This research will investigate factors that determine the capital financing structure of firms within a tax-exempt economy, Kuwait. It will question why companies in a tax-exempt economy, regardless of the lack of debt incentives, continue to prefer debt financing to internal sources of capital. The research attempts to fill the literature gaps, using theories of capital structure, to provide significant reasons why firms in tax-exempt economies tend to use debt as a source of finance.
Although several studies have focused on this topic, there are still no tangible or conclusive findings that can be used to generalize this scenario. The reason why I have chosen this research topic is that the paper will be instrumental in contributing toward the development of literature and providing insights to future researchers in the field of business finance.
Since the listed companies in Kuwait Stock Exchange (KSE) are few relative to other developed markets, The study will include all non-financial firms listed in Kuwait Stock Exchange (KSE). Therefore, it is a pioneer study in this field in the GCC region and very important to understand why firms in tax-exempt economies are utilizing debts as a source of finance even though they are not benefiting from tax incentives “Tax Shields”.
The study will use closed-end type’s questionnaires to collect data from CEOs, board members, CFOs and executive managers of listed companies from non financial sectors in KSE. In addition, structured interviews are planned to be used to help in the interpretation of the quantitative results. Advanced statistical techniques are going to be used.
The findings of this research will help company executives and stakeholders in companies to understand the decision-models that inform a firm’s capital structure financing decision. The paper will also confirm findings of previous studies, while finding gaps in some of studies that have been completed.
Kuwait is a small Middle East country that has vast crude oil reserves. The country has approximately 100 billion barrels of crude oil reserves. 7% of the world’s crude oil originates from Kuwait. Petroleum accounts for 48% of the country’s GDP. In addition, it accounts for approximately 90% of the government’s revenues and 95% of export revenues. The Kuwaiti Dinar (KWD) is the legal tender of the country. In 2012, the GDP of Kuwait was $165.9 billion. In 2012, the GDP of the company grew by 6.1%. Kuwait generally has a budget surplus. In 2012, the country had revenues of $106.9 billion and expenditures of $69.18 billion. The government had a budget surplus of $37 billion. Kuwait’s government uses two reserve funds to invest the budget surplus. These include the Fund for Future Generations and the General Reserve Fund. The government invests the surplus in stocks, bonds, fixed yield instruments, and real estates in the U.S., U.K. Japan, France, and Southeast Asia (Lehman, 2008).
Following the establishement of National Bank of Kuwait (NBK), investment and trade in inventory increased. Thereafter, the government passed several laws to regulate the trading of stocks. This culminated in the formation of the Kuwait Stock Exchange (KSE) in August 1983. The duty of the KSE is to regulate and organise trading activities. In 2010, the government established the Capital Markets Authority to take over some of the previous functions of the KSE (Al-Bashir, 2011).
Kuwait is an Islamic country. Therefore, its laws conform to the teachings of the Quran. Kuwait’s economic model focuses on wealth distribution. The conventional economic model focuses on wealth creation. It is the duty of wealthy Kuwaitis to offer a certain percentage of their income to the needy. The government does not prohibit financial institutions from engaging in conventional business activities.
The Central Bank of Kuwait (CBK) is the main body that regulates Kuwait’s monetary sector. The CBK requires all financial institutions to have anti-money laundering measures. In addition, it requires the financial institutions to circulate guidelines of their money laundering procedures. The CBK also regulates the financial transactions of all financial institutions to protect the public (Stella & Lönnberg, 2008).
The Capital Markets Authority (CMA) is the independent body that regulates the KSE. The government established the CMA is 2010. The Capital Markets Law (CML) mandates the CMA to regulate the KSE. The CMA requires companies to obtain consent from the agency prior to undertaking mergers or acquisitions. In addition, the purchase of over 30% of voting rights of a company by the parties forms the foundation for listing in the KSE. The CMA strives to reduce insider trading in the KSE. Parties that engage in insider trading risk facing stiff penalties (Al-Bashir, 2011).
Kuwait strives to attract foreign direct investments into the country. Several laws regulate foreign direct investments into the country. According to article 23 of the Kuwaiti Commercial Code, foreigners cannot have majority shareholding of a company in Kuwait. Foreign investors should have a Kuwaiti partner who has equity holding of at least 51%. However, ‘Law No. 8 of 2001’ permits 100% foreign ownership of firms in certain approved sectors. The parliament passed this law to attract foreign investors into the country (Jones, 2008).
