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

• Main Authors: Tebourbi, Imen, Irene, Wei Kiong Ting, Qian, Long Kweh, Al Huseini, Harith Ali Hamood
• Format: Article
• Language: English
• Published: Inderscience Enterprises Ltd. 2020
• Subjects: HF Commerce
• Online Access: http://umpir.ump.edu.my/id/eprint/30419/1/Capital%20structure%20and%20profitability%20in%20a%20tax1.pdf; http://umpir.ump.edu.my/id/eprint/30419/; https://dx.doi.org/10.1504/AAJFA.2020.108257; https://dx.doi.org/10.1504/AAJFA.2020.108257

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.