Capital Structure in Saudi Arabian Listed and Unlisted Companies Mohammed S Al-Dohaiman

301 Pages·2008·1.38 MB·English

Capital Structure in Saudi Arabian Listed and
Unlisted Companies

Mohammed S Al-Dohaiman
Capital Structure in Saudi Arabian Listed and Unlisted Companies.

A thesis submitted for the degree of Doctor of Philosophy

By

Mohammed S Al-Dohaiman

Department of Accounting and Finance
University of Stirling
Stirling
Scotland

April 2008
Declaration

This work has been conducted exclusively by my own research. Work in this thesis
has neither been accepted nor is being submitted for any other degree. Work and
analysis in this thesis has been conducted independently unless otherwise
acknowledged.

Candidate:………………………..

Supervisor:……………………….

Date :………………………..
Acknowledgement

My gratitude first goes to the Almighty Allah, with His word: Qun Fa Yaqun
(Qur’an 19: 35). I would like to express my sincere recognition to my
principal supervisor Professor Alan Goodacre without whose high quality and
friendly supervision, this work would not have come to completion. Sincere
regards are also due to Dr. Kevin Campbell, who provided efficient
supervision and academic advice during my study.
My sincere thanks go to my family for their support: my parents and my
mother in-law who supported me emotionally; my wife and my kids Saleh,
Norah, Sarah and Nowf for their love, encouragement and sacrifice, especially
whenever I need their strength to move forward. I am also deeply grateful to
my brothers, in particular Professor Ali and my sisters for their
encouragement especially on difficult days. I am also deeply grateful to
Engineer Abdullaziz Al-Namlah for his full support and courage before and
during my study. I would like to thank most sincerely former minister of
labour and social work Professor Ali Al-Namlah, governor of the technical
and vocational training corporation Dr. Ali Al-Ghafis and vice governor Dr.
Saleh Al-Amr for granting me the opportunity to make my study possible here
in the UK. Special thanks go to Mr. Fallaj Al-Mansour, the former general
manager of Companies General Department at the ministry of commerce and
the current general manager Mr. Waleed Al-Rwaished and Mr. Abdulrahman
Al-Hujab the joint companies and limited liability director for their help and
full cooperation during the data collection process in Saudi Arabia.
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Abstract

Although there have been many prior studies of the determinants of capital
structure, most have investigated listed companies in countries with well-
developed markets and institutions. The main objective of the present study is
to extend prior research by investigating both listed and unlisted companies in
Saudi Arabia where many cultural and institutional features may have an
impact on financing decisions in a different manner to ‘developed’ countries.
A further contribution is the application of a systematic statistical approach,
using meta-analysis, to summarise the many prior empirical studies.
The empirical part of the study investigates 60 listed and 403 unlisted firms
over the period 2000-2004 using several regression-based archival techniques
including panel data analysis. Robustness checks are carried out to investigate
the potential impact of the different methods and alternative measurement
proxies.
The results show that, in general, companies in Saudi Arabia have
substantially lower levels of debt than in many other countries. This finding is
related to the very low tax regime and other environmental characteristics.
Unlisted firms have more short-term debt but less long-term debt than listed
firms, as found in other countries.
Despite the profound institutional differences, several firm-specific factors
(such as firm size, asset tangibility, profitability, and liquidity) are found to
have similar impacts on capital structure decisions in Saudi Arabia as they
have in prior research. However, the impact of some factors is different, most
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likely reflecting lower levels of agency costs in the Saudi Arabian institutional
environment.
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Table of content

