Determinants of Capital Structure: A Comparison between Sharia-Compliant and Sharia Non-Compliant Firms in Indonesia

Islamic finance is a subject that is no longer reserved for Muslims around the world, and the usage of Islamic finance is now widely accepted. In Indonesia, to meet with the increasing demand, OJK launched three indices dedicated to sharia-compliant stocks. In doing so, the organization has come up with a list of criteria that a firm needs to meet to be classified as sharia-compliant. One of which is that a sharia compliant firm must maintain a debt level below 45%. Sharia-compliant firms are then expected to behave differently from sharia non-compliant firms that do not have this restriction placed upon them in terms of capital structure. This study aims to examine and compare the determinants of capital structure among sharia-compliant and non-compliant firms in Indonesia, using a cross-sectional data of all firms in Indonesia that are listed in 2017. We used four independent variables to predict capital structure: profitability, firm size, tangibility, and business risk. The result is there are variables that do affect sharia compliant and non-compliant firms differently, with some variables being significant for sharia non-compliant firms but not significant for compliant firms. For example, the variable profitability was found to be significant for sharia non-compliant firms, but not for sharia compliant firms.