Corporate strategy and capital structure: An empirical study of listed manufacturing firms in Saudi Arabia

Abstract

While there have been studies on capital structure and corporate strategy, limited research has considered the unique characteristics that influence the capital structures and corporate strategies of Saudi Arabian manufacturing firms. This thesis, therefore, intends to enrich the literature that relates capital structure to corporate strategy in the Saudi context. Informed by the literature, this research has developed a theoretical framework to study the influence of corporate strategy on capital structure. The framework could be extended to other industries with similar characteristics in Saudi Arabia in addition to other countries in the Gulf Cooperation Council. A mixed methodology was adopted in this research that consists of quantitative analysis, supported by qualitative results where relevant. The findings of this thesis highlight three main points. First, the results on the determinants of capital structure demonstrate the significance of the cost of servicing debt, zakat, industry structures and the nature of assets in influencing leverage. The results indicate a negative relationship between leverage and profitability and a positive relationship between leverage and risk. Second, when considering the influence of stakeholders on capital structure, the evidence indicates that debt is strategically used as a disciplining device for managers. The findings also underline the importance of equity-holders and debt-holders, demonstrating that corporate attitudes towards debt could depend on ownership structures. Institutional and family ownership positively influence leverage. Government ownership is found to be insignificant. The results demonstrate that strong banking relationships and the availability of government loans lead to higher leverage. Limited evidence was found to support a relevant role for non-financial stakeholders. The thesis illustrates to managers the possible strategic considerations of capital structure decisions that go beyond the need for finance. Further, the evidence illustrates that Saudi bankruptcy laws require clarification and that disclosure rules ought to be more stringent.