The Quarterly Review of Economics and Finance 63 (2017) 2133

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The Quarterly Review of Economics and Finance

journal homepage: www.elsevier.com/locate/qref

Do nancial crises alter the dynamics of corporate capital structure?

Evidence from GCC countries
Rami Zeitun, Akram Temimi, Karim Mimouni
Department of Finance and Economics, College of Business and Economics, Qatar University, P.O. Box 2713, Doha, Qatar

a r t i c l e i n f o a b s t r a c t

Article history: We study the impact of the 2008 nancial crisis on the capital structure of GCC rms. We employ a
Received 29 January 2016 dataset covering a 10-year period from eight sectors to investigate patterns in corporate leverage before
Received in revised form 1 May 2016 and after the crisis and identify changes in debt nancing. Our results indicate that leverage ratios were
Accepted 11 May 2016
negatively and signicantly impacted by the 2008 crisis due to lack of debt supply by lenders. We also
Available online 18 May 2016
nd that the demand for debt by rms is the main driver of leverage before the crisis whereas the demand
for debt by rms and the supply of debt by lenders are both important determinants of leverage after the
JEL classication:
crisis. Moreover, we nd that rms adjust their leverage ratios toward the target leverage much slower
G3
after the crisis. Our results also indicate that the impact of the crisis on the capital structure is different
Keywords: across industries and across countries. These results are of paramount importance for stakeholders to
Dynamic capital structure understand and mitigate the impact of crises on capital structure.
Crisis 2016 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.
Debt demand
Debt supply

1. Introduction
Economic downturns have always challenged nancial theories
given that the assumptions of normality and well-behaved markets
are usually violated, and capital structure theories are no exception.
On one hand, crises reduce the supply of lending resources limiting
considerably the ability of rms to borrow. On the other hand, rms
may need more debt nancing during nancial turmoil to cope with
the lack of internal resources. As a result, the exact effects of a crisis
on rms capital structure remain partially unknown.
The importance of capital structure has been an ongoing
research debate since the irrelevance results of Modigliani and
Miller (1958). The same authors have acknowledged that the capital
structure matter under market frictions (Modigliani & Miller, 1963).
More than half a century later, the exact reasons underlying cap-
ital structure decisions still remain partially unrevealed (Graham,
Leary, & Roberts, 2015).
Two traditional approaches have emerged attempting to explain
capital structure decisions. The rst, the trade-off theory (Bradley,
Jarrell, & Kim, 1984; Jensen & Meckling, 1976; Jensen, 1986; Kraus
& Litzenberger, 1973; Morellec, 2003; Myers, 1977), asserts that
when searching for the optimal capital structure, rms balance the
Corresponding author. Tel.: +974 44037753.
E-mail addresses: rami.zeitun@qu.edu.qa (R. Zeitun), atemimi@qu.edu.edu
(A. Temimi), kmimouni@qu.edu.qa (K. Mimouni).
benets of debt achieved through tax savings and the reduction of
managerial agency costs; against bankruptcy costs and the agency
costs between shareholders and bondholders. A dynamic extension
of this theory allows rms to deviate from their target leverage
where rms adjust their leverage by balancing the benets from
being at their optimal capital structure and the adjustment costs
toward the target leverage (Antoniou, Guney, & Paudyal, 2008;
Frank & Goyal, 2004; Huang & Ritter, 2009; ztekin & Flannery,
2012; ztekin, 2015). The second, the pecking order theory, does
not assume the existence of an optimal capital structure and post-
ulates that capital structure decisions are driven by the costs of
adverse selection between the rm and outside investors. When
nancing their operations, the managers attempt to reduce the
asymmetry costs in capital markets. According to the pecking order
theory, the rm rst uses internal resources, then issues debt if
internal resources are insufcient, and nally issues external equity
believed to be the most expensive (Myers & Majluf, 1984).
As the two frameworks focus on different market imperfections,
neither can exclusively account for the observed leverage patterns,
and for the observed correlations between capital structure and
the various rm-specic and macroeconomic factors. For instance,
the pecking order framework is more appropriate for mature rms
with limited growth opportunities (Myers & Majluf, 1984) while the
tradeoff framework is more appropriate for fast growing rms with
highly intangible assets, as agency costs between shareholders and
bondholders are of rst order importance in this case. More gener-
ally, if the adverse selection costs of issuing equity are large while

