Risk and Capital Structure: Evidence from Sharia'h and Non-Sharia'h Firms

Abstract

The research tries to matriculate the effect of risk on the capital structure of the firm in Sharia’h compliant and non-Sharia’h compliant firms of Pakistan. The paper chooses three independent variables, which are systematic risk, credit risk, and liquidity risk, and three dependent variables for capital structure (debt, non-current debt, and current debt to asset) to evaluate the connection between them. The panel data after Sharia’h screening was left with 81 Sharia’h firms and 276 non- Sharia’h firms. The data was collected from 2015 to 2019 which was taken from the state bank of Pakistan. The analysis showed, there was no significant effect of credit and systematic risk on Sharia’h firms. While credit and liquidity, risk had a significant effect on non-Sharia’h firms. The one-point incline (decline) in CR, increases (decreases) LVTD by 0.0027 points in non-Sharia’h firms. The liquidity risk had a significant effect on Sharia’h companies. So, one-point increases (decreases) in QR, incline (decline) LVSTD by 0.037 points in non-Sharia’h firms and 0.0218 in Sharia’h firms. The study provides suggestions for future researchers and gives key ideas about policy implications on risk management to the managers while making decisions on capital structure.