Debt Determinants of Shari’ah Approved Firms: Empirical Evidence from Malaysia


  • Nurshamimitul Ezza Ramli Universiti Sains Islam Malaysia (USIM)
  • Razali Haron IIUM Institute of Islamic Banking and Finance,(IIiBF), International Islamic University Malaysia


Debt determinants, Shariah approved firms, Islamic finance, panel data


The issue of high reliance on debt has raised major concern especially since its impact has been linked to the several corporate problems in United States’ big corporations such as Enron and Lehman Brothers. On a wider scope, the impact of debt may also be evidenced by the Greek Depression in the year 2009. Various studies have been conducted to explain which factors determine debt of the firms, given different setting of periods, countries and methodologies. Uniquely, this study focuses on the firms which stocks are Shari’ah approved in accordance to the Malaysia’s Securities Commission guidelines. This study covers a balanced panel of 239 Shariah approved firms listed on the Bursa Malaysia for the period of analysis from 2000 to 2014. To meet its objective, this study employs a static panel regression model which includes the pooled OLS, random effect model (REM) and fixed effect model (FEM). The study also conducts a robustness test to the empirical model. Several factors have been examined and the result shows that certain firm-specific variables like growth opportunity, size, bankruptcy risk, non-debt tax shield (NDTS) and Herfindahl-Hirschman Index are significant determinants of a firm’s debt. Also macro variables such as inflation, GDP and economic crisis are also found to be significant determinants of  Shariah approved firms’ debt. In contrast with the prior studies that focuses on the non-Shariah approved firms, the output from this study provides new insight and understanding on the debt determinants of Shariah approved firms.


Download data is not yet available.