The literature explores the theories of capital structure and widens the empirical studies concerning the capital structure theory. In essence, the literature review will examine the different theories of capital structure as well as scrutinize the measures of short-term and long-term liabilities given the pragmatic connotations of the capital structure theories regarding the various types of debt instruments (Vasiliou & Daskalakis, 2009).
Pecking Order Theory
The pecking order theory developed by Myers and majluf (1984), which suggests that external capital sources are affected by adverse selection because of asymmetry of information. In simple terms, they found that since internal management has more information than outsiders do, company executives tend to cash on the ignorance of the outsiders who are in demand of a premium on top of their investments (Myers & Majluf, 2004). Companies who have the monopoly of information tend to read the behavior of investors and use it to increase their capital investments. For organizations that are tax-exempt, the adverse selection does not only include interest expense, but also other factors such as bond covenants, including other factors that may be decided by the executives of a firm.
This theory relies on the concept of asymmetry of information (Leary & Roberts, 2005). This theory postulates that firms are unable to design or achieve optimal leverage, but are able to set targets, which are used as pointers for future capital capacities. This theory focuses on the costs of information and other singnalling effects (Majluf &Myers, 2004). In their studies, Myers and Majluf showed that firms prefer to finance their investments through internal finances rather than outside sources (Myers & Majluf, 2004). They use such sources as depreciation expenses and retained earnings. Upon exhausting these sources, these firms move to debts to finance their activities. In cases where the debt is not sufficient, a company may move to fill its financing needs through additional equity.
The theorem postulates that companies rank their sources of capital in the order of the costs of financing and the amount of benefits that can be derived from such sources. In essence, they use the hierarchy order, which is justified by the financing costs. The issuance of additional equity by a company is considered the most expensive source of investment capital. This is because equity capital is a source of capital that is affected by the informational asymmetry between a company’s existing shareholders, company executives, and prospective shareholders (Van Binsbergen et al., 2011). However, since debts tend to have fixed returns and payments, it is least sensitive to effects of asymmetry of information. On the other hand, internally generated finances are not affected by since they have no issuing costs.
Contrary to the trade-off theory, the pecking order theory argues that there can never be a definite optimal capital that a company can use to navigate its long-term investments. The key component of this theorem revolves around how a firm chooses between external sources and internal sources of capital to finance its operations. Therefore, the pecking order theory concludes that there exists a hierarchy of choice of financing options where a firm descends from internal sources then debts and finally equity funding (Rajan & Zingales, 2005).
Static Trade-Off Theory
The static trade-off theory proposes that there is no existence of an optimal capital structure, and that what companies do is to set their levels of debt and formulate strategies toward achieving these targets. In fact, the hypothesis argues that the trade-off relatioship existing between the company’s expenses and the gains as well as equity and debt influences the firm’s capital structure. The theory anticipates that a firm seeks to increase its debt holding to offset the marginal tax advantages by the increased cost of financial distress and bankruptcy (Leary & Roberts, 2005). In essence, the theory of static trade-off of capital structure implies assumes that since the interests are subject to tax deductions, increasing the level of debt raises the tax benefits (Shyam-Sunder & Myers, 1999). On the same line of thinking, increasing the amount of debt capital stimulates default and this raises chances of bankruptcy.
Modigliani and Miller (1963) contend that the dteductibility of the company’s interest costs is a recipe to attain the most favorable capital structure by utilizing liabilities. Other studies have expanded this theory to include other the probability of financial distress costs as some of firm-specific factors that may affect the capital structure of a firm. The trade-off theory suggests that firms are always on the mission to balance the cost and returns of debt (Leary & Roberts, 2005). Companies operating a tax-exempt economy must strive to strike a balance between the costs of financing through equity and debts and minimizing financial distress arising from debt equity.
Agency cost theory
The last theory that the research will consider is the agency cost theory, which suggests that a firm seeks to achieve optimal level of capital by balancing between returns and costs that accompany conflicting interests. According to Meckling and Jensen (1976), agency costs refer to the cumulative costs of monitoring expenses by the bond agent, the principal and the residential loss from such a relationship (Jensen & Meckling, 1976). Meckling and Jensen argue that agency costs influence the cost financing decisions citing the role of secured debts in downsizing the costs of acquisition of debts (Modigliani & Miller, 1963).
