The Capital Structure Determinants: A Case Study from Material Industry Firms Listed in Saudi Arabia Market

Abstract

Abstract Purpose: This study seeks to identify the determinants that affect the capital structure decision in listed Saudi’s material firms. Further, this study aims to explore the nature of relationships between the determinants of capital structure and leverage as a proxy of the capital structure. This study used microeconomic determinants namely profitability, tangible assets, firms’ size, liquidity, growth, and zakat. Design and Methodology: The sample size of this study includes all material firms listed in Saudi’s stock market (42 company) from 2016 to 2020. A quantitative approach has been employed to achieve the purpose of this study. Pooled regression model and regression diagnostic tests including stationarity, multicollinearity test, autocorrelation, heteroskedasticity, and normality tests were applied to make sure the model estimation is robust. All statistical techniques and tests have been done using E-views software. Results: The results show that profitability, tangibility, firms’ size, liquidity position, and growth opportunities are highly significant in explanting the variation in leverage ratio in material industry firms in Saudi Arabia at 99% confidence level. However, zakat shows insignificant effect toward leverage. Furthermore, tangibility, size, liquidity, and growth indicate to a positive relationship with leverage. On the other hand, profitability and zakat were negatively related to the leverage ratio. Contribution/Added Value: This is the first research investigate the determinants of capital structure for listed Saudi Arabian firms and in particular industry taking into account the tax environment in Saudi Arabia