DOES THE FINANCIAL DESIGN AFFECT THE CAPITAL STRUCTURE?

ABSTRACT

This paper evaluates elements that form the capital structure of the firm. The traditional variables under observation in capital structure model are the agency cost, the bankruptcy cost, the level of collateralized assets, firm size, corporate tax, firm’s growth, industry classification and the volatility. By introducing the element of profit loss sharing in the capital structure, the financial design can be transformed into Islamic financial design that differs from the bank-base design or the market-base design.  Under the profit loss sharing the external capital obtained from the financial intermediary is a non-debt financing which resembles the equity financing.  By estimating the unbalanced panel data of 598 firms for the year 1995 to 2000 listed in the Syariah Board of Kuala Lumpur Stock Exchange, the study evaluates the capital structure with the presence of profit loss sharing. Thus, this will answer how could financial design affect the firm’s capital structure?

JEL Classification: C23; G32;

Keywords: capital structure; financial design; profit loss sharing; panel data;