http://dx.doi.org/10.1016/j.qref.2016.05.004
1062-9769/ 2016 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.
22 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133
agency costs and taxes are not important, the pecking order frame-
work is more suitable. However, if agency costs and tax benets
are large compared to the adverse selection costs of equity, then
the tradeoff framework will lead to better predictions.
However, in most situations, all these dimensions may be
important. Since the different market frictions lead to different pre-
dictions on the relationship between leverage and its determinants,
the complex interactions of these forces makes it challenging to
account for the observed capital structure patterns and to iden-
tify the effect of the different factors affecting capital structure
decisions.
If these two theoretical frameworks lead to conicting predic-
tions when the supply of capital by lenders is perfectly elastic as
is assumed by most of the existent literature, the ndings may be
even more ambiguous during, and after nancial crises where the
assumption of perfect elasticity of the supply of credit does not hold
anymore.
A growing body of research (Akbar, Rehman, & Ormrod, 2013;
Faulkender & Petersen, 2006; Judge & Korzhenitskaya, 2012; Leary,
2009; Lemmon & Roberts, 2010; Su, 2009) investigates the effect
of the supply of capital on the capital structure of rms, and nds
that supply conditions have a signicant effect on corporate lever-
age. In particular, nancial crises provide a natural experiment
for investigating the effect of supply shocks on rm nancing
decisions. During crises, lending becomes scarce and more expen-
sive, risks increase, and the rms prospects are usually modest
(Harrison & Widjaja, 2014, Akbar et al., 2013; Ivashina & Scharfstein,
2010; Vithessonthi & Tongurai, 2015). These abnormal conditions
are expected to affect both the demand and supply of debt. On one
hand, banks usually face liquidity problems during periods of crises
limiting signicantly their ability to lend and bondholders looking
for safer investment such as commodities are more reluctant to buy
bonds. On the other hand, rms are more cautious using leverage
due to wrong signals they may send to market participants. At the
same time, rms may need more debt to cope with the low internal
cash ows during turmoil.
The interactions of these factors make the predictions as to the
impact of the crisis on the rms leverage challenging and motivate
this study to investigate any changing patterns. The 2008 nancial
crisis offers a unique laboratory to test these effects. Hence, the
central questions in this paper are: what drives the leverage ratios
in GCC countries before and after the 2008 nancial crisis? How
does the absence of corporate taxes impact the borrowing behav-
ior of rms following the crisis? Are the leverage ratios impacted
differently by the crisis across industries and across countries?
Which dimensions matter in determining the leverage ratios after
the crisis: micro versus macro dimension and long-term versus
short-term dimension?
The 2008 nancial crisis has attracted signicant amount of
research (Atkinson, Luttrell, & Rosenblum, 2013; Brunnermeier
& Pedersen, 2009; Claessens & Kodres, 2014; Gennaioli, Shleifer,
& Vishny, 2012; Reinhart & Rogoff, 2008; Thakor, 2015a, 2015b,
among many others). The consensus of the prior literature is that
the crisis adversely affected the credit supply (see Thakor (2015a,
2015b) and Lo (2012) for detailed accounts of the crisis). DeYoung,
Gron, Torna and Winton (2015) and Ivashina and Scharfstein (2010)
show that US banks, faced with less access to deposit nancing,
have signicantly reduced lending to rms during the crisis.
While the literature on the general causes and macroeconomic
effects of the crisis is large, the literature on the effect of the crisis on
corporate capital structure is scant. The few existing studies inves-
tigating the effect of the nancial 2008 crisis on corporate capital
structure for different countries and regions of the world concur
that economic downturns have a signicant impact on the rms
nancing behavior (Akbar et al., 2013; Duchin, Ozbas, & Sensoy,
2010; Harrison & Widjaja, 2014; Iqbal & Kume, 2014; Judge &
Korzhenitskaya, 2012).
This paper contributes to this literature by providing evidence
on the impact of the crisis on the capital structure of rms in GCC
countries. To our knowledge, this is the rst study that attempts
to reveal any patterns related to nancial crises in an environ-
ment where traditional capital structure theories predictions may
not be as expected. When making capital structure choices, rms
may balance the cost of debt and the tax shield benets from debt.
GCC countries have very low corporate taxes and therefore such
compromise does not hold. Accordingly, during nancial down-
turns, rms use of debt may be driven by considerations other than
tax benets. Hence, scal reforms (Mirrlees et al., 2012; Schepens,
2016) in other tax-paying countries that may be used prior or dur-
ing a nancial crisis to mitigate its adverse effects will be inefcient
in the GCC region. Investigating what drives the leverage ratios in
the GCC countries before and after the crisis would help identifying
the appropriate reforms and support during nancial downturns.
The ndings of this study are interesting for several reasons.
First, the GCC region is an ideal environment to investigate how
the capital structure determinants, other than taxes, impact corpo-
rate capital structure during crises. Second, the ndings for this
region would also highlight whether the effects of these deter-
minants strengthen or weaken prior, during, and after a crisis.
Understanding these complex relationships is crucial to analyze
and mitigate the adverse effects of the crisis. Finally, once these
drivers of the capital structure in the GCC region are identied, they
can be used in tax-paying countries to offer alternative solutions to
tax reforms to mitigate the effect of crises.
Following the existing literature which has explored a vari-
ety of factors including rm-specic, macroeconomic, and stock
market factors, that may affect the capital structure of rms
(Antoniou et al., 2008; Belkhir, Maghyereh, & Awartani, 2016;
Booth, Aivazian, Demirguc-Kunt, & Maksimovic, 2001; Deesomsak,
Paudyal, & Pescetto, 2004; Fan, Titman, & Twite, 2012; Rajan &
Zingales, 1995; Sbeiti, 2010), we investigate how the relation-
ship between these factors and the capital structure of rms was
affected by the nancial crisis. Since the relationship between
leverage and its determinants is dynamic, we use a target adjust-
ment model where rms are allowed to deviate from their optimal
leverage and to adjust it over time. To estimate our dynamic panel
model, we use a System Generalized Method of Moments estimator.
We employ a large dataset of 270 listed rms from eight sectors
in the GCC region. Our pooled regressions show that leverage after
the crisis is lower compared to what is predicted by the control
variables. This suggests that the supply of credit is also an important
factor in rms capital structure in the post-crisis period. When
we explore this further by investigating leverage decisions before
and after the crisis, the results indicate that the capital structure
decisions operate primarily through the demand channel before
the crisis while the supply and demand play pivotal roles after the
crisis. Specically, the supply acquires a critical importance after
the crisis as the suppliers of credit, faced with liquidity constraints,
select rms eligible for credit based on their size and the nature of
their assets.
Our results also indicate that a mean and median analysis using
the pooled data does not reveal the complete effects of the crisis.
Splitting the data by industry however, unveils substantial differ-
ences across the sectors of the economy depending on their future
prospects.
We also nd that the long-term rm specic factors like size
and growth opportunities are important determinants of leverage
after the crisis and that the variability of current earnings due to
the crisis does not impact leverage. Moreover, we nd that the
effects of the macroeconomic factors weaken after the crisis. In the
 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133
post-crisis period, the rm specic factors and the industry where
rms operate play a key role.
Furthermore, our ndings show that on average rms adjust
slowly to their optimal leverage ratios after the crisis compared to
pre-crisis. This suggests that rms take more time to reach their
target leverage due to the limited supply of credit.
Finally, the impact of the crisis on leverage is different across
countries. More specically, we nd that the leverage ratios are
higher than what is predicted by the control variables in Saudi Ara-
bia whereas they are lower than what is predicted by the control
variables for Kuwait and Oman. This may be explained by the avail-
ability of large oil revenues in Saudi Arabia that offered a strong
hedge against any potential liquidity shortage from debt suppliers.
The rest of the paper proceeds as follows. Section 2 provides
a brief review of capital structure theories. Section 3 presents the
data and the estimation technique. Section 4 reports and discusses
the results. Finally, Section 5 concludes.
2. Capital structure theories and expected signs
In the heart of the capital structure literature are two main com-
peting theories that attempt to explain reasons underlying the use
of leverage. The rst theory, often referred to as the trade-off the-
ory, asserts that rms use of leverage is a balance between the
tax benets of debt and bankruptcy costs resulting from exces-
sive use of debt. Agency costs are also encompassed in this theory
and are believed to impact the rms choice to use debt. The opti-
mal capital structure is thus reached when the marginal benets
from one extra unit of debt equates its marginal costs. While
the trade-off theory emphasizes the search of an optimal cap-
ital structure by weighting the benets and costs of debt, the
pecking order theory of capital structure suggests that a rm has
no specic leverage ratio that maximizes its value and that the
choice of leverage is the result of information asymmetry in the
market.
2.1. The trade-off theory
The literature (Antoniou et al., 2008; Booth et al., 2001;
Deesomsak et al., 2004; Frank & Goyal, 2009; Rajan & Zingales,
1995; Titman & Wessels, 1988) has identied key leverage factors
that affect either the benets or the costs of leverage. Below is a
brief review of these factors under the trade-off theory.
First, growth opportunities of the rm are negatively related
to leverage. Firms with better future prospects usually experience
higher nancial distress and agency costs between shareholders
and bondholders due to either risk shifting (Jensen & Meckling,
1976) or underinvestment (Myers, 1977). As a result, they tend to
use less debt in their optimal capital structure.
Second, tangibility effects on leverage are mixed. On one hand,
tangibility implies lower costs of nancial distress (they represent
a collateral in case of bankruptcy) and lower agency costs between
shareholders and bondholders (due to reduced risk shifting). These
lower costs imply a positive relationship between tangibility and
leverage (Frank & Goyal, 2009; Rajan & Zingales, 1995; Titman
& Wessels, 1988). On the other hand, however, the disciplinary
role of debt becomes less important in rms with large tangible
assets implying a negative relationship between tangibility and
debt (Grossman Sanford & Hart, 1982; Titman & Wessels, 1988).
Third, according to the trade-off theory, protability positively
impacts leverage. This results from the low costs of nancial dis-
tress in protable rms, the increased benets of the tax shield,
and the low managerial agency costs as protable rms with larger
amounts of cash tend to use more debt to exert closer monitoring
on managers to ensure an adequate use of free cash-ows.
23
Fourth, size is positively related to leverage as bigger rms have
usually lower likelihood of default and therefore lower nancial
distress costs. (Ang, Chua, & McConnell, 1982; Rajan & Zingales,
1995; Titman & Wessels, 1988; Warner, 1977).
Fifth, risk is negatively related to leverage as rms with higher
volatility of their earnings have higher costs of nancial distress
(Bancel & Mittoo, 2004; Brierley & Bunn, 2005; Frank & Goyal, 2009;
Harris & Raviv, 1991).
Finally, the relationship between liquidity and leverage is uncer-
tain. On one hand, the rm has incentives to use more debt to
discipline and monitor managers with large liquidities. On the other
hand, the rm may choose to use less debt to reduce agency costs
between shareholders and bondholders given that shareholders
can expropriate liquid assets easier.
The macroeconomic conditions may also impact the leverage
ratio of a rm. Among the most inuential macroeconomic vari-
ables on leverage, we include in this study ination and GDP
growth. Ination has a positive impact on leverage. High ina-
tion levels reduces the real cost of borrowing encouraging rms to
employ more debt. (Kuhnhausen & Stieber, 2014; Kksal, Orman,
& Oduncu, 2013; Frank & Goyal, 2009).
The GDP growth impact on leverage is uncertain. Countries with
high GDP growth offer better growth opportunities for their rms
(which negatively impacts leverage) but at the same time they are
more protable (which positively impacts leverage).
Lastly, the stock market development may impact leverage.
According to the predictions of the trade-off theory the effect
of stock market development is uncertain. More developed stock
markets reduce agency costs between shareholders and both bond-
holders (as they provide more information to bondholders) and
managers (stock markets may be used by shareholders to discipline
managers who do not act in their best interest). However, the devel-
opment of stock markets reduces the costs of equity borrowings
and may encourage rms to use more equity nancing. Demirgc-
Kunt and Maksimovic (1996) nd that stock market development
is positively related to leverage in developing countries and nega-
tively related to leverage in developed countries.
2.2. The pecking order theory
The second theory attempting to explain the use debt is the
pecking order theory, which postulates that rms will rst use
internal resources. When those resources are depleted, the rm
then turns to debt and lastly considers raising external equity, usu-
ally more expensive. Below, we review the factors discussed in
Section 2.1 above and analyze their impact on leverage under the
pecking order theory.
First, the pecking order theory postulates a positive relation-
ship between growth opportunities and leverage given that growth
requires supplementary nancing resources to fund future invest-
ments (Frank & Goyal, 2008; Myers & Majluf, 1984).
Second, tangibility has a negative effect on leverage as rms
with more tangible assets tend to have less information asymmetry
reducing the cost of equity (Frank & Goyal, 2008). This makes equity
nancing more attractive.
Third, according to the pecking order theory, protability has a
negative impact on leverage since large prots are associated with
more internal resources to nance projects and therefore less need
for debt funding (Myers & Majluf, 1984).
Fourth, the pecking order theory asserts that size has a negative
impact on leverage since, as discussed above, large rms tend to
experience less information asymmetry lowering the cost of equity
(Fama & Jensen, 1983; Rajan & Zingales, 1995). As a result, rms will
issue more equity to nance their long term capital needs.
Fifth, risk is positively related to leverage as rms with volatile
earnings suffer more from adverse selection (Frank & Goyal, 2009).
24 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133
Table 1
Impact of rm-specic and macroeconomic factors on the capital structure.
Category Variable
Growth opportunities Annual growth in total assets (GTA)
Tangibility Net xed assets/Total assets (NFATA)
Prot Return on assets (ROA)
Size Logarithm of total assets (LTA)
Liquidity Current assets to current liabilities (CATCL)
Risk Volatility of EBITD
Ination Percentage change in GDP deator
GDP growth Per capita real GDP growth (GDPG)
Stock market development Market capitalization/GDP (MCR)
Finally, liquidity is negatively related to leverage. More liquid
rms may use these internal resources as a potential nancing
mechanism and hence will be less dependent on debt.
Regarding the macroeconomic variables, the pecking order the-
ory does not provide guidance for the impact of ination on
leverage. Moreover, this theory predicts that GDP growth effect on
leverage is mixed. GDP growth will negatively impact leverage as
rms generate more internal funds in a prosper economy. However,
GDP growth is associated with more growth opportunities which
has a positive impact on leverage
2.3. Evidence from the empirical literature
The capital structure empirical literature attempted to study
these effects to conrm the predictions of both theories when they
concur and to disentangle which impact prevails when theories
predictions are mixed.
Most of the empirical literature nds a negative relationship
between growth opportunities and leverage (Antoniou et al., 2008;
Booth et al., 2001; Deesomsak et al., 2004; Fan et al., 2012; Rajan
& Zingales, 1995), a positive relationship between tangibility and
leverage (Antoniou et al., 2008; Fan et al., 2012; Frank & Goyal,
2009; Rajan & Zingales, 1995), a negative relationship between
leverage and protability (Antoniou et al., 2008; Belkhir et al., 2016;
Booth et al., 2001; Deesomsak et al., 2004; Ebrahim, Girma, Shah, &
Williams, 2014; Frank & Goyal, 2009; Rajan & Zingales, 1995; Sbeiti,
2010; Titman & Wessels, 1988), a positive impact of size on lever-
age (Antoniou et al., 2008; Booth et al., 2001; Rajan & Zingales, 1995
and Titman & Wessels, 1988), an inconclusive relationship between
liquidity and leverage (Fan et al., 2012; Kksal et al., 2013; Ozkan,
2001; ztekin & Flannery, 2012) and between GDP growth and
leverage (Fan et al., 2012; Frank & Goyal, 2009; Kksal et al., 2013),
a negative relationship between leverage and risk (Bancel & Mittoo,
2004; Brierley & Bunn, 2005; Harris & Raviv, 1991;Frank & Goyal,
2009). Finally, the impact of stock market development on lever-
age seems to be country dependent (Demirgc-Kunt & Maksimovic,
1996; Giannetti, 2003; Padachi & Seetanah, 2007).
Table 1 summarizes the effect of these variables according to
the trade-off theory, the pecking order theory, and the empirical
ndings in the literature.
2.4. Capital structure and nancial crises
Prior work has analyzed the effect of nancial crises on the capi-
tal structure of rms in different geographical regions. Harrison and
Widjaja (2014) examine the impact of the 2008 crisis on the capi-
tal structure of US S&P 500 companies. They nd that the effect of
tangibility on leverage signicantly increases after the crisis while
the effect of protability becomes less important.
Akbar et al. (2013) investigate the effect of the subprime cri-
sis on UK private rms. They nd that the crisis has negatively
affected short-term nancing but had little effects on long-term
credit, and that rms usually hold cash and issue equity to hedge
Trade-off Pecking order Empirical literature
+
+ +
+
+ +
+
? Country dependent
Country dependent
against the unavailability of credit during economic downturns.
Moreover, they show that the shock to the supply of credit affected
the investment and performance of rms that were not able to nd
alternative sources of nance. Judge and Korzhenitskaya (2012)
argue that the weakness in bank lending to UK rms during the
2008 nancial crisis were mainly driven by the supply side rather
than demand factors.
Iqbal and Kume (2014) study the impact of the 2008 crisis on
UK, French, and German rms and nd that leverage ratios initially
increase during the crisis but return back to their pre-crisis level
subsequently. Moreover, they show that rms that had low lever-
age before the crisis acquire more debt while heavy levered rms
acquire less debt.
Duchin et al. (2010) analyze how the 2008 crisis affected US pub-
licly traded rms. They nd that the negative supply shock had a
signicant adverse effect on corporate investment. They also show
that this decline has continued after the crisis when demand effects
became strong following the stock market crash, making the sup-
ply constraints less binding. Campello, Graham and Harvey (2010),
using survey data on corporate managers from the US, Europe and
Asia, show that the negative shock to the credit supply had long-
term effects lowering growth opportunities.
While the empirical research on the 2008 crisis is limited, the
literature on other crises offers rich but ambiguous results for other
economic downturns. For instance, Voutsinas and Werner (2011)
study the impact of the prices bubble burst of 1989 and the 1997
Asian crisis on the leverage ratios of Japanese rms. They nd that
the instability of credit supply affects negatively and signicantly
rms leverage. Ariff and Hassan (2008) analyze the impact of the
1997 Asian crisis on the capital structure of nancially distressed
rms in Malaysia. Using a dynamic capital structure adjustment
model, they nd that Malaysian rms adjust slowly to their opti-
mal capital structure compared to developed countries. Deesomsak
et al. (2004) analyze the impact of the 1997 Asian crisis on the cap-
ital structure of rms in the Asia-Pacic region. They show that
while the crisis has signicantly affected the role of some of the
capital structure determinants, the effect was not uniform across
countries. Hence, while there is clear evidence that the crises have
a signicant effect on corporate leverage, the effect seems to vary
widely across different countries.
3. Data and estimation methodology
3.1. Data
The data is collected from Bloomberg database, International
Financial Statistics, and the World Bank (WB) and consists of 270
listed companies in six GCC countries over the period 20032013.
It includes 69 rms from Saudi Arabia, 60 rms from Kuwait, 76
rms from Oman, 14 rms from Qatar, 36 rms from United Arab
Emirates, and 5 rms form Bahrain.
The data spans eight sectors of the economy namely Basic
Materials and Chemicals (BAMA), Consumer Goods (COGO)
 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133 25