Ahmad, N., & Azhar, N. N. (2015). Investigating of Shariah compliant companies capital structure determinants. Advanced Science Letters, 21(6), 1986–1989.
Ahmad, N., & Rahim, F. A. (2013). Theoretical investigation on determinants of government-linked companies capital structure. In Proceedings of 3rd Asia-Pacific Business Research Conference, 1–14).
Ahmed, A. (2010). Global financial crisis: An Islamic finance perspective. International Journal of Islamic and Middle Eastern Finance and Management, 3(4), 306–320.
Ahmed, H. (2007). Issues in Islamic corporate finance: Capital structure in firms. Jeddah, Saudi Arabia: Islamic Research and Training Institutes (IRTI).
Al-Najjar, B., & Hussainey, K. (2011). Revisiting the capital-structure puzzle: UK evidence. The Journal of Risk Finance, 12(4), 329–338.
Al-Najjar, B., & Taylor, P. (2008). The relationship between capital structure and ownership structure: New evidence from Jordanian panel data. Managerial Finance, 34(12), 919–933.
Altman, E. I. (1968). The prediction of corporate bankruptcy: A discriminant analysis. The Journal of Finance, 23(4), 193–194.
Bacha, O. I., & Mirakhor, A. (2013). Islamic Capital Markets: A Comparative Approach. John Wiley and Sons Singapore Pte. Ltd.
Baharuddin, N. S., Khamis, Z., Mahmood, W. M. W., & Dollah, H. (2011). Determinants of capital structure for listed construction companies in Malaysia. Journal of Applied Finance & Banking, 1(2), 115–132.
Balios, D., Daskalakis, N., Eriotis, N., & Vasiliou, D. (2016). SMEs capital structure determinants during severe economic crisis : The case of Greece. Cogent Economics and Finance, 4(1), 1–11.
Belkhir, M., Maghyereh, A., & Awartani, B. (2016). Institutions and corporate capital structure in the MENA region. Emerging Markets Review, 26(1), 99–129.
Byoun, S. (2008). How and when do firms adjust their capital structures toward targets ? The Journal of Finance, 63(6), 3069–3096.
Byoun, S. (2011). Financial flexibility and capital structure decision.
Central Bank of Malaysia. (2015). Annual Report 2015. Retrieved from
Chadha, S., & Sharma, A. (2015). Determinants of capital structure: An empirical evaluation from India. Journal of Advances in Management Research, 12(1), 3–14.
Chakraborty, I. (2010). Capital structure in an emerging stock market: The case of India. Research in International Business and Finance, 24(3), 295–314.
Chang, C., Chen, X., & Liao, G. (2014). What are the reliably important determinants of capital structure in China? Pacific-Basin Finance Journal, 30(1), 87–113.
Charalambakis, E. C., & Psychoyios, D. (2012). What do we know about capital structure? Revisiting the impact of debt ratios on some firm-specific factors. Applied Financial Economics, 22(20), 1727–1742.
Chipeta, C., Wolmarans, H. P., & Vermaak, F. N. (2012). Financial liberalisation and the dynamics of firm leverage in a transitional economy. South African Journal of Economic and Management Sciences, 15(2).
Davis, E. P. (1995). Debt, financial fragility and systemic risk. Oxford: Oxford University Press Inc.
Deangelo, H., & Masulis, R. W. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8(1), 3–29.
Deesomsak, R., Paudyal, K., & Pescetto, G. (2004). The determinants of capital structure: Evidence from the Asia Pacific region. Journal of Multinational Financial Management, 14(1), 387–405.
Donaldson, C. (1961). Corporate debt capacity: A study of corporate debt policy and the determination of corporate debt capacity. Harvard University.
Eriotis, N., Vasiliou, D., & Ventoura-Neokosmidi, Z. (2007). How firm characteristics affect capital structure: An empirical study. Managerial Finance, 33(5), 321–331.
Fama, E. F. (1980). Agency problem and the theory of firm. The Journal of Political Economy, 88(2), 288–307.
Fama, E. F., & Miller, M. H. (1972). The theory of finance. Dryden Press.
Frank, M. Z., & Goyal, V. K. (2003). Testing the pecking order theory of capital structure. Journal of Financial Economics, 67(2), 217–248.
Frank, M. Z., & Goyal, V. K. (2008). Trade-off and pecking order theories of debt. In B. E. Eckbo (Ed.), Handbook of corporate finance: Empirical corporate finance (Vol. 2, pp. 136–202). Amsterdam, The Netherlands: Elsevier.
Hall, T. W. (2012). The collateral channel : Evidence on leverage and asset tangibility. Journal of Corporate Finance, 18(3), 570–583.
Haron, R. (2014). Capital structure inconclusiveness: Evidence from Malaysia, Thailand and Singapore. International Journal of Managerial Finance, 10(1), 23–38.
Haron, R., & Ibrahim, K. (2012). Target capital structure and speed of adjustment : Panel data evidence on Malaysia Shariah compliant securities. International Journal of Economics, Management and Accounting, 2(2), 87–107.
Haron, R, & Adewale, A.A. (2016). Islamic capital market and debt financing of Shariah compliant firms in Indonesia. Al-Shajarah (Special Issue in Islamic Banking and Finance), 67-86.
Haron, R. (2017). Ownership structure of family-owned firms and debt financing. Evidence on Shari’ah compliant firms in Malaysia. Al-Shajarah (Special Issue in Islamic Banking and Finance), 139-163.
Hassan, N. N. N. M., Shafi, R. M., & Mohamed, S. (2012). The determinants of capital structure: Evaluation between Shariah-compliant and conventional companies. In 2012 International Conference on Innovation Management and Technology Research (pp. 205–209). Ieee.
Huizinga, H., Laeven, L., & Nicodeme, G. (2008). Capital structure and international debt shifting. Journal of Financial Economics, 88(1), 80–118.
Iqbal, Z., & Mirakhor, A. (2011). An introduction to Islamic finance :Theory and Practice (2nd Editio). John Wiley & Sons (Asia) Pte. Ltd.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review, 76(1), 323–329.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Joeveer, K. (2013). Firm, country and macroeconomic determinants of capital structure: Evidence from transition economies. Journal of Comparative Economics, 41(1), 294–308.
