Islamic Finance and the Theory of Capital Structure

Abstract

This paper empirically investigates firms using Islamic finance in Malaysia and Middle East countries. The comparative analysis of Islamic finance and non-Islamic finance users resulted in three major implications. First, Islamic bond issuers preferentially choose the Islamic bond issuance prior to bank borrowing and other external financing tools. Second, Islamic bond issuance is not related to the issuer's internal funds, while Islamic bank borrowing is significantly influenced by the magnitude of a firm's internal funds. These results suggest that Islamic bond issuers do not always choose to issue bonds based on information cost, but Islamic bank borrowers always do. Third, the Islamic bond issuance contributes to an increase in the issuer's stock returns and total factor productivity. This empirical result suggests that Islamic bond issuance is preferred because of this unique benefit which standard external financing does not have.JEL Classification: G20, G21, G32

The impact of Sukuk on the insolvency risk of conventional and Islamic banks

“…According toNagano's (2010), Sukuk share features from debt and equity. The author asserts that the information cost related to Sukuk lies between that of using debt and issuing equity.…”

“…The author asserts that the information cost related to Sukuk lies between that of using debt and issuing equity. Hence,Nagano (2010) concludes that issuing conventional debt is preferred to Sukuk which is preferred to equity.8 We also used the Herfindahl-Hirschman Index (HHI) instead of the Lerner index to measure banking competition and the overall results of this study remain unchanged. The unreported results are available from the corresponding author upon request.…”

The Infuence of Macroeconomics Factors and Political Risk on the Sukuk Market Development in Selected GCC Countries: A Panel Data Analysis

“…In this regard, Halim et al (2016) and Klein and Weill (2016) conclude that the higher is the degree of information asymmetry, the more frequently the firm issues sukuk. Further, Nagano (2017Nagano ( , 2010 concludes that firms prefer to issue sukuk compared to equity and debt issuance in case of a high level of information asymmetry. Since the issuance of sukuk contributes to a rise in the stock returns of the issuer, the issuance of sukuk is given preference over bonds.…”

“…Hence, well-functioning stock markets reduce asymmetric information, enhance the corporate governance, and lower the cost of external equity and the cost of issuing debt (Demirgüç Kunt & Maksimovic 1996). In this regard, Nagano (2010) found that the issuance of sukuk improves the stock returns of the issuers and the total factor of productivity. This empirical finding recommends that preference is given to sukuk issuance due to this exclusive benefit and because the standard external finance is unable to provide.…”

“…According to Shahida and Saharah (2013), the marginal benefit of further increases in the debt declines as debt increases, whereas the marginal cost increases, so that a firm that optimizes its overall value focuses on this trade-off when choosing the quantity of debt and equity to use for financing. Therefore, the selection of funding by sukuk based on this theory is achieved before the external financing when the financial scheme offers managerial merits to the issuer (Nagano 2010). Some studies reveal that sukuk issuance follows the pecking order and trade-off theories.…”