In their studies, they suggest that using short-term financing may mitigate and solve problems of agency relationships. This is because motivation of the shareholders to reap from debt holders tends to narrow a firm’s access to short-term debts rather than long-term debts. This helps to solve agency problems.
Because of such costs arising from agency relations, a firm is motivated to focus on a targeted debt level to lower agency costs. If there are no effects or costs of floatation, similar adjustments are deemed continuous in all firms. In practical terms, the fact that floatation costs exist implies that there shall be a fluctuation in the debt and leverage ratios on the target debt levels. Because of this, there is need to establish a company’s debt targets and find out how this level may change as a result of external factors. However, it is difficult to unveil this given that the target levels are difficult to tell. It means that we can only use historical information to study behavior of companies’ target levels. In this respect, the research will use the dynamic panel approach to provide a basis to investigate a firm’s target leverage ratio.
Berger, Ofek, and Yermack (1997) found that executives who have worked in a company for long tend to have a tendency of evading debts. Further, Galai and Masulis (1976), Jensen and Meckling (1976), and Stulz (1990) postulate that the choices of the firm are influenced by acrual of liabilities thereby venturing in projects with high uncertainties.in other words,liabilities exert pressure on the fims shareholders.
For firms that are tax-exempt, the approach puts foward that management choices concerning the kind and amount of liabilities depend on personal uncertainty aversion, entrenchment as well as aspects concerning personal career. The effects arising out of these factors could be more in a tax-exempt economy, or sector because of non-existence of corporate control.
Net income theory
The approach contends that the permutation of fewer inventories and more debt in capital structure in the long-run leads a company to descending expenses. In essence, greater utilization of low-cost sources of financing in capital structures have the effect of diminishing the capital expenditures (Afrasiabi & Ahmadinia, 2011). In principle, the extent of financial advantage in a company is critical in manipulating the average cost of capital as well as the prices of inventory. However, Ahmadinia, Afrasiabishani and Hesami (2012) argue that the approach provides no insights of attaining the most advantageous capital configuration.
Debt tax shield and non-debt tax shield
Miller and Modigliani brought the theory forward. The researchers base their approach on a number of postulations. For instance, the theory assumes that businesses and financiers incur same rates regarding interest borrowing when the economic situation is perfect and frictionless. Taxation, transaction expenditures and default risks are never incurred according to this theory. The non-debt tax shield also referred to as the capital gains structure contends that higher or less utilization of liability in capital structure has insignificant implications regarding gains to the business (Aydogan, 2007). On the other hand, the debt tax shield that relates to tax gains asserts that tax protection made up of liability provides higher percentage of advantages to the company through decreasing the business’ capital cost. Conversely, Miller and Modigliani fail to encompass financial misery and insolvency as debt obligation in their theory.
Asymmetric of information theory
The approach argues that in the capital structure, the managers of businesses get credible and efficient data regarding the firm’s internal rate of cash flows, investment prospects as well as the corporation’s real value through links with the external investors (Baker & Wurgler, 2002). Actually, deficiency of information from the exterior shareholders of a company is a recipe for the undervaluation of shares. However, lack of symmetry in information accessibility among the involved parties leads to the problems of adverse selection as well as moral hazard (Baum & Crosby, 2008).
Free cash flow theory
The approach contends that the amount of cash that remains in a firm after the settlement of its obligations and ventures is invaluable to the company in a number of ways. For instance, the business is able to augment the worth of its stakeholders through the development of innovative products, payment of dividends, making acquisitions as well as reduction of liabilities. In addition, the hypothesis argues that considering the capital structure, the likelihood divergences a company’s executive concerning income misappropriation can be averted through moderating free cash flows by paying interest of debt and shares (Brennan & Schwartz, 2004). In essence, shelling out principal as well as interest of liability significantly decreases free cash flow levels compared to paying of dividends.
