FIRMS’ CAPITAL STRUCTURE AND THE ISLAMIC FINANCIAL DESIGN

Abstract

This study presents empirical evidence of capital structure of Syariah compliance firms of Malaysia. Empirical results imply that the agency cost, bankruptcy cost, profit and loss sharing, asset structure, age, growth, industrial classification, non-debt tax shields, profitability, volatility and size affected firms’ capital structure.  But most importantly, it is discovered that the issues of agency cost and bankruptcy cost are addressed effectively in Islamic mode of financing.  As a result it negates previous acquisition of agency cost that coherent in Islamic financing. At the same time it reveals that the design of Islamic financial system surpass its conventional counterparts, the bank-based or market-based system design, in dealing not only on the issues of agency costs but also the bankruptcy costs in extending financing to firms.

 

JEL classification: G32;

Keywords: capital structure; agency cost; bankruptcy cost; profit and loss sharing; Islamic financial system design;