including Automobiles and Parts, Food and Beverage and Per- Table 2
Descriptive statistics for the independent and dependent variables.
sonal and Household Goods, Consumer Services (COSE), Health
Care (HECA) including Health Care Equipment and Services and Variable Mean S.D. Min Max
Pharmaceuticals and Biotechnology, Construction and Materials Full sample 20032013
and Industrial Goods and Services (INDU), Software and Com- Leverage 23.37 19.42 0.29 80.05
puter Services and Technology Hardware and Equipment (TECH), Size 2.14 0.75 0.73 3.95
Telecommunications (TELE) and Oil and Gas (OIGA). Growth 12.47 24.03 29.03 107.26
Liquidity 2.84 2.96 0.29 14.63
We do not include banks, insurance companies and nancial
Tangibility 39.53 24.16 0.72 89.43
services rms given that their capital structures are not compa- Prot 7.58 9.22 14.76 30.62
rable with non-nancial rms. We also exclude extreme values Risk 23.17 44.28 0.07 172.02
(Dang, Kim, & Shin, 2012; Flannery & Rangan, 2006; Sobrinho, GDP growth 5.41 4.65 7.08 17.32
Ination 9.17 12.08 25.13 33.75
2010). Finally, rms should disclose their nancial statements for
Stock market cap. 72.03 44.68 20.46 196.71
at least ve years in order to be included in our sample.
The dependent variable employed in this study to proxy for Pre-crisis 20032007
Leverage 23.16 21.49 0.20 91.91
leverage is the total debt to total assets (TDTA) ratio. We use
Size 2.00 0.70 0.62 3.64
ve rm-specic variables, two macroeconomic variables, and one Growth 21.45 33.31 32.03 167.86
stock market development variable to explore whether the rela- Liquidity 3.34 3.84 0.30 18.53
tions between these independent variables and the leverage were Tangibility 38.73 24.53 0.56 89.87
Prot 9.59 9.67 13.10 33.59
impacted by the 2008 nancial crisis. The rm-specic indepen-
Risk 17.26 32.02 0.06 122.09
dent variables are size, protability, tangibility, growth, risk, and GDP growth 6.82 4.45 2.67 17.99
liquidity. Size is measured by the the logarithm of total assets (LTA). Ination 12.63 5.38 4.19 22.46
Protability is measured by the ratio of return on assets (ROA) Stock market cap. 92.33 51.18 23.27 196.71
dened as earnings before interest, tax, and depreciation (EBITD), Post-crisis 20092013
divided by total assets. Tangibility is measured by the net xed Leverage 23.39 18.06 0.40 71.07
assets divided by total assets (NFATA). Growth opportunities are Size 2.26 0.77 0.80 4.07
calculated as the annual growth of rms total assets (GTA). Liquid- Growth 7.12 17.32 26.69 68.06
Liquidity 2.52 2.32 0.29 11.54
ity is measured by the ratio of current assets to current liabilities Tangibility 39.98 23.98 0.53 88.87
(CATCL). Risk is measured by the volatility of earnings. The two Prot 6.08 8.63 16.79 27.52
macroeconomic independent variables used in this study are the Risk 27.91 56.03 0.08 226.49
annual GDP growth (GDPG) and the ination rate (GDPDG). Lastly, GDP growth 4.16 4.36 7.08 13.02
Ination 6.66 14.63 25.13 33.75
we use the market capitalization ratio (MCR) measured by the total
Stock market cap. 51.63 23.60 17.70 99.74
stock market capitalization relative to GDP as a proxy for the stock
market development.
Tables 24 report the overall data descriptive statistics and the
data statistics grouped by year and by sectors of the economy.
Table 2 shows that the overall mean of the dependent variable crisis when we consider each industry separately. We will discuss
(TDTA) is 23.37 percent. The impact of the crisis on leverage seems these variations later.
to be minimal as this ratio was 23.16 percent before the crisis and For the rm-specic explanatory variables, Table 2 reports
23.39 percent after the crisis. However, a careful review of Table 2 some interesting ndings. It shows that the rms earnings
statistics reveals that the variations of the leverage ratio among volatility increased on average from 17.26 percent before crisis
rms are substantially smaller after the nancial crisis 18.06 per- to 27.91 percent after the crisis, the protability decreased from
cent compared to 21.49 percent before the crisis. Moreover, the 9.59 percent to 6.08 percent, the growth opportunities decreased
range between the highest and lowest (TDTA) ratio is signicantly from 21.45 percent to 7.12 percent, the tangibility increased from
lower after the crisis suggesting that rms are more careful using 38.73 percent to 39.98 percent, and the liquidity decreased from
leverage and that crises may discipline extreme borrowers. 3.34 to 2.52. While some of these changes predict an increase
While the mean pooled results suggest that the impact of the in the demand for debt, others lead to the opposite effect. Thus,
2008 crisis on leverage ratios is negligible, the results should be the impact of the crisis on leverage will depend on which factors
interpreted with caution and may conceal large variations that can- are dominant. In addition, as we will show later, the nancial
cel out by averaging. Table 4 reveals some of these variations and crisis had resulted in a negative supply shock. Hence, investi-
shows substantial differences in leverage ratios before and after the gating how the interactions of the supply and demand channels