Dynamic trade-off theory
Expectation as well as adjustment expenses are major influencers of daily activities of a business organization (Cespedes & Molina, 2010). Actually, accurate investment choices of a business in the context of the dynamic approach are impacted by the future expectations in terms of financing margin. In other words, the availability of funds is significant as either liabilities or equity in the business (Chang et al., 2009). The combination of financing margin and availability of funds forms the cornerstone of the firm’s choices. For instance, De Angelo and Roll (2011) scrutinized the impacts of taxation taking into account the public finance sector. Further, Desai Foley and Hines (2011) examined the relationship of trade-off between tax savings and bankruptcy. In the model, the major ingredients of the firm’s operations include uncertainty, taxes and insolvency expenses. Actually, the theory puts forward that during times of adverse shocks businesses respond by rebalancing without incurring costs. As a result, the businesses incur higher proportions of liabilities thereby taking advantages of the savings from tariffs (Dissanayake, 2012).
Market timing theory
The market timing theory of capital structure argues that business organizations take several measures in occasioning their equity aspects. For instance, when the costs of inventories are overvalued, firms issue new inventories into the economy and subsequently purchase back the shares at times of valuations. Such actions characterized by fluctuations in the value of inventories affect the capital structure dynamics in a number of ways. Baker and Wurgler (2002) postulates that businesses often issue equity when the costs are low. The firms repurchase the inventories when its worth is overvalued. Jensen (2003) proves that the market-timing hypothesis indefatigably influences the capital structure of the business through issuing inventory only when the financiers are willing to increase the company’s future proceeds. In addition, business executives maintain the purchase and selling of stock by timing the trends of in the volume of shares.
The theory proposes that in order to pay off the information imbalance that exists between the investors and the manager, business managers relay financial choices to the financiers to compensate the asymmetry (Kolasinski, 2009).
Analysis of Kuwaiti Non-Financial Listed Companies “Secondary Data”
Global Industry Classification Standard (GICS) is the major tool that helps in classification of industries in various sectors. MCSI and Standard & Poor’s are the companies that developed the GICS. According to the GICS, the financial sector comprises of banks, real estate, insurance, and investment companies. Provision of loans and management of finances are some of the major activities of companies in the financial sector. On the other hand, the non-financial sector comprises of industrial, food, and service companies. These companies provide various products and services that are vital in the economy (Knetch, 2013).
However, in Kuwait, real estate sector is also included in the non-financial sector as opposed to the global Industry Classification Standards GICS. According to the institute of banking studies, real estate is among the elements that constitute the non-financial sector in most of the Middle East countries particularly Kuwait. In essence, the non-financial sector in Kuwait comprises of industrial, services companies, food and real estate. The reason why real estate is considered as non-financial is because real estate in Kuwait is majorly financed by the government and has not developed systems that would enable its classification as financial sector (Salehi & Biglar,2009). Though real estate companies are not considered among the financial sector, 30% of the non-financial firms accounts for the real estate. The real estate companies are rapidly rising in the Middle East particularly in Kuwait. The problem with the industry is that the firms are yet to diversify into the financial services (Roberts, 2002). The reason why there is still slow growth in the diversification as opposed to the western countries’ firms is that most of the resources are sourced from the government or oil industry. In other words, real estate investments are funded by proceeds from oil. Diversification in the financial products will enable the real estate firm be classified within the financial sector. However, since they do not deal in financial services, the real estate firms cannot be classified under the financial sector.
The financial sector accounts for the largest share of market capitalisation and stock turnover of the KSE. On the other hand, the non-financial sector accounts for a small share of the market capitalisation of the KSE. As of 2010, there were 29 companies in the industrial sector that were listed in the KSE. 61 companies in the service sector were listed in the KSE. 6 companies in the food sector were listed in the KSE (Masood, 2010).
The petroleum sector is the major segment in the industrial sector. Kuwait Pipes Industries & Oil Services is one of the major companies in this segment. Ship building is also a major economic activity in Kuwait. Heavy Engineering Industries & Ship Building Co. is one of the major companies that engage in ship building and other heavy engineering works. The assets of the company are worth more than KWD 81 million. Cement manufacturing is also a major economic activity in Kuwait. Kuwait Cement Company is one of the major companies that engage in the manufacture of cement. The assets of the company are worth more than KWD 258 million.
The service industry is a major activity in the non-industrial sector. Telecommunications, hospitality, transport and education are some of the major segments in this sector (Masood, 2010). In 2010, Zain was one of the major companies in the service industry. The company engaged in the provision of the telecommunication services. The assets of the company were worth KWD 3.7 billion. Zain was the largest company in the KSE in terms of market capitalisation. National Mobile Telecommunications is one of the main competitors of Zain. In 2010, the assets of the company were worth more than KWD 1 billion. City Group Company is also a major company in the service sector. Transport is one of the major activities of the company. The assets of City Group Company are worth KWD 58 million. Kuwait Hotels Company is one of the companies in the hospitality industry that is listed in the KSE. In 2010, the assets of the company were worth KWD 15 million.