Acknowledgement......................................................................................................i
Abstract......................................................................................................................ii
Chapter 1: Introduction....................................................................................4
1.1 Statement of the Problems..................................................................6
1.2 Objective of the Research...................................................................7
1.3 Research Method................................................................................9
1.4 Expected Contributions and significances of the research...............10
1.5 The Structure of the Thesis...............................................................10
Chapter 2: Literature review.........................................................................13
2.1 Introduction:.....................................................................................14
2.2 Theoretical literature review:............................................................14
2.2.1 Modigliani and Miller propositions:..............................................14
2.2.2 Models based on trade-off theory..................................................15
2.2.2.1 The impact of tax on capital structure...........................................15
2.2.2.2 The impact of conflicts among the agent groups on capital
structure:........................................................................................18
2.2.2.2.1 Conflicts of interest between managers and shareholders:.....19
2.2.2.2.2 Conflicts of interest between shareholders and debt-holders:21
2.2.2.3 Dynamic trade-off theory:.............................................................22
2.2.3 Models based on asymmetric information:....................................23
2.2.3.1 Pecking order and modified pecking order hypothesis:.................24
2.2.3.2 Signalling with proportion of debt:................................................26
2.2.4 Models based on the market for corporate control:.......................27
2.2.5 Models based on industrial organization theory:...........................29
2.2.5.1 Capital structure and the firm's competitive strategy:...................30
2.2.5.2 Capital structure and the characteristics of firm's products or
inputs:............................................................................................30
2.3 Theoretical Prediction.......................................................................31
2.3.1 Size.................................................................................................32
2.3.2 Tangibility......................................................................................32
2.3.3 Profitability....................................................................................33
2.3.4 Risk................................................................................................34
2.3.5 Tax.................................................................................................34
2.3.6 Growth...........................................................................................35
2.3.7 Uniqueness.....................................................................................36
2.3.8 Dividends.......................................................................................36
2.3.9 Free cash flow................................................................................37
2.3.10 Liquidity.........................................................................................37
2.3.11 Age.................................................................................................37
2.3.12 Government...................................................................................38
2.4 Review of prior empirical studies:....................................................38
2.4.1 Prior empirical studies survey-based analysis:..............................39
2.4.2 Empirical results concentrated on the testing of specific theories.41
2.4.3 Empirical results on general capital structure themes...................44
2.4.4 Prior studies related to the context of Saudi Arabia......................45
2.4.5 Prior empirical studies in the context of small and medium firms47
2.5 Conclusion........................................................................................50
Chapter 3: Meta-Analysis Techniques..........................................................56
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3.1 Introduction.......................................................................................57
3.2 Meta analysis technique....................................................................57
3.2.1 Combine significance test..............................................................58
3.2.2 Moderating effects.........................................................................62
3.2.3 Data collection procedure..............................................................64
3.2.3.1 Determining the research issue and the scope of the literature......64
3.2.3.2 Searching process..........................................................................65
3.2.3.3 Sample selection............................................................................65
3.3 Results...............................................................................................69
3.3.1 Size.................................................................................................70
3.3.2 Tangibility......................................................................................73
3.3.3 Profitability....................................................................................75
3.3.4 Risk................................................................................................77
3.3.5 Tax.................................................................................................80
3.3.5.1 Effective tax rate............................................................................80
3.3.6 NDTS.............................................................................................81
3.3.7 Growth...........................................................................................83
3.3.8 Uniqueness.....................................................................................86
3.3.9 Dividend.........................................................................................88
3.3.10 Free cash flow................................................................................90
3.3.11 Liquidity.........................................................................................92
3.3.12 Age.................................................................................................93
3.3.13 Government...................................................................................94
3.4 Conclusion........................................................................................96
Chapter 4: The Environment within Saudi Framework.............................97
4.1 Introduction.......................................................................................98
4.2 Central bank......................................................................................99
4.3 Banking system...............................................................................101
4.4 Capital Market................................................................................110
4.4.1.1 Saudi Stock Market (SSM)..........................................................110
4.5 Bond market....................................................................................116
4.6 Legal system...................................................................................118
4.7 Tax system......................................................................................119
4.8 Ownership pattern...........................................................................120
4.9 The privatisation program...............................................................123
4.10 Conclusion......................................................................................124
Chapter 5: Hypotheses Development..........................................................126
5.1 Introduction.....................................................................................127
5.2 Hypotheses development................................................................127
5.2.1 Size...............................................................................................127
5.2.2 Profitability..................................................................................128
5.2.3 Tangibility....................................................................................129
5.2.4 Free cash flow..............................................................................131
5.2.5 Liquidity.......................................................................................131
5.2.6 Uniqueness...................................................................................132
5.2.7 Growth.........................................................................................133
5.2.8 Dividends.....................................................................................134
5.2.9 Age...............................................................................................135
