Title: Capital structure and profitability in a tax-free country: evidence from the UAE

Authors: Imen Tebourbi; Irene Wei Kiong Ting; Qian Long Kweh; Harith Ali Hamood Al Huseini

Addresses: Faculty of Management, Canadian University Dubai, P.O. Box 117781, 1st Interchange, Sheikh Zayed Road, Dubai, United Arab Emirates ' Faculty of Industrial Management, Universiti Malaysia Pahang, 26300 Gambang, Pahang, Malaysia ' Faculty of Management, Canadian University Dubai, P.O. Box 117781, 1st Interchange, Sheikh Zayed Road, Dubai, United Arab Emirates ' Deloitte & Touche, P.O. Box 60072, Dubai, United Arab Emirates

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.

Keywords: capital structure; profitability; debt; information asymmetry; United Arab Emirates.

DOI: 10.1504/AAJFA.2020.108257

Afro-Asian Journal of Finance and Accounting, 2020 Vol.10 No.3, pp.430 - 444

Received: 28 Sep 2018
Accepted: 16 Jun 2019

Published online: 08 May 2020 *

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