The Determinants of Capital Structure: Evidence from GCC and UK Real Estate Sectors

Open access


This paper investigates the determinants of capital structure in the context of the Gulf Cooperation Council (GCC) and United Kingdom (UK) real estate sectors. The results of a bivariate analysis indicate that leverage in the UK is much higher than in GCC countries. This may be attributable to UK companies facing a lower cost of debt, which would facilitate their raising of debt capital from the market. In addition, UK real estate firms tend to be larger and have higher levels of tangibility and retained earnings compared with GCC firms, while GCC firms tend to be more profitable and have more growth opportunities. The results of panel and Tobit regression analyses support both trade-off and pecking order theories; for instance, company size was found to have a significant positive impact on different types of debt measurements (market and book debt ratios), which is consistent with the trade-off theory, while profitability and retained earnings to total assets exhibited a significant negative impact for GCC and UK real estate firms, which is consistent with the pecking order theory. Importantly, these results hold true regardless of whether the regressions are estimated using an OLS, random effects, fixed effects panel estimation or a Tobit model.

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Aalbers M.B. 2016 The financialization of home and the mortgage market crisis Competition & Change no. 2(12). pp. 148-166.

  • Ahmed H. J. A. Hisham N. 2009 Revisiting capital structure theory: A test of pecking order and static order trade-of model from Malaysian Capital Market International Research Journal of Finance and Economics no. 30 pp. 58-65.

  • Al-Najjar B. Hussainey K. 2011 Revisiting the capital-structure puzzle: UK evidence The Journal of Risk Finance no. 12(4) pp. 329-338.

  • Al-Yahyaee K.H. Pham T.M. Walter T.S. 2011 The information content of cash dividend announcements in a unique environment Journal of Banking & Finance no. 35(3) pp. 606-612.

  • Amidu M. 2007 How does dividend policy affect performance of the firm on Ghana stock Exchange Investment Management and Financial Innovations no. 4(2) pp. 103-112.

  • Anwar S. Sun S. 2015 Can the presence of foreign investment affect the capital structure of domestic firms? Journal of Corporate Finance no. 30 pp. 32-43.

  • Baker M. Wurgler J. 2002 Market timing and capital structure The journal of finance no. 57(1) pp. 1-32.

  • Baltagi B. 2008 Econometric analysis of panel data John Wiley & Sons.

  • Bancel F. Mittoo U. R. 2004 Cross-country determinants of capital structure choice: a survey of European firms Financial Management pp. 103-132.

  • Beck T. Demirguc-Kunt A. Martinez Peria M.S. 2008. Bank financing for SMEs around the world: Drivers obstacles business models and lending practices. The World Bank Policy Research Working Paper (4785)

  • Booth L. Aivazian V. Demirguc-Kunt A. Maksimovic V. 2001 Capital structures in developing countries The Journal of Finance no. 56(1) pp. 87-130.

  • Boudry W. I. Kallberg J. G. Liu C. H. 2010 An analysis of REIT security issuance decisions Real Estate Economics no. 38(1) pp. 91-120.

  • Brounen D. De Jong A. Koedijk K. 2006 Capital structure policies in Europe: Survey evidence Journal of Banking & Finance no. 30(5) pp. 1409-1442.

  • Brown D. T. Riddiough T. J. 2003 Financing choice and liability structure of real estate investment trusts Real Estate Economics no. 31(3) pp. 313-346.

  • Chakraborty I. 2010 Capital structure in an emerging stock market: The case of India Research in international business and finance no. 24(3) pp. 295-314.

  • Cheikh N.B. Naceur M.S.B. Kanaan M.O. Rault C. 2018 Oil Prices and GCC Stock Markets: New Evidence from Smooth Transition Models International Monetary Fund Working Paper (WP/18/98).

  • Chen D. H. Chen C. D. Chen J. Huang Y. F. 2013 Panel data analyses of the pecking order theory and the market timing theory of capital structure in Taiwan International Review of Economics & Finance no. 27 pp. 1-13.

  • Cortez M. A. Susanto S. 2012 The determinants of corporate capital structure: evidence from Japanese manufacturing companies Journal of International Business Research no. 11(3) pp. 121.

  • Cvijanović D. 2014 Real estate prices and firm capital structure The Review of Financial Studies no. 27(9) pp. 2690-2735.

  • DeAngelo H. Masulis R. W. 1980 Optimal capital structure under corporate and personal taxation Journal of financial economics no. 8(1) pp. 3-29.