5.2.10 Business risk................................................................................136
5.2.11 Government ownership................................................................136
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5.2.12 Industry classification..................................................................137
5.3 Leverage definitions.......................................................................138
5.4 Explanatory Variables definitions..................................................140
5.4.1 Size...............................................................................................140
5.4.2 Tangibility....................................................................................141
5.4.3 Profitability..................................................................................141
5.4.4 Free cash flow..............................................................................142
5.4.5 Liquidity.......................................................................................142
5.4.6 Uniqueness...................................................................................143
5.4.7 Growth.........................................................................................143
5.4.8 Dividends.....................................................................................144
5.4.9 Age...............................................................................................144
5.4.10 Risk..............................................................................................145
5.4.11 Government ownership:...............................................................145
5.4.12 Industry classifications:...............................................................146
5.5 Conclusion......................................................................................146
Chapter 6: : Research Methods...................................................................149
6.1 Introduction.....................................................................................150
6.2 Sample............................................................................................150
6.2.1 Sources of data.............................................................................152
6.2.1.1 Capital Market Authority.............................................................153
6.2.1.2 Companies General Department..................................................154
6.2.2 Accounting standards and data reliability....................................156
6.3 Data collection procedure...............................................................158
6.3.1 Initial sample................................................................................158
6.3.2 Industry classification process.....................................................158
6.3.3 Collecting process........................................................................159
6.3.4 Difficulties faced during data collection process.........................160
6.4 Guidelines in sample selection.......................................................160
6.5 Variables calculation.......................................................................163
6.6 Data issues......................................................................................165
6.7 Testing procedure...........................................................................167
6.7.1 Data testing..................................................................................167
6.7.2 Hypotheses test............................................................................168
6.7.2.1 Pooled time-series and cross-sectional analysis..........................169
6.7.2.2 Cross-sectional data analysis.......................................................170
6.7.2.3 Yearly cross-sectional estimation................................................171
6.7.2.4 Panel data analysis.......................................................................172
6.7.3 Estimation technique....................................................................173
6.8 Conclusion......................................................................................174
Chapter 7: RESULTS...................................................................................175
7.1 Introduction.....................................................................................176
7.2 Debt Analysis..................................................................................176
7.2.1 International comparison.............................................................181
7.3 Determinants of capital structure analysis......................................182
7.3.1 Descriptive statistics....................................................................182
7.3.2 Data testing..................................................................................186
7.3.3 Result analysis.............................................................................188
7.3.4 Pooled analysis............................................................................189
7.3.4.1 Size...............................................................................................190
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7.3.4.2 Tangibility....................................................................................193
7.3.4.3 Free cash flow..............................................................................195
7.3.4.4 Liquidity.......................................................................................196
7.3.4.5 Uniqueness...................................................................................197
7.3.4.6 Growth.........................................................................................198
7.3.4.7 Dividends.....................................................................................200
7.3.4.8 Age...............................................................................................201
7.3.4.9 Risk..............................................................................................202
7.3.4.10 Government.................................................................................203
7.3.4.11 Industry........................................................................................204
7.3.5 Average cross-sectional analysis based on 2004 debt ratios.......205
7.3.6 Yearly cross-sectional analysis....................................................208
7.3.7 Fixed effects panel analysis.........................................................209
7.3.7.2 Profitability..................................................................................212
7.3.7.3 Tangibility....................................................................................213
7.3.7.4 Free cash flow..............................................................................214
7.3.7.5 Liquidity.......................................................................................215
7.3.7.6 Uniqueness...................................................................................216
7.3.7.7 Growth.........................................................................................217
7.3.7.8 Dividends.....................................................................................218
7.3.7.9 Age...............................................................................................219
7.4 Alternative proxies analysis............................................................220
7.4.1.1 Size...............................................................................................221
7.4.1.2 Profitability..................................................................................222
7.4.1.3 Tangibility....................................................................................223
7.4.1.4 Liquidity.......................................................................................223
7.4.1.5 Uniqueness...................................................................................224
7.4.1.6 Growth.........................................................................................224
7.4.1.7 Dividends.....................................................................................226
7.4.1.8 Age...............................................................................................226
7.5 Regression diagnostics....................................................................227
7.6 Chapter summary............................................................................229
Chapter 8: Conclusion..................................................................................231
8.1 Introduction.....................................................................................232
8.2 Summary of the major results.........................................................233
8.2.1 Meta-analysis findings.................................................................233
8.2.2 Limitation of meta-analysis.........................................................234
8.3 Saudi firm’s capital structure determinants....................................235
8.3.1 Limitation of the determinants analysis.......................................243
8.4 Suggestion for future research........................................................243
References 246
Appendices 267

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