Table 3
Descriptive statistics: mean values for dependent and independent variables by year.

Year Leverage Size Prot Liquidity Risk Tangibility Growth Ination GDP growth Stock market cap.

2003 24.01 1.878 8.688 3.657 39.55 18.459 6.948 67.80

2004 24.82 1.893 9.139 3.509 39.57 18.88 11.09 7.842 83.62
2005 23.50 1.992 11.39 3.784 17.92 39.58 27.90 20.45 6.229 125.8
2006 24.32 2.066 8.578 3.574 18.38 39.58 42.67 12.23 7.690 80.03
2007 23.25 2.145 10.15 2.993 21.53 39.58 30.65 7.167 5.883 104.4
2008 25.10 2.199 6.035 2.608 23.56 39.58 24.57 21.76 6.543 46.61
2009 23.62 2.223 6.066 2.774 26.76 39.59 5.618 -19.59 0.430 62.71
2010 23.42 2.245 6.298 2.614 26.39 39.58 8.642 12.81 3.869 62.66
2011 23.55 2.265 5.545 2.408 25.45 39.57 6.964 16.67 6.144 44.93
2012 23.72 2.294 5.991 2.509 25.43 39.57 6.665 4.444 6.088 41.44
2013 23.79 2.337 6.212 2.543 22.68 39.59 6.268 0.132 2.364
26 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133

Table 4
Descriptive statistics: median values by Industry pre- and post-crisis.

Variable BAMA COGO COSE HECA INDU TECH TELE OIGA

Pre-crisis 20032007
Leverage 23.86 16.62 11.96 24.9 16.08 28.44 21.39 21.68
Size 2.27 1.68 1.77 1.96 2.20 1.38 3.33 2.15
Prot 9.15 4.08 10.72 4.23 10.86 9.89 17.93 10.77
Liquidity 2.04 1.68 1.89 2.02 2.12 5.26 1.1 1.53
Growth 19.6 6.3 12.4 17.99 15.22 8.37 18.01 25.62
Tangibility 38.81 37.13 37.12 46.21 35.61 22.37 38.83 34.50

Post-crisis 20092013
Leverage 34.67 18.59 15.62 21.31 19.16 12.93 16.16 31.09
Size 2.58 1.82 2.05 2.36 2.50 1.58 3.97 2.57
Prot 4.27 5.22 7.6 5.6 5.25 14.83 8.92 2.39
Liquidity 2.43 1.68 1.51 2.27 1.8 5.93 0.92 1.19
Growth 6.75 4.18 5.02 8.18 3.27 11.26 4.5 3.62
Tangibility 40.90 36.78 42.48 58.39 39.83 7.07 34.43 39.66

affect the capital structure of rms can lead to new interesting
insights.
For the macroeconomic explanatory variables, Table 2 shows
that the average GDP growth rate is high (5.41 percent) with a rel-
atively low standard deviation. Due to their important oil and gas
resources and to the important infrastructure investments under-
taken in the region, GCC countries have managed to sustain high
GDP growth rates. This high growth resulted in relatively high ina-
tion rates averaging 9.17 percent in our sample.
Finally, for the stock market development variable, Table 2
reports a sharp decline in the Market Capitalization measure from
92.33 percent before the crisis to 51.63 percent after the crisis con-
rming the adverse effects of the 2008 nancial crisis on GCC stock
markets.
Table 3 reports the mean values of the dependent and indepen-
dent variables by year. The results in Table 3 conrm the negative
impact of the crisis. While some of the variables experienced a large
change around the crisis period (20082009), the average leverage
ratio did not change much even during this period.
Table 4 reports the impact of the crisis on GCC rms by indus-
try. While the ndings reveal different trends across industries, it
is possible to draw some clear patterns. First, several industries
were adversely affected by the crisis. This includes Basic Materials
and Chemicals (BAMA) where the ROA decreased from 9.15 per-
cent before the crisis to 4.27 percent after the crisis and its growth
opportunities declined from 19.6 percent to only 6.75 percent. Con-
sumer Services (COSE) had experienced a similar pattern where the
ROA decreased from 10.72 percent to 7.6 percent and its expected
growth decreased from 12.4 percent to only 5.02 percent. Construc-
tion and Materials & Industrial Goods and Services (INDU), which is
known to be cyclical, had excellent nancial ratios before the crisis
with an ROA of 10.86 percent and a rms growth of 15.22 percent.
After the crisis however, those ratios were negatively affected with
an ROA of 5.25 percent and a growth of 3.27 percent. Finally, Oil and

Table 5
Correlation matrix for the explanatory variables.