The food sector is the smallest sector of the non-industrial segment. Only six companies in the food sector are listed in the KSE. Kuwait Food Company is the major company in this sector (Masood, 2010). The assets of the company are worth more than KWD 625 million. Danah Al-Safat Foodstuff Co. is one of the major companies in the food sector that is listed in the KSE. In 2010, the assets of the company were worth KWD 46 million. Kuwait United Poultry Company is another company in the food sector that is listed in the KSE. The company engages in the production of poultry products. The assets of the company are worth more than KWD 15 million.
Currently, a new system has been introduced in Kuwait capital markets. Most companies in the past were listed in KSE. KSE is one of the major and oldest capital markets in Middle East. KSE improved its services in the recent past by introducing NASDAQ X-stream system that ensures transparency in the capital markets and by major players or companies listed in Kuwait capital markets. Most of the firms both in financial and non-fiancial sector were listed by KSE and when multi-asset system known and X-stream most of the companies were transferred into the new system. Afterwards, Kuwait NASDAQ QMX became a home to over 3400 companies estimated to be worth over $1.5trillion. For instance, at the end of the year 2012, the following companies were listed by Kuwait stock exchange under the new X-stream system introduced by NASDAQ.
|Financial sector||101||NBK||National Bank of Kuwait|
|102||GBK||Gulf Bank of Kuwait|
|103||CBK||Commercial Bank of Kuwait|
|104||ABK||Al-Ahli Bank of Kuwait|
|Non-Financial Sector||401||KRE||Kuwait Real Estate|
|402||URE||United Real Estate|
|2013||ALEID||Al-Eid Food Company|
|2014||MIDAN||Al-Maidan Dental Clinic Company|
The new system was adopted by the KSE to offer transparency in the dealings of firms within the capital markets. In addition, the KSE as well as the listed firms were introduced into the system to ensure increased perfomances. KSE entered into an agreement with NASDAQ to provide the X-stream services to the listed firms. The agreement followed the requirements of the global rating companies that capital market adopt the NASDAQ X-stream services to boost their efficiency, transparency and performance. As a result, most of the firms listed in KSE had to adjust to fit within the requirements of the capital markets. The companies that were most affected by the adoption of the X-stream services were found within the financial sector.
Qualitative and Quantitative Research
The data to be gathered from the questionnaire responses will be tested and analysed through descriptive analysis in order to explain the sample used. The qualitative data will be analysed in comparison with both the literature review and the findings of the quantitative data analysis. Common themes and ideas to be grouped together, while areas of distinction to be illustrated. Descriptive data will focus on age, gender, education, position, and years of experience of each CEO, board members, CFO, or executive manager to be interviewed.
To obtain the best correlation approximation values, the study quantitative data analysis will be carried out through the application of regression analysis method, particularly multiple regressions. The multiple regression analysis is used to postulate an outcome whose predicting variables are two or more (Luigi & Sorin, 2010). The multiple regression analysis will be used to determine the research respondents’ proportions that chose various responses. The method will be applied for each group of items available in the questionnaire that ideally corresponds to the formulated research question and objectives (Booth et al., 2005). The multiple regression is applied under the situations where the predicted outcome is more than two. In normal circumstances, the multiple regression take the formula Y = a + Ix + Ex where Y is the dependent variable, (a) is the constant while I and E are the dependent variables.
The Need for Further Research (The Research Problem)
Over the past decades a lot of studies and research related to the reasons that push companies to get loans to finance their projects has been provided.There are also many theories presented on the relationship between the financial performance of the companies and its debts .Most of these studies were related to the economics of which contain tax in its regime. Although there are some researches that included a study of companies that are not subject to the country’s tax system, such as charities and nonprofit organizations, yet these studies concerned companies operating in countries with a tax system
The benefit of including a debt in the capital structure of any company is to take advantage of the tax shield. The benefit of tax shield is to lower the weighted average cost of capital (WACC) to a certain level “optimal capital structure”, which in effect will increase the value of the company. In Kuwait, which is a state that does not contain a tax system, a lot of non-financial companies obtain loans for their activities despite the fact that they will not benefit from the advantage of the tax “tax Shield”.
