Shariah compliance and capital structure: evidence from Boursa Kuwait

Purpose This study aims to examine whether the capital structure determinants identified by Rajan and Zingales (1995) and Frank and Goyal (2009) hold in Kuwait, a tax-free market with a significant presence of Islamic firms, and whether Shariah compliance systematically influences leverage. Design/methodology/approach Using panel data from Boursa Kuwait (2013–2022), the authors estimate fixed-effects regressions that incorporate Islamic status as a key explanatory variable for the capital structure. They control for standard firm-level determinants and test robustness using multiple leverage definitions. Findings While return on equity (ROE), firm size and dividends significantly affect leverage, tangibility and the market-to-book ratio do not have a significant impact. Shariah-compliant firms exhibit 25%–30% lower leverage, reflecting religious and institutional constraints on debt financing. These patterns persist across alternative leverage measures. Research limitations/implications The focus on Kuwait limits the generalizability of the findings. Future work should examine cross-country variation and assess how instruments like Sukuk affect capital structure. Governance and macro-level factors also warrant further study. Practical implications The findings suggest that ethical and institutional boundaries shape capital structure decisions in Islamic firms. Financial models in dual banking systems must consider these constraints. Expanding access to Shariah-compliant instruments is essential to support firm growth and ensure financial inclusion. Originality/value By integrating Islamic status into capital structure models, this study broadens the theoretical and empirical understanding of financing behavior in religiously segmented, tax-neutral markets. This study fills a gap in the literature by providing the first large-scale panel data analysis of the effect of Shariah compliance on corporate leverage in Kuwait’s listed firms.