  • DeAngelo H. DeAngelo L. Stulz R. M. 2006 Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory Journal of Financial economics no. 81(2) pp. 227-254.

  • El Bahsh R. Alattar A. Yusuf A. N. 2018 Firm Industry and Country Level Determinants of Capital Structure: Evidence from Jordan. International Journal of Economics and Financial Issues no. 8(2) pp. 175-190.

  • Elsas R. Florysiak D. 2015 Dynamic capital structure adjustment and the impact of fractional dependent variables Journal of Financial and Quantitative Analysis no. 50(5) pp. 1105-1133.

  • Elsas R. Flannery M. J. Garfinkel J. A. 2014 Financing major investments: information about capital structure decisions Review of Finance no. 18(4) pp. 1341-1386.

  • Ertugrul M. Giambona E. 2011 Property segment and REIT capital structure The Journal of Real Estate Finance and Economics no. 43(4) pp. 505-526.

  • Fama E. F. French K. R. 2001 Disappearing dividends: changing firm characteristics or lower propensity to pay? Journal of Financial economics no. 60(1) pp. 3-43.

  • Fama E. F. French K. R. 2002 Testing trade-off and pecking order predictions about dividends and debt Review of financial studies no. 15(1) pp. 1-33.

  • Fan J. P. Titman S. Twite G. 2012 An international comparison of capital structure and debt maturity choices Journal of Financial and quantitative Analysis no. 47(1) pp. 23-56.

  • Feng Z. Price S. M. Sirmans C. 2011 An overview of equity real estate investment trusts (REITs): 1993–2009 Journal of Real Estate Literature no. 19(2) pp. 307-343.

  • Fougère D. Lecat R. Ray S. 2017 Real estate prices and corporate investment: theory and evidence of heterogeneous effects across firms Centre for Economic Policy Research (11883).

  • Frank M. Z. Goyal V. K. 2009 Capital structure decisions: which factors are reliably important? Financial management no. 38(1) pp. 1-37.

  • Graham J. R. Harvey C. R. 2001 The theory and practice of corporate finance: Evidence from the field Journal of financial economics no. 60(2) pp. 187-243.

  • Graham J. R. Leary M. T. Roberts M. R. 2015 A century of capital structure: The leveraging of corporate America Journal of Financial Economics no. 118(3) pp. 658-683.

  • Grossman S. J. Hart O. D. 1982 Corporate financial structure and managerial incentives In The economics of information and uncertainty pp. 107-140 University of Chicago Press.

  • Han B. 2006 Insider ownership and firm value: evidence from real estate investment trusts The Journal of Real Estate Finance and Economics no. 32(4) pp. 471-493.

  • Harris M. Raviv A. 1990 Capital structure and the informational role of debt The Journal of Finance no. 45(2) pp. 321-349.

  • Hovakimian A. Hovakimian G. Tehranian H. 2004 Determinants of target capital structure: The case of dual debt and equity issues Journal of financial economics no. 71(3) pp. 517-540.

  • Huang G. Song F. M. 2006 The determinants of capital structure: Evidence from China China Economic Review no. 17(1) pp. 14-36.

  • Jensen M. C. 1986 Agency cost of free cash flow corporate finance and takeovers. Corporate Finance and Takeovers American Economic Review no. 76(2).

  • Kashefi-Pour E. Lasfer M. Carapeto M. 2010 The Determinants of Capital Structure across Firms’ Sizes: The UK Main and AIM Markets Evidence.

  • Kayhan A. Titman S. 2007 Firms’ histories and their capital structures Journal of financial Economics no. 83(1) pp. 1-32.

  • Köksal B. Orman C. 2015 Determinants of capital structure: evidence from a major developing economy Small Business Economics no. 44(2) pp. 255-282.

  • Lemmon M. Liu L. X. Mao M. Q. Nini G. 2014 Securitization and capital structure in nonfinancial firms: An empirical investigation. The Journal of Finance no. 69(4) pp. 1787-1825.

  • Margaritis D. Psillaki M. 2007 Capital structure and firm efficiency Journal of Business Finance & Accounting no. 34(9-10) pp. 1447-1469.

  • Mazur K. 2007 The determinants of capital structure choice: evidence from Polish companies International Advances in Economic Research no. 13(4) pp. 495-514.

  • Modigliani F. Miller M. H. 1958 The cost of capital corporation finance and the theory of investment The American economic review pp. 261-297.

  • Morri G. Beretta C. 2008 The capital structure determinants of REITs. Is it a peculiar industry? Journal of European Real Estate Research no. 1(1) pp. 6-57.