Therefore, there is a huge gap in the literature regarding the benefit of containing a debt in the companys capital structure and what in reality happens by the non-financial firms in Kuwait. In an attempt to bridge this gap, this study will be the first in Kuwait that examines the hidden reasons behind getting debts by the non-financial firms that are listed in Kuwait Stock Exchange (KSE).
The objective of this research is to explore why do companies in tax exempt economy, Kuwait, are utilizing debt as a source of fund even though they are not benefiting from tax incentives (tax shield). The research will focus on Kuwaiti non-financial listed companies in Kuwait Stock Exchange “KSE”. It will examine the factors that affect the selection of debt in the capital structure in an attempt to discover the reasons for using debts in financing the firms in a tax exempt economy, Kuwait. In order to meet the objectives of the research, one major and two minor questions to be answered.
With the lack of tax incentive, why do non-financial companies in a tax exempt economy, Kuwait, are utilizing debts in their capital structure?
What is the relationship between debt and profitability of these firms?
This study will use a quantitative examination to test hypothesis for Kuwaiti non-financial sector companies. Furthermore, a qualitative analysis will be used to test the reason for utilizing debt as a source of fund for Kuwaiti non-financial sector companies.
As indicated the quantative data will be analysed through the application of regression analysis.There are various situations where multiple regressions are applied in decision-making process (Pandey, 2001). In most cases, the circumstances involve the determination of the correlation existing between the expected outcome and the independent variables. In multiple regressions analysis, the outcomes are determined by several independent variables (Knetch, 2013). In this case , the indipenedent variables are short-term and long-term debts while the dependent variable is the returns on investments ROE. The general formula in the regession analysis was that Y = a + Ix + Ex where Y was the independent variable, (a) was a constant and I and E were the dependent variable. Since most of the financial researches apply the formula ROE = Short-term debt + Long-term debt, the multiple regression analysis that would be applied in this case would be ROE = a + x(Short-term debt) + x(Long-term debt). The values of x will be determined through regression procedures. In this case, I represent the short-term debt while E is the long-term debt.
In the examination of the use of debt in firms from different Kuwaiti non- financial sectors, this study will test the following hypothesis:
- H1: There is a significant relationship between profitability and debt
The data from various companies both from financial and non-financial sectors will be collected through a survey concerning the use debt as a source of finance in tax-exempt economy even though most of the companies do not benefit from tax incentives (Mishra & Tannous, 2010). The data will be collected from the companies’ Chief Executive Officers (CEOs) as well as specialist in this field.
In essence, as one of the most important studies, the the information will be collected through administering properly designed research questionnaires through conducting well-structured in-depth interviews to the unbiased selected participants (Mundy, 2002). The soundly designed research questionnaire will be administered to 65 participants constituting 35 CEOs and 30 experts in the field. Each part of the questionnaire will constitute key items that suitably attend to the research questions. For instance, part one will constitute whether there is a relationship between profitability and debt while part two will elicit the impact of such relationships. Other parts will generate insights amidst offering recommendations to the organizations and encourage the recognition of the importance of such financial relationships in order to augment success of the organization. Some items in the questionnaire will throw light on the reasons for linkages of the two variables and the impacts of the relationship on the organizations’ success.
Conversely, secondary research data will be acquired from the relevant organization records and other documents (Margaritis & Psillaki, 2010). For this particular case, the study intends to trace the relationship between the returns on investments and debts.
Since the financial companies have their own characteristics and their accounting and reporting environments differ from those in other industries when dealing with it , we will select and study non-financial companies listed on the Kuwait Stock Exchange in this research.
As the number of companies listed on the Kuwait Stock Exchange is small relative to other developed markets , and as the number of corporate non-financial listed on the Kuwait Stock Exchange is only 132 company at the end of 2012 , the sample to be the studied in this research will cover all the companies in non-financial sector at Kuwait Stock Exchange for the period 2008 till 2012.
Data Collection Plan
Data collection is planned to be done by means of:
- Numerical data from Institute of Banking Studies (Quantitative). The numerical data that is going to be used in this research will be extracted from Institute of Banking Studies. At the end of each fiscal year the Institute of Banking Studies issues a yearly financial report about all companies and sectors that are listed in Kuwait Stock Exchange. This financial report presents financial ratios, market capitalization, ranking of companies and other financial indicators.