Prot LIQ. Ination GDP growth Stock market cap. Size Growth Risk Tangibility

Full sample 20032013

Prot 1
LIQ. 0.15 1
Ination 0.03 0.02 1
GDP growth 0.16 0.08 0.33 1
Stock market cap. 0.17 0.12 0.05 0.32 1
Size 0.17 0.1 0.11 0.11 0.16 1
Growth 0.29 0.06 0.06 0.01 0.07 0.06 1
Risk 0.07 0.01 0.02 0.05 0.03 0.32 0.10 1
Tangibility 0.06 0.25 0.01 0.01 0.16 0.02 0.04 0.03 1

Pre-crisis 20032007
Prot 1
LIQ. 0.1 1
Ination 0.01 0.04 1
GDP growth 0.13 0.13 0.08 1
Stock market cap. 0.18 0.06 0.1 0.47 1
Size 0.27 0.02 0.16 0.29 0.33 1
Growth 0.01 0.01 0.03 0.01 0.02 0.06 1
Risk 0.08 0.02 0.02 0.02 0.08 0.33 0.07 1
Tangibility 0.15 0.28 0.04 0.16 0.18 0.13 0.13 0.06 1

Post-crisis 20092013
Prot 1
LIQ. 0.17 1
Ination 0.02 0.03 1
GDP growth 0.11 0.06 0.39 1
Stock market cap. 0.05 0.09 0.25 0.2 1
Size 0.14 0.17 0.06 0.08 0.21 1
Growth 0.1 0.03 0.08 0.03 0.01 0.06 1
Risk 0.07 0.03 0.01 0.07 0.04 0.32 0.10 1
Tangibility 0.01 0.38 0.02 0.04 0.01 0.14 0.16 0.01 1
 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133 27

Table 6
Dynamic capital structure of GCC rms using rm specic factors, macroeconomic variables and stock market development (full sample: 20032013).

Variables (1) (2) (3) (4)

Model 1 Model 2 Model 3 Model 4

Lag leverage 0.511*** 0.492*** 0.490*** 0.497***

(0.00150) (0.00379) (0.00311) (0.00305)
Prot 0.408*** 0.390*** 0.396*** 0.397***
(0.000983) (0.00771) (0.00263) (0.00549)
Growth 0.00227*** 0.00495*** 0.00385*** 0.00503***
(0.000233) (0.000276) (0.000208) (0.000208)
Size 3.680*** 3.570*** 4.746*** 5.242***
(0.0290) (0.0581) (0.0835) (0.0793)
Tangibility 0.00243** 0.00948** 0.0169*** 0.0186***
(0.000956) (0.00414) (0.00522) (0.00548)
Liquidity 1.347*** 1.142*** 1.149*** 1.140***
(0.0129) (0.0264) (0.0400) (0.0370)
Risk 0.000759*** 0.000799*** 0.000835*** 0.000907***
(4.82e07) (2.08e06) (3.20e06) (2.81e06)
Financial crisis 3.439*** 3.963*** 4.084*** 3.800***
(0.0284) (0.0546) (0.0562) (0.0523)
Ination 0.0357*** 0.0380***
(0.00122) (0.00157)
GDP growth 0.0332*** 0.0296***
(0.00735) (0.00598)
Stock market cap. 0.0152*** 0.00861***
(0.000251) (0.000203)
Correlation 1 (P-value) 0.00 0.00 0.00 0.00
Correlation 2 (P-value) 0.767 0.3376 0.667 0.419
Sargan test (P-value) 0.952 0.460 0.394 0.285
Wald test (P-value) 0.00 0.00 0.00 0.00
*
Signicant at 10 percent level.
**
Signicant at 5 percent level.
***
Signicant at 1 percent level.

Gas (OIGA), which is one of the main drivers of GCC economies, was
severely affected. ROA decreased from 10.77 percent to 2.39 per-
cent and the growth decreased from 25.62 percent to only 3.62
percent.
In some of these sectors, leverage ratios increased dramatically
after the crisis. The extreme examples are (BAMA) and (OIGA). Basic
Materials and Chemicals (BAMA) experienced a surge in its aver-
age leverage ratios from 23.86 percent before the crisis to 34.67
percent after the crisis. Similarly, Oil and Gas (OIGA) leverage ratios
increased from 21.68 percent to 31.09 percent in the same period. A
plausible explanation is that despite having low investments result-
ing from low growth prospects, rms in these sectors have high
operating costs, which requires using external funding to cope with
the insufcient internal resources.
In other sectors (HECA, TECH, TELE), rms experienced a signi-
cant decline in their leverage ratios. Two of these industries, namely
(HECA) and (TECH), became more protable after the crisis, which
may explain the decrease of their leverage ratios.1 (HECA) is known
to be a defensive industry to which investors shift their investments
during bearish economic conditions.
Table 5 reports the correlations between the rm-specic
factors, the macro-economic variables, and the stock market devel-
opment variable for the full sample (20032013), the pre-crisis
period (20032007) and the post-crisis period (20092013). The
results show that pairwise correlations between these independent
variables are low implying that the problem of multicollinearity is
not severe in our sample.
1
Unlike (HECA) and (TECH), (TELE) was badly affected by the crisis. This industry
had the highest protability before the crisis and rms in this sector are bigger than
rms in other sectors. This leads to better and healthier nancial structure to cope
with nancial crises. The investment in (TELE) are usually expensive. The slower
growth will therefore imply less need for cash and less borrowing.
3.2. Estimation methodology
The theoretical and empirical capital structure literature
emphasize the role of rm-specic factors in determining the opti-
mal use of leverage. The decision of whether to borrow funds from
the banking system and from bondholders largely depends on the
characteristics of the rm in terms of growth prospects, value of
tangible assets, protability of the rm, its liquidity, and its size,
(Graham et al., 2015; Harris & Raviv, 1991; Rajan & Zingales, 1995;
Titman & Wessels, 1988). The literature on capital structure also
highlights the importance of macroeconomic variables on the bor-
rowing strategy of the rm (Antoniou et al., 2008; Booth et al.,
2001; de Jong, Kabir, & Nguyen, 2008; Frank & Goyal, 2008; Graham
et al., 2015). These variables include, among others, GDP growth
and ination. Finally, stock market development indicators are also
included as stock markets compete with debt lenders in supply-
ing nancing and represent a valuable source of information for
lenders. The optimal leverage ratio for rm i at time t, LEVGit , can
be written as:

