The Capital Structure Choice: Evidence of Debt Maturity Substitution By GCC Firms

Abstract

The objective of this study is to investigate the determinants of the capital structure decision in the face of restricted access to external financing. Based on a sample of 150 listed firms over the period 2000-2009, a two-stage least squares regression is used to test the determinants of capital structure, while controlling for firm-specific and country-specific factors. The results show that size, profitability, tax-shield and collateral have a significant impact on leverage. A country effect is also observed. Firms operating in the United Arab Emirates (UAE) exhibit a significantly higher level of leverage when compared to their peers in the neighboring countries. The results further document a novel finding that highlights the practice of debt-maturity substitution to circumvent the existence of external financing constraints faced by firms operating in the Gulf Cooperation Council (GCC) region.