- A multi-part questionnaire containing close-ended questions and interviews will be conducted (Qualitative)
The questionnaire contains five sections:
- Section I : To collect data regarding the respondent’s demographic data. It will include age, educational level, position, experience, organisation’s experience and number of staff.
- Section II :To collect data regarding the organisational objectives. It includes increasing market-share, sustaining current market-share, raising profit, and enhancing customer satisfaction and loyalty. A blank space will be provided for additional comments by respondents.
The questionnaire will be presented in English and Arabic, with the Arabic version being a translation from the English original. Copies will be distributed by hand to all participants, with follow-up phone calls to ensure responses. Structured interviews will be conducted to enhance the findings of the questionnaire. These interviews will be done face-to-face, telephone, and via e-mail correspondence. The interview questions will be extracted from the questionnaire in addition to further questions to be raised.
Data Analysis Plan
The data to be obtained from the questionnaire and interviews responses will be classified, stored, and examined for error of any type. The research results will be analysed through descriptive analysis in order to describe them and a descriptive statistics to describe the sample used. The qualitative data will be analysed in comparison with both the literature review and the findings of the quantitative data analysis. Common themes and ideas will be grouped together, while areas of distinction will be illustrated.
The study quantitative data analysis will be carried out through the application of regression analyisis method, particularly multiple regressions. The multiple regression analysis is used to predict an outcome whose predicting variables are two or more will be used to determine the research respondents’ proportions that chose various responses. The method will be applied for each group of items available in the questionnaire that ideally corresponds to the formulated research question and objectives (Magni, 2010).
Even though multiple regression will majorly be utilized, for accuracy, validity and to obtain the best correlation approximation values, the study quantitative data analysis will also be carried out through the application of the integrated Statistical Analysis Tool (WISAT). Further, other quantitative data analysis techniques including spearman’s correlation, percentages, frequency distribution and deviations will be also be used to determine the research respondents’ proportions that chose various responses (Mahajan & Tartaroglu, 2008). Line graphs, tables as well as statistical bar charts will be used to make sure that quantitative data analysis is simply comprehensible.
Afrasiabi, J & Ahmadinia, H 2011, “How financing effect on capital structure, evidence from Tehran Stock Exchange (TSE),” International Journal of Academic Research, vol.3 no.1, pp.309-316.
Ahmadinia, H, Afrasiabishani, J & Hesami E 2012, “A comprehensive review on capital structure theories,” The Romanian Economic Journal, vol.55 no.45, pp.3-26.
Al-Bashir, M 2011, Global sukuk and Islamic securitization market: Financial engineering and product innovation, Danvers, MA, BRILL.
Aydogan, A 2007, “How persistent is the impact of market timing theory on capital structure,” The Journal of Finance, vol.11 no.4, pp.1051-1083.
Baker, M & Wurgler, J 2002, “Market timing and capital structure”, Journal of Finance, vol.16 no.1, pp.1-32.
Baum, A & Crosby, N 2008, Property investment appraisal, Routledge, London.
Berger, PG, Ofek, E & Yermack, DL 1997, “Managerial entrenchment and capital structure decisions,” Journal of Finance, vol.52 no.4, pp.1411-1438.
Booth, L, Aivazian, V, Demirguc-Kunt, A & Maksimovic, V 2005, “Capital structures in developing countries,” Journal of Finance, vol.56, no.1, pp.87-130.
Brennan, MJ & Schwartz, ES 2004, “Optimal financial policy and firm valuation,” The Journal of Finance, vol.39 no.3, pp.593-607.
Cespedes, J & Molina, AC 2010, “Ownership and capital structure in Kuwait,” Journal of Business Research, vol.63 no.3, pp.248-254.
Chang, C, Lee, CA & Lee, FC 2009, “Determinants of capital structure choice: a structural equation modeling approach,” The Quarterly Review of Economics and Finance, vol.49 no.2, pp.197-213.
De Angelo, H & Roll, RW 2011, “How stable are corporate capital structures?” Journal of Financial Economics, vol.3 no.2, pp.18-22.
Desai, AM, Foley, CF & Hines, RJ 2011, “Capital structure with risky foreign investment,” Journal of Financial Economics, vol.88 no.3, pp.534-553.