n
LEVGit = 0 + 0 Crisist + j Xjit + i + it (1)
j=1
where X is a vector of rm-specic, macroeconomic, and stock mar-
ket development factors, i represents rm xed effects to control
for unobserved panel effects, Crisis represents a dummy variable
that is equal to 1 if the observation belongs to the after crisis period,
and it is the random error term assumed to be iid.
Leverage may adjust slowly to changes in some independent
variables and hence may deviate from the optimal target debt
according to the following equation (Antoniou et al., 2008; Fama &
French, 2002; Hovakimian, Opler, & Titman, 2001;Huang & Ritter,
2009; ztekin & Flannery, 2012):
LEVGit LEVGit1 = (LEVGit LEVGit1 ) (2)
28 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133
where  (0  1) represents the speed of adjustment toward the
optimal leverage.
Rearranging (2) and substituting in (1) we obtain the follow-
ing dynamic panel model which includes one lag of the dependent
variable used as an independent variable (Bond, 2002; Roodman,
2009).
LEVGit = + Crisist + LEVGit1 + 2 GROWTHit + 3 TANGBit
+ 4 PROFit + 5 SIZEit + 6 LIQit + 7 RISKit + 8 INFit + 9 GDPGit
+10 MCRit + i + it
where = 0 , = 0 , = (1 ), j = j ,  i = i , it = it .
LEVG is the total debt to total assets, GROWTH represents the
annual growth rates of the rms total assets, TANGB refers to the
tangible assets of the rm, PROF is protability, SIZE is the logarithm
of total assets, LIQ is the measure of liquidity, RISK is the variability
of earnings. INF is the economys ination rate, GDPG is the real
GDP growth, and MCR represents the stock market capitalization
ratio.
Arellano and Bond (1991) derived a consistent generalized
method of moments (GMM) estimator for this model. However,
we use in this paper the Arellano and Bover (1995), and Blundell
and Bond (1998) models which yield a better system estimator that
uses additional moment conditions. Their estimation technique
performs particularly well when the data has a large number of
individuals observed over a relatively short period of time.
Given that a system GMM estimator yields consistent estimates
only when the moment conditions used are valid, we use the Sargan
test to check if the overidentifying moment conditions are valid and
therefore whether the instruments considered are appropriate.
4. Empirical results
This section discusses the empirical results for the full period
20032013, the pre-crisis period 20032007, and the post-crisis
period 20092013 respectively.
4.1. The full sample results
We estimate four versions of the model. The rst includes
only the rm-specic characteristics believed to impact the capital
structure decisions of the rm. The second includes the rm spe-
cic factors and the macroeconomic variables to investigate if the
overall economic environment inuences leverage ratios. The third
model, which includes the rm-specic factors and the stock mar-
ket development variable, studies the use of debt when we control
for the stock market development. Finally, the last model includes
all variables.
Table 6 reports the results for the four models. According to
Table 6, the coefcient on the crisis dummy variable is negative
and signicant in all models. This indicates that the crisis had a
negative effect on corporate leverage.2 This implies that the supply
of credit is also an important factor in rms capital structure in the
post-crisis period.
Hence, we will investigate how the interaction of the supply and
the demand channels affect the corporate leverage by comparing
the capital structure of rms before and after the crisis. This may
generate interesting new insights as most of the extent literature
has focused only on the demand channel as the supply was assumed
to be perfectly elastic before the crisis. While the recent literature
has started to investigate the supply side (Harrison & Widjaja, 2014,
2 3
In all models, rms have from 3.44 percent to 4.08 percent less debt after the
crisis than what is predicted by the control variables.
Akbar et al., 2013; Iqbal and Kume, 2014; Judge & Korzhenitskaya,
2012; Leary, 2009), our analysis may provide unique insights as GCC
countries have large natural resources that may represent a poten-
tial hedge against the shortage of debt supply. Moreover, banks
rather than the bonds market mainly provide debt. Finally, a unique
scal environment characterizes GCC countries. These characteris-
tics make it particularly interesting to study the capital structure
in this region pre and post-crisis.
4.2. Pre -crisis results
(3)
Tables 7 and 8 report the four models results for two subsam-
ples: 20032007 and 20092013 which correspond to the periods
before and after the 2008 nancial crisis respectively. Many con-
clusions emerge from these tables and are discussed below.
Table 7 shows that before the 2008 crisis, growth opportuni-
ties, protability, liquidity and risk are highly signicant in the
determination of leverage and their signs are more inline with the
trade-off theory.3 However, tangibility, GDP growth, and stock mar-
ket development are not signicant. Indeed, rms capital structure
is mainly driven by their growth potential, their protability level
and its variability, and their needs for working capital. As shown in
Table 7, the speed of adjustment to the optimal capital structure is
65 percent suggesting that rms do not experience any difculty
adjusting to their target debt ratios and hence the supply of debt
does not seem to play an important role before the crisis.
It is interesting to notice that the tangibility is not signicant
before the crisis and that the size is not signicant in models (1)
and (3) and is only signicant at the 5 percent level in the other two
models. The low impact of these variables on leverage before the
crisis can be explained by the existence of an elastic supply where
lenders attribute easy credit to rms without rigorous screening
and without considering the value of their tangible assets or their
size as the risk of bankruptcy was slim before the crisis. Moreover,
if bankruptcy risks are of second order magnitude, tangibility will
not be an important factor when rms choose their optimal capital
structure. In addition, banks and governments sovereign funds are
usually the main shareholders of rms in the GCC countries. This
special ownership structure facilitates rms access to credit before
the crisis without substantial collateral and regardless of rm size.
Firms leverage is therefore not necessarily related to tangibility
and size implying that supply is irrelevant in determining leverage
ratios before the crisis.
For the macroeconomic variables, ination is positively related
to leverage before the crisis, which is consistent with the full sam-
ple results. However, the impact of GDP growth on leverage is not
signicant as shown in Table 7. Countries with high GDP growth
offer better growth opportunities for their rms but they are at the
same time more protable. As protability and growth opportuni-
ties lead to opposite effects on leverage, the net effect will depend
on which factor prevails. It turns out that these effects seem to
offset each other leading to insignicant impact on leverage. Alter-
natively, in our sample, the variability in the GDP growth is very
small to be able to detect any effect on leverage.
Finally, our results indicate that the stock market development
variable does not impact leverage. Demirgc-Kunt and Maksimovic
(1996) argue that the development of stock markets benets both
debt and equity as equity markets aggregate information about
rms for banks and investors, and hence makes external nan-
cing less risky. However, it is theoretically ambiguous whether
debt or stock markets benet more. They state: It is unclear, how-
ever, whether external equity or debt would benet more. They
Except for protability, which negatively affects leverage in line with the pre-
dictions of the pecking order theory and the empirical ndings in the literature.
 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133 29

Table 7
Dynamic capital structure of GCC rms using rm specic factors, macroeconomic variables and stock market development (pre-crisis sample: 20032007).

Variables (1) (2) (3) (4)

Model 1 Model 2 Model 3 Model 4

Lag leverage 0.339*** 0.353*** 0.336*** 0.355***

(0.0334) (0.0338) (0.0330) (0.0337)
Growth 0.00757*** 0.00782*** 0.00772*** 0.00776***
(0.00192) (0.00179) (0.00192) (0.00177)
Prot 0.383*** 0.374*** 0.385*** 0.372***
(0.101) (0.103) (0.0997) (0.102)
Size 1.684 10.31** 2.006 10.12**
(3.680) (4.406) (3.675) (4.356)
Tangibility 0.0210 0.0160 0.0184 0.0119
(0.0682) (0.0677) (0.0706) (0.0703)
Liquidity 0.905*** 1.043*** 0.894*** 1.040***
(0.309) (0.327) (0.307) (0.328)
Risk 0.00287*** 0.00321*** 0.00269*** 0.00318***
(0.000369) (0.000399) (0.000404) (0.000431)
Ination 0.265*** 0.260***
(0.0821) (0.0842)
GDP growth 0.112 0.103
(0.116) (0.112)
Stock market cap. 0.0113 0.00188
(0.0141) (0.0149)
Correlation 1 (P-value) 0.02 0.03 0.02 0.03
Correlation 2 (P-value) 0.987 0.989 0.99 0.989
Sargan test (P-value) 0.3121 0.375 0.319 0.382
Wald test (P-value) 0.00 0.00 0.00 0.00
*
Signicant at 10 percent level.
**
Signicant at 5 percent level.
***
Signicant at 1 percent level.

show that in developed stock markets, equity has beneted more
than debt and that leverage has decreased. Our results suggest that
both debt and equity have beneted equally from the information
aggregation made possible by the development of stock markets.
4.3. Post-crisis results
The post-crisis results reported in Table 8 reveal some interest-
ing patterns. The results show that while the demand for debt is
still an important determinant of leverage, the supply side gained
a more critical role after the crisis.
First, the speed of adjustment to the target leverage is signif-
icantly lower after the crisis. This may be explained by both the
demand and the supply sides. On one hand, rms are more con-
cerned about meeting their short-term obligations such as the
working capital needs. Hence, the costs of deviating from the opti-
mal capital structure may not be the primary focus of rms after a
crisis. On the other hand, due to shortage of liquidity, lenders are
more selective granting credit to rms. Combined, the low supply

Table 8
Dynamic capital structure of GCC rms using rm specic factors, macroeconomic variables and stock market development (post-crisis sample: 20092013).

