Abstract
Purpose The purpose of this paper is to investigate how Islamic banks (IBs) and conventional banks (CBs) in Malaysia choose their capital structure and what are the most significant factors that affect their decisions regarding their capital structure. Design/methodology/approach This study applies the autoregressive distributed lag (ARDL) approach for a sample of 54 Banks listed on Malaysian stock market over the period 2010-2018. Findings The study findings show that the capital structure of IBs appears to be driven by similar factors to those previously found in the corporate finance literature. They also provide evidence of the existence of a long-run and short-run relationship between leverage and its main determinants for Islamic and CBs. However, the results show that various independent variables on the capital structure do exhibit different effects (in magnitude of the coefficient) among Islamic and CBs. Moreover, we find that IBs slowly adjust their capital structure toward the desired leverage ratio than CBs. Research limitations/implications This research contributes to the theory in re-validating capital structure theories on IBs. It helps understand the capital structure of IBs in comparison with CBs. If in conventional finance, the standard presiding decisions of an economic agent is optimizing the risk-return ratio, this standard is not the only or the primary decision criterion in the Islamic finance context where spiritual and theological considerations are taken into consideration. Practical implications This research can contribute to managers in understanding the choice of capital structure for IBs within the bound of Sharia requirement. Such an understanding provides managers with applied knowledge of determining their appropriate capital structure to compete locally and globally in which IBs operate. Originality/value This paper offers some insights on the determinants of capital structure by investigating Islamic and CBs. It explores the implication of relevant Islamic principles on capital structure. Moreover, it analyses the determinants of capital structure using ARDL method that permits to identify the short-run and long-run relationships between capital structure and its main determinants.