitability, growth opportunities, liquidity, company size, business risk, and dividend policy. Tax in Saudi Arabia is a unique code called zakat and found irrelevant in previous empirical study by Al-Sakran (2001) so we decided not to be included. We have examined a sample of non-financial Saudi companies for the a 10-year period 1988-2007 using the pooled regression analysis, the variables, taking into consideration the theoretical predictions as to the direction of their influence on debt ratio and proxies, are found inline with pecking order theory. In addition, the findings show that Saudi companies tend toward internal financing, equity financing and short term borrowing. Long-term financing is not well preferred since the debt market in the country is not yet so developed , moreover, the source of external financing available to Saudi firms is the commercial banks operating in the country and Middle East Region , these banks encourage short term and secured loans. Further more, the religious teaching forbids interest bearing loans transactions, this is main reason for slow development of debt market in Saudi Arabia. The second part of the paper discussed the relationship of capital structure for the sampling firms with firms' value taking the earning per share; average market and price earning ratio are a proxies to measure the firm's value. Using the polled regression analysis we found that changes in the capital structure have no effects on the market price and the price earning ratio, meanwhile there is a positive relationship between the aggregate debt ratio and the earning per share and a negative relationship between the short-debt ratios, the long term ratio with the earning per share. The results could be confusing and may be explained that the total liabilities include other debt items such as trade credits (accounts payable), non-debt liabilities such as the provision for employees end of service (pension) or either there are factors affecting the dependent variables but we couldn’t observe then and include in the regression which will be required to do further empirical studies to confirm the results.
Source: SSRN Electronic Journal
Author: Riyad Sakatan
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W10635829