Variables (1) (2) (3) (4)

Model 1 Model 2 Model 3 Model 4

Lag leverage 0.680*** 0.615*** 0.498*** 0.499***

(0.0570) (0.0726) (0.0991) (0.0998)
Growth 0.0583*** 0.0520** 0.0140 0.0153
(0.0224) (0.0209) (0.0252) (0.0258)
Prot 0.281*** 0.264*** 0.198** 0.230***
(0.0611) (0.0651) (0.0782) (0.0784)
Size 4.219** 8.496*** 11.23*** 12.65***
(2.089) (2.046) (3.292) (3.653)
Tangibility 0.0364 0.0454 0.0887 0.0560
(0.0372) (0.0427) (0.0717) (0.0788)
Liquidity 1.849*** 2.054*** 1.928*** 1.938***
(0.412) (0.475) (0.565) (0.589)
Risk 2.63e06 7.16e05 8.82e05 3.30e05
(0.000165) (0.000245) (0.000122) (0.000141)
Ination 0.0440* 0.0403
(0.0242) (0.0507)
GDP growth 0.0399 0.0748
(0.0605) (0.0948)
Stock market cap. 0.00623 0.0108
(0.0196) (0.0256)
Correlation 1 (P-value) 0.00 0.00 0.00 0.00
Correlation 2 (P-value) 0.273 0.2034 0.986 0.989
Sargan test (P-value) 0.244 0.559 0.446 0.447
Wald test (P-value) 0.00 0.00 0.00 0.00
*
Signicant at 10 percent level.
**
Signicant at 5 percent level.
***
Signicant at 1 percent level.
30 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133
of funds and the priorities of rms after the crisis lead to a slow
adjustment to the target debt ratios.
Second, growth opportunities have a positive effect on
leverage.4 This is consistent with the ndings of Akbar et al. (2013),
Psillaki and Daskalakis (2009), Bevan and Danbolt (2002), and
Michaelas, Chittenden and Poutziouris (1999). While agency costs
between shareholders and bondholders lead to a negative rela-
tionship between growth opportunities and leverage, Michaelas
et al. (1999) and Myers (1977) argue that short-term debt miti-
gates these agency costs. As there is a shift to short-term debt after
the crisis, a positive relationship results. Furthermore, given that
protability is usually low after a nancial crisis, the only alter-
native for rms is to borrow funds from lenders to nance any
residual growth.5 In doing so, rms may use all types of credit
options available from lenders to overcome unexpected nancial
difculties during and after the crisis.
Third, the size of the rm becomes more signicant after the
crisis compared to pre-crisis. As shown in Table 8, the size is sig-
nicant at the 1 percent level in three models and at the 5 percent
level in one model. In addition, the tangibility coefcient is larger
and mostly positive but not signicant in all models. Although
the tangibility is not signicant, a closer review of Table 3 con-
rms its importance as a potential determinant of debt after the
crisis. Table 3 shows that the industries that have been success-
ful in increasing noticeably their leverage ratios experienced an
increase in their tangible assets. This includes (BAMA) and (OIGA).
On the other hand, the (TECH) industry, where the tangible assets
are usually low, experienced a sharp decline in their leverage ratios
from 28.44 percent before the crisis to 12.93 percent after the
crisis.6 When the economy slows down, some industries fail to con-
vince lenders to approve any required funding because they cannot
provide the high collateral needed to assure banks that money is
safe. As a result, to satisfy the high collateral rates (the ratio of col-
lateral to the amount of the loan), rm tangibility and size become
important ingredients in securing debt after the crisis.
Accordingly, among all seekers of funding, larger rms with
more tangible assets seem to be privileged by lenders as they offer
a lower investment risk and have better recovery rates. From a
demand perspective, small rms sales are lower after a crisis reduc-
ing considerably their need for capital. Gertler and Gilchrists study
the effects of tight monetary and credit policy on the leverage ratios
in 1966, 1968, 1974, 1978, 1979, and 1988. They nd different
effects depending on the size of the rm. Small rms short-term
debt declines while large rms short-term debt increases.
Fourth, the variability of earnings has no signicant effect on
leverage after the crisis. As discussed above, following the crisis,
the rms need for debt is dictated by meeting its short-term obli-
gations and surviving the crisis. It may therefore decide to raise
or reduce its leverage ratio independently of the variability of
earnings. On the supply side, lenders are aware that earnings are
generally low during nancial turmoil, thus more variable on a rela-
tive basis.7 Therefore, lenders are more interested in the long-term
perspectives of the rm rather than the variability of its current
earnings. It follows that the determinants of the rms repayment
ability after a nancial crisis are more related to the nature of the
rms assets and long-term considerations such as size and industry
prospects rather than the short-term variability in earnings.
4
The result is positive but not signicant in two models.
5
See Harrison and Widjaja (2014) for a discussion on the effects of low protabil-
ity on leverage ratios after a crisis.
6 8
The decline in leverage ratios in (TECH) is also partly explained by the increase
of their protability after the crisis (pecking-order theory).
7
This can be seen in Table 2 where the standard deviation of earnings increased
from 17.26 percent before the crisis to 27.91 percent after the crisis.
Table 8 also shows that the macroeconomic environment effects
weaken after the crisis. While the effect of GDP growth does not
change from the pre-crisis period,8 the effect of ination becomes
not signicant after the 2008 crisis. Generally, ination is low but
uncertain after a crisis since the aggregate consumption is usually
low and the extent and length of crisis is unknown. The reduced
ination rates lead to low short-term interest rates resulting in
an increase in the demand for credit. However, the climate of
uncertainty leads to higher long-term interest rates. Hatzinikolaou,
Katsimbris and Noulas (2002) argue that ination uncertainty
increases interest rate risk and therefore leads to increasing cost
of debt. Combined, these effects seem to offset each other after the
crisis. This suggests that after the crisis, capital structure decisions
are more affected by the microeconomic environment rather than
the macroeconomic factors. Moreover, we will show in Section 4.4
that the crisis has beneted some industries while it harmed others,
and that the effects of the crisis were not uniform across industries.
To sum up, the after crisis period seems to grant lenders and
debt suppliers their typical role in the economy as screeners and
monitors of debt. It is well accepted now that the 2008 nancial
turmoil was the result of the passive supply of debt whose role was
to provide abundant resources without due diligence.
4.4. Crisis effects by industry
The severity of a nancial crisis is usually different across
industries. Cyclical industries including Tourism, Manufacturing,
Logistics, High-Tech and Real Estate are sensitive industries and
show signicant difculty to recover after a crisis. On the other
hand, Healthcare, Education, Agriculture, and the Food Industry
represent defensive industries that manage to resist economic
downturns. However, given the limited number of observations
when we separate our data by industry, studying the effect of
the crisis in all industries is not statistically feasible. Taking into
account this limitation, we study how the crisis affects differently
the leverage ratios in four industries with sufcient number of
observations: Basic Materials and Chemicals (BAMA), Consumer
Goods (COGO), Consumer Services (COSE), and Industrial Goods
(INDU) known to be very sensitive to nancial instability. Due to the
limited number of observations, we report the results for the full
sample (20032013) only as estimations using pre- and post-crisis
samples are not feasible.
The results for the full sample by industry are reported in Table 9.
The results show some interesting patterns. First, the level of lever-
age ratios were signicantly lower than what is predicted by the
control variables for (COSE) and (INDU) after the crisis. The (COGO)
being a defensive industry had not experienced a similar pattern as
the crisis coefcient is not signicant. The demand for the goods of
rms belonging to this industry, such as food, is only marginally
impacted by crises. Table 9 also shows that leverage ratios are
higher than what is predicted by the control variables after the
crisis for (BAMA) industry but the result is not signicant.
Table 9 also shows that the speed of adjustment to the opti-
mal capital structure is the slowest in the (COGO) industry. Given
that the impact of a crisis is generally minimal on this industry, we
would expect rms to obtain lending easily and to adjust to their
optimal capital structure quickly. This is clearly not the case for
(COGO) industry and may be explained in part by the predictions
of the pecking-order theory. As shown in Table 3, rms belonging to
(COGO) industry became more protable after the crisis allowing
The GDP growth was also insignicant before the crisis. Therefore, arguments
similar to the pre-crisis period may apply. According to the trade-off and pecking
order theory, more growth leads to opposite effects. These effects may offset each
other leading to insignicant impact on leverage.
 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133 31

Table 9 Table 10
Dynamic capital structure of GCC rms using rm specic factors, macroeconomic Dynamic capital structure of GCC rms using rm specic factors, macroeconomic
variables and stock market development by industry (full sample: 20032013). variables and stock market development by country (full sample: 20032013).

