Capital structure and profitability in a tax-free country: evidence from the UAE
by Imen Tebourbi; Irene Wei Kiong Ting; Qian Long Kweh; Harith Ali Hamood Al Huseini
Afro-Asian J. of Finance and Accounting (AAJFA), Vol. 10, No. 3, 2020

Abstract: The balance between debt and equity is a key factor explaining profitability. This study examines how capital structure affects the profitability of firms listed on stock exchanges in the United Arab Emirates (UAE), a country that does not have a federal corporate income tax regime. The proxies of capital structure used include total, short-term, and long-term debt ratios, while those of profitability are return on assets and return on equity. Over a 2001-2016 sample period, this study documents a significantly negative association between capital structure and profitability. This study finds that the negative association is mainly found in companies with a high level of debts. The results of this study not only imply that information asymmetry exists, they also highlight how capital structure and profitability are associated in the context of a corporate tax-free country.

Online publication date: Fri, 08-May-2020

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