Dissanayake, S 2012, “A review of relevant literature on capital structure and efficient market hypothesis,” Global Finance Journal, vol.9 no.3, pp.28–30.
Galai, D & Masulis, RW 1976, “The option-pricing model and the risk factor of stock,” Journal of Financial Economics, vol.3, no.1, pp.53-81.
Jensen, C 2003, “Organization theory and methodology,” The Accounting Review, vol.58 no.2, pp.319 – 339.
Jensen, MC & Meckling, WH 1976, “Theory of the firm: Managerial behavior, agency costs and ownership structure,” Journal of Financial Economics, vol.33 no.3, pp.305-360.
Jones, D 2008, The Report: Kuwait 2008, Oxford, Oxford Business Group.
Knetch, M 2013, Diversification, industry dynamism, and economic performance: The impact of dynamic related diversification on the multi-business firm, London, Springer.
Kolasinski, CA 2009, “Subsidiary debt, capital structure and internal capital markets,” Journal of Financial Economics, vol.94 no.2, pp.327-343.
Leary, MT & Roberts, MR 2005, “Do firms rebalance their capital structures?”,Journal of Finance, vol.60, no.6, pp.2575-2619.
Lehman, D 2008, Kuwait telecom laws and regulations handbook, Washington, DC, International Business Publications.
Luigi, P & Sorin, V 2010, “A review of capital structure theories,” Journal of Finance, vol.36 no.6, pp.142-146.
Magni, CA 2010, “Residual income and value creation: an investigation into the lost – capital paradigm,” European Journal of Operational Research, vol.201 no.2, pp.505-519.
Mahajan, A & Tartaroglu, S 2008, “Equity market timing and capital structure: international evidence,” Journal of Banking and Finance, vol.32 no.5, pp.754-766.
Majluf, NS &Myers, SC 2004, “Corporate financing and investment decisions when firms have information that investors do not have,” Financial Economics, vol.113, pp.187-221.
Margaritis, D & Psillaki, M 2010, “Capital structure, equity ownership and firm performance,” Journal of Banking and Finance, vol.34 no.3, pp.621-632.
Masood, A 2010, Kuwait: Financial system stability assessment – update, Washington, DC, International Monetary Fund.
Mishra, D & Tannous, G 2010, “Securities laws in the host countries and the capital structure of us multinationals,” International Review of Economics, vol.19 no.3, pp.483-500.
Modigliani, F & Miller, MH 1963, “Corporate income taxes and the cost of capital: a correction,” American Economic Review, vol.53, no.3, pp.433-443.
Mundy, B 2002, “The impact of hazardous material on value,” The Appraisal Journal, vol.60 no.2, pp.155-162.
Myers, SC & Majluf, NS 2004, “Corporate financing and investment decisions when firms have information that investors do not have,” Journal of Financial Economics, vol.13 no.2, pp.18-21.
Pandey, L 2001, “Capital structure and the firm characteristics: evidence from an emerging market,” Journal of Financial Economics, vol.5 no.1, pp.21-44.
Rajan, RG & Zingales, L 2005, “What do we know about capital structure? Some evidence from international data,” Journal of Finance, vol.50 no.5, pp.1421-60.
Roberts, MR. 2002, “The dynamics of capital structure: an empirical analysis of a partially observable system,” International Journal of Business and Management, vol.6 no.2, pp.87-98.
Salehi,M & Biglar,K 2009,”Study of the relationship between capital structure measures and performance: evidence from Iran”, International Journal of Business and Management, vol.4 no.1, pp.97-103.
Shyam-Sunder L & Myers, SC 1999, “Testing static trade-off against pecking order models of capital structure,” Journal of Financial Economics, vol.51, pp.219-244.
Stella, P & Lönnberg, Å 2008, Issues in central bank finance and independence, issues 2008-2037, Washington, DC, International Monetary Fund.
Stulz, RM 1990, “Managerial discretion and optimal financing policies,” Journal of Financial Economics, vol.26 no.2, pp.3-27.
Van Binsbergen, JH, Graham, JR & Yang, J 2011, “Optimal capital structure,” Quarterly Review of Economics and Finance, vol.50 no.2 pp.222–233.
Vasiliou, D & Daskalakis, N 2009, “Institutional characteristics and capital structure: a cross-national comparison,” Global Finance Journal, vol.19 no.3, pp.286–306.