Debt complexity, working capital and sharia governance: moderating financing constraints in Indonesian and Malaysian listed firms

Purpose The purpose of this paper is to analyze how debt complexity (DC) and cash conversion cycles affect investment allocation in Islamic and conventional firms and to examine whether Sharia governance moderates financing constraints. Design/methodology/approach The authors use 9,807 firm-years of Indonesian and Malaysian listed companies (2016–2024) using interaction models, propensity score matching (PSM) and robustness tests including bootstrap analysis, Tobit regression and placebo tests. Findings Empirical results indicate that Islamic firms are more resilient to financial frictions than conventional firms. They experience about 81 % weaker investment cuts from DC (net effects: ß = −0.0007 vs −0.0035) and around 32% lower sensitivity to working capital pressures. Moreover, PSM results confirm that these gaps are structural. Crisis period analysis during COVID-19 shows that the protection is systematic rather than purely cyclical. Research limitations/implications The sample is limited to non-financial firms in Malaysia and Indonesia, potentially restricting generalizability. Binary Sharia classification does not capture variation in adherence quality. Practical implications Corporate managers can consider Islamic financing as a governance-based solution when facing complex debt structures. Islamic financial institutions can market products emphasizing empirically validated protective mechanisms. Regulators should incorporate these structural differences when designing capital requirements. Originality/value To the best of the author’s knowledge, this paper is the first to provide empirical quantification of how Islamic governance reduces financing constraints. This paper finds that the effect of DC is approximately 81% weaker and that working capital sensitivity is approximately 3 lower for Sharia-compliant firms, based on interaction model estimates confirmed by PSM.