Kahf, M. (1994). Time value of money and discounting in Islamic perspective: Re-visited. Review of Islamic Economics, 3(2), 31–38.
Kayo, E. K., & Kimura, H. (2011). Hierarchical determinants of capital structure. Journal of Banking and Finance, 35(2), 358–371.
Khan, M. M. (1997). The Book of Wasaya. In The translation of the meanings of Sahih Al-Bukhari (p. 506). Darussalam Publishers and Distributers.
Köksal, B., & Orman, C. (2015). Determinants of capital structure: Evidence from a major developing economy. Small Business Economics, 44(2), 255–282.
Koller, T., Dobbs, R., & Huyett, B. (2011). Value : The four cornerstones of corporate finance. Hoboken, New Jersey.: JohnWiley & Sons, Inc.,.
Leary, M. T., & Roberts, M. R. (2010). The pecking order, debt capacity and information asymmetry. Journal of Financial Economics, 95(3), 332–355.
Lokken, L. (1986). Time value of money rules. Tax Law Review, 42(1), 10–80.
Mackay, P., & Phillipis, G. M. (2005). How does industry affect firm financial structure? Review of Financial Studies, 18(4), 1433–1466.
Marks, K. H., Robbins, L. E., Fernández, G., & Funkhouser, J. P. (2009). The Handbook of Financing Growth : Strategies and capital structure. Hoboken, NJ, USA: John Wiley & Sons, Inc.
Matemilola, B. T., & Ahmad, R. (2015). Debt financing and importance of fixed assets and goodwill assets as collateral: dynamic panel evidence. Journal of Business Economics and Management, 16(2), 407–421.
Md-Rus, R., & Samiran, M. (2012). The determinants of capital structure for Malaysian construction firms. In 3rd International Conference on Business and Economic Research (3rd ICBER 2012) Proceeding (Vol. 1997, pp. 992–1008).
Mitani, H. (2014). Capital structure and competitive position in product market. International Review of Economics and Finance, 29, 358–371.
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory Of investment. The American Economic Review, 48(3), 261–297.
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital : A correction. The American Economic Review, 53(3), 433–443.
Mustapha, M., Ismail, H., & Minai, B. (2011). Determinants of debt structure: Empirical evidence from Malaysia. In 2nd International Conference on Business and Economic Research (pp. 2523–2540).
Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 575–592.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(1), 187–221.
Nejad, N. R., & Wasiuzzaman, S. (2015). Multilevel determinants of capital structure: Evidence from Malaysia. Global Business Review, 16(2), 199–212.
Obaidullah, M. (2005). Islamic Financial Services. King Abdulaziz University Press.
Obaidullah, M. (2006). Teaching corporate finance from an Islamic perspective. Islamic Economics Research Centre, King Abdulaziz University Jeddah, Kingdom of Saudi Arabia.
Prasad, S., Green, C. J., & Murinde, V. (2001). Company financing, capital structure and ownership : A survey and implications for developing economies. Vienna: Société Universitaire Européenne de Recherches Financières.
Psillaki, M., & Daskalakis, N. (2008). Are the determinants of capital structure country or firm specific? Small Business Economics, 33(3), 319–333.
Ramli, N.E. & Haron, R. (2017). Target capital structureand speed of adjustment: a dynamic evidence from Shariah approved firms in Malaysia. Journal of Muamalat and Islamic Finance Research (JMIFR), 14(2), forthcoming.
Rampini, A. A., & Viswanathan, S. (2013). Collateral and capital structure. Journal of Financial Economics, 109(1), 466–492.
Securities Commission Malaysia. (2013). Revised Shariah screening methodology : Expands ICM’s global reach. Securities Commission Malaysia, 36. Retrieved from
Shah, S. Z. A., & Jam-e-Kausarb. (2012). Determinants of capital structure of leasing companies in Pakistan. Applied Financial Economics, 22(22), 1841–1853.
Smith, D. J., Chen, J., & Anderson, H. D. (2015). The influence of firm financial position and industry characteristics on capital structure adjustment. Accounting and Finance, 55(4), 1135–1169.
Suharto, U. (2014). Analysis of the concept of Islamic choice (ikhtiyór) on opportunity cost and time value of money in Islamic economics and finance. International Journal of Economics, Management and Accounting, 22(2), 1–20.
Swanson, Z., Srinidhi, B., & Seetharaman, A. (2003). The capital structure paradigm : Evolution of debt/equity choices. Westport, Connecticut: Praeger Publishers.
Ting, I. W. K., & Lean, H. H. (2011). Capital structure of government-linked companies in Malaysia. Asian Academy of Management Journal of Accounting and Finance, 7(2), 137–156.
Tongkong, S. (2012). Key factors influencing capital structure decision and its speed of adjustment of Thai listed real estate companies. Procedia - Social and Behavioral Sciences, 40(1), 716–720.
Uddin, N. (2015). Determinants of corporate capital structure: A theoretical integration and some empirical evidences. International Journal of Economics and Finance, 7(7), 254–277.
Vasiliou, D., Eriotis, N., & Daskalakis, N. (2009). Testing the pecking order theory: The importance of methodology. Qualitative Research in Financial Markets, 1(2), 85–96.
Yu, B. (2012). Agency costs of stakeholders and capital structure: International evidence. Managerial Finance, 38(3), 303–324.
Zandi, G., Abdul Razak, D., & Hussin, N. H. (2014). Stock market screening: An analogical study on conventional and Shariah compliant stock markets. Asian Social Science, 10(22), 270–279.




How to Cite

Ramli, N. E., & Haron, R. (2017). Debt Determinants of Shari’ah Approved Firms: Empirical Evidence from Malaysia. Journal of Islamic Finance, 6, 188–204. Retrieved from