Variables BAMA COGO COSE INDUS Variables Kuwait KSA Oman

Model 1 Model 2 Model 3 Model 4 Model 1 Model 2 Model 3

Lag leverage 0.359* 0.736*** 0.533*** 0.337*** Lag leverage 0.546*** 0.646*** 0.468***
(0.194) (0.0289) (0.109) (0.00716) (0.0483) (0.0594) (0.0129)
Growth 0.115* 0.0376** 0.0514** 0.00369*** Growth 0.00303 0.166*** 0.0157***
(0.0665) (0.0165) (0.0227) (0.000410) (0.00273) (0.00946) (0.00109)
Protability 0.00123 0.487*** 0.231*** 0.369*** Protability 0.356*** 0.231*** 0.490***
(0.509) (0.0587) (0.0502) (0.0214) (0.0270) (0.0255) (0.0538)
Size 15.66* 5.442 1.908 7.414*** Size 7.087** 5.295*** 2.242
(9.268) (5.377) (2.614) (1.231) (3.039) (1.206) (2.185)
Tangibility 0.675 0.0898 0.0749 0.00921 Tangibility 0.149*** 0.102*** 0.114***
(0.433) (0.0626) (0.0946) (0.0134) (0.0261) (0.0263) (0.0324)
Liquidity 2.558 1.175** 2.203*** 1.358*** Liquidity 1.030*** 1.103*** 2.174***
(2.530) (0.467) (0.704) (0.142) (0.358) (0.336) (0.372)
Risk 0.000129 0.0107* 0.0259 0.00421* Risk 0.0157 0.000995*** 0.623*
(0.000180) (0.00610) (0.0219) (0.00244) (0.0285) (0.000135) (0.371)
Financial crisis 2.746 0.952 2.755** 2.535*** Financial crisis 13.02*** 1.262** 7.130***
(5.380) (1.280) (1.287) (0.275) (1.129) (0.531) (0.835)
Ination 0.00124 0.0685*** 0.0260** 0.00708* Ination 0.0613*** 0.00911 0.0140*
(0.131) (0.0202) (0.0110) (0.00383) (0.0126) (0.0460) (0.00850)
GDP growth 0.466 0.250** 0.0861 0.0687*** GDP growth 0.264*** 0.299 0.181*
(1.319) (0.107) (0.143) (0.0215) (0.0423) (0.244) (0.0995)
Stock market cap. 0.0225 0.0300* 0.0252* 0.0155*** Stock market cap. 0.0822*** 0.00421 0.134***
(0.0318) (0.0157) (0.0142) (0.00577) (0.0145) (0.0104) (0.0388)
Correlation 1 (P-value) 0.210 0.0182 0.033 0.00 Correlation 1 (P-value) 0.00 0.00 0.00
Correlation 2 (P-value) 0.130 0.264 0.377 0.932 Correlation 2 (P-value) 0.338 0.669 0.4693
Sargan test (P-value) 0.98 0.968 0.989 0.980 Sargan test (P-value) 0.98 0.998 0.978
Wald test (P-values) 0.00 0.00 0.00 0.00 Wald test (P-values) 0.00 0.00 0.00
* *
Signicant at 10 percent level. Signicant at 10 percent level.
** **
Signicant at 5 percent level. Signicant at 5 percent level.
*** ***
Signicant at 1 percent level. Signicant at 1 percent level.

for more use of internal resources as a substitute for debt nan-
cing. As a result, these rms adjust slowly to their optimal capital
structure. Table 3 shows that (BAMA) and (INDU) have the highest
size after the crisis among the four selected industries. As discussed
above, this characteristic of the rm becomes an important deter-
minant of leverage from the debt suppliers perspective after the
crisis. This explains why these industries have been able to adjust
quickly to their optimal capital structure.9
The sign and signicance of the other variables are mostly con-
sistent with the full sample using all industries and the empirical
ndings in the literature.
4.5. Crisis effects by country
The nancial crises impact has usually been different between
countries, even for neighboring countries. For this reason, we re-
estimate the model for three of the GCC countries: Kuwait, Saudi
Arabia, and Oman. Discarding the other GCC countries is mainly
due to the limited number of observations. Table 10 reports the
results by country. According to Table 10, the crisis dummy param-
eter estimate is large, negative, and highly signicant for Kuwait
implying that leverage ratios are lower than what is predicted by
the control variables after the nancial crisis. The crisis dummy for
Oman is also negative and signicant but is not as large compared
to Kuwait implying that the crisis impact is not that severe in this
country.
Table 10 reports a different result for Saudi Arabia where the cri-
sis impact is positive on leverage ratios. After the crisis, the rms
leverage in Saudi Arabia is higher compared to what is predicted
by the control variables. This may be explained by the availability
of funds given the importance of oil revenues. Oil prices have been
high after the crisis ranging from $40 in 2009 to around $120 in
2011 through 2013. This offered a strong hedge against any poten-
tial liquidity shortage from debt suppliers. In addition, Saudi Arabia
credit extended by stated-owned credit institutions helped reduce
the impact of the crisis on debt supply.10
The results for the other variables are mostly consistent with
the empirical ndings in the literature.
5. Conclusions and implications
This paper examines the impact of the 2008 nancial crisis on
the capital structure of GCC rms. The study is conducted using
270 listed rms from eight industries over the period 20032013.
To further identify the impact of the crisis, the full sample is
divided into two subsamples: pre-crisis (20032007) and post-
crisis (20092013).
Understanding the effect of the crisis on leverage has some
important policy implications and may allow rms and nancial
authorities to take precautionary actions to alleviate the impact of
any shortage of debt during crises. For instance, the tax deductibil-
ity of debt has encouraged rms to increase their leverage ratios.
However, doing so also increased the bankruptcy risk of the rms
and their vulnerability to crises. Hence, scal reforms that aim to
align the benets of debt and equity would help rms attain an opti-
mal capital structure without being exposed to higher risks during
crises. In a recent study, Temimi, Zeitun and Mimouni (2016) show
that the nancial authorities should be careful implementing scal
reforms as their impact may be different among industries. They
show that, while taxes may prove to be an efcient tool to impact
the capital structure of rms in some industries, it is almost inef-
cient in others. This increases the complexity of implementing
reforms aiming to avoid the adverse effects of a crisis. This study is

9
The speed of adjustment to the optimal capital structure in these industries is
10
around 65%. See Khamis and Senhadji (2010), IMF.
32 R. Zeitun et al. / The Quarterly Review of Economics and Finance 63 (2017) 2133
a step forward in understanding the determinants of leverage dur-
ing the crisis and hence represents a rst step in nding effective
remedies.
Our novel results are of importance to stakeholders and nancial
intermediaries in order to understand if the determinants of lever-
age ratios are altered after the crisis and to identify any changes in
the nancing behavior of corporate rms in the GCC region.
First, we nd that debt is mainly driven by demand before the
crisis where the supply is believed to be perfectly elastic accommo-
dating any potential demand. After the crisis however, the supply
along with the demand play important roles in determining the
leverage ratios. After the crisis, lenders seem to grant more empha-
sis to the size of the rm and its growth prospects before approving
loans.
Second, while the mean pooled results do not show evidence
of signicant changes in the leverage ratios before and after the
crisis, a careful investigation by industry reveals substantial varia-
tions. The leverage ratios increased signicantly in some industries
like (BAMA) and (OIGA) and decreased in other industries such as
(TECH), (TELE) and (HECA).
Third, the long-term industry prospects seem to matter more
in determining leverage ratios compared to short-term variability
in earnings. Firms usually need to borrow more during and after
crises as their lower protability does not allow to generate enough
internal resources to sustain their long-term growth prospects.
Fourth, we also nd that the impact of the crisis is different by
country. Some GCC countries are more exposed than others to eco-
nomic downturns. The leverage ratios in Saudi Arabia for instance
have been higher after the crisis suggesting that rms with less
internal resources tend to borrow more and do not encounter debt
supply shortage. This can be attributed to the abundance of oil rev-
enues in Saudi Arabia, which is one of the world biggest exporters
of oil.
Finally, our results also indicate that the speed of adjustment to
the optimal capital structure is on average slower after the crisis
due to the lack of debt nancing supply. Hence, rms have more
difcultly to reach their optimal capital structure after the crisis
and need more time to secure debt nancing from lenders who
become more cautious screening loan applications.
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