Effect of Shariah compliance on financing decisions: empirical evidence from GCC

Abstract

Purpose The purpose of this study is to examine the effect of companies’ Shariah compliance (SC) debt financing decisions, financing with retained earnings (REs), cash holdings, capital expenditures and dividend pay-out policies. Design/methodology/approach The sample consisted of 1,648 firm-year observations of GCC non-financial firms from various industries. The authors scrutinised the firms over a period of eight financial years from 2012 to 2019. To analyse the research hypotheses, the authors used a panel data model using ordinary least squares and generalised method of moments, depending on historical data. Findings The results of this study show a negative effect of SC on debt financing decision and dividend pay-out policies but a positive effect on financing decision with REs, cash holdings and the decision on capital expenditures. Practical implications This study's findings provide a better understanding of the role of restrictions of financing options in SC companies on financing decisions in the GCC. Whether religious or simply interested in investing in SC companies, investors can benefit from knowing that these companies make financial decisions that may affect their short- and long-term profits for policymakers and regulators. This study may be valuable in evaluating the effect of restrictions imposed by Islamic Shariah on how firms make different financial decisions. Policymakers should encourage the issuance of Islamic financial products and prepare two financial indicators to classify SC firms. Originality/value The main contribution of this study is to obtain empirical evidence on the effect of SC on a set of financial decisions. To the best of the authors’ knowledge, this study is the first to focus on non-financial companies committed to Shariah. They do not depend on interest-bearing loans for their financing but are limited to financing by shares, financing with REs and financing using various Islamic financing formulas.