  • Morri G. Cristanziani F. 2009 What determines the capital structure of real estate companies? An analysis of the EPRA/NAREIT Europe Index Journal of Property Investment & Finance no. 27(4) pp. 318-372.

  • Mukherjee S. Mahakud J. 2010 Dynamic adjustment towards target capital structure: evidence from Indian companies Journal of Advances in Management Research no. 7(2) pp. 250-266.

  • Myers S. C. Majluf N. S. 1984 Corporate financing and investment decisions when firms have information that investors do not have Journal of financial economics no. 13(2) pp. 187-221.

  • Myers S. C. 1977 Determinants of corporate borrowing Journal of financial economics no. 5(2) pp. 147-175.

  • Myers S. C. 1984 The capital structure puzzle The Journal of Finance no. 39(3) pp. 574-592.

  • Ooi J. T. Ong S. E. Li L. 2010 An analysis of the financing decisions of REITs: the role of market timing and target leverage The Journal of Real Estate Finance and Economics no. 40(2) pp. 130-160.

  • Ott S. H. Riddiough T. J. Yi H. C. 2005 Finance investment and investment performance: Evidence from the REIT sector Real Estate Economics no. 33(1) pp. 203-235.

  • Penrose E. T. 1952 Biological analogies in the theory of the firm American Economic Review.

  • Property Industry Alliance 2017 Property Data Report 2017 Facts and figures about the UK commercial property industry to year-end 2016 PIA Property Data Report 2017

  • Rajan R. G. Zingales L. 1995 What do we know about capital structure? Some evidence from international data. The journal of Finance no. 50(5) pp. 1421-1460.

  • Ramlall I. 2009 Determinants of capital structure among non-quoted Mauritian firms under specificity of leverage: Looking for a modified pecking order theory International Research Journal of Finance and Economics no. 31(31) pp. 83-92.

  • Sbeiti W. 2010 The determinants of capital structure: evidence from the GCC countries International Research Journal of Finance and Economics no. 47 pp. 56-82.

  • Serrasqueiro Z. Caetano A. 2015 Trade-Off Theory versus Pecking Order Theory: capital structure decisions in a peripheral region of Portugal Journal of Business Economics and Management no. 16(2) pp. 445-466.

  • Shah A. Khan S. 2007 Determinants of capital structure: Evidence from Pakistani panel data International review of business research papers no. 3(4) pp. 265-282.

  • Siddik M. N. A. Kabiraj S. Joghee S. 2017 Impacts of capital structure on performance of banks in a developing economy: evidence from Bangladesh International journal of financial studies no. 5(2) pp. 13.

  • Stewart J. 2013 Tobit or not tobit? Journal of Economic and Social Measurement no. 38(3) pp. 263-290.

  • Thies C. F. Klock M. S. 1992 Determinants of capital structure Review of Financial Economics no. 1(2) pp. 40.

  • Timmons J. A. 2004 Opportunity recognition. The portable MBA in entrepreneurship no. 3 pp. 29-70.

  • Tong G. Green C. J. 2005 Pecking order or trade-off hypothesis? Evidence on the capital structure of Chinese companies Applied Economics no. 37(19) pp. 2179-2189.

  • Vohra R. 2017 The Impact of Oil Prices on GCC Economies International Journal of Business and Social Science no. 8(2) pp. 7-14.

  • Wooldridge J. M. 2015 Introductory econometrics: A modern approach Nelson Education.

  • Yousef I. Patra S. Tanna S. 2016 Signaling and Lifecycle Theories in the Banking Sectors of GCC Frontier Markets: An Empirical Assessment Handbook of Frontier Markets (pp. 49-63).

  • Yousef I. Tanna S. Patra S. 2019 Testing Dividend Life Cycle Theory in Islamic and Commercial Banking Sectors of GCC Countries International Journal of Islamic and Middle Eastern Finance and Management no. 1(12) forthcoming.

  • Yue H. Y. 2011 Determinants of corporate capital structure under different debt maturities International Research Journal of Finance and Economics no. 66 pp. 99-106.

  • Zeitun R. 2014 Corporate governance capital structure and corporate performance: evidence from GCC countries Review of Middle East Economics and Finance Rev. Middle East Econ. Fin. no. 10(1) pp.75-96.

Journal information
Impact Factor

CiteScore 2018: 0.64

SCImago Journal Rank (SJR) 2018: 0.275
Source Normalized Impact per Paper (SNIP) 2018: 0.825

All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 204 204 98
PDF Downloads 118 118 46