An investigation of the reasons for companies issue sukuk or conventional bond using partial adjustment models

Companies obtain the funds needed to continue their operations and to achieve their planned investments through equity capital or through the issuance of sukuk and bonds. Choosing the most appropriate debt instrument in terms of costs is among the most important decision making processes for the companies. The present search puts forth the reasons why companies choose sukuk or conventional bond as debt instruments. The relationship between the issuance of bonds and sukuk with profitability, non-debt tax shield, profit, size and growth have been analyzed by using the pecking order and the trade-off theories. Firms operating in finance sector are not included in the analysis section as the accounting practices of the firms in the finance sector are different from the ones in the other sectors. The analysis is based on seven countries chosen among those which have the highest sukuk and conventional total bond issue size. The relationship between the debt ratio of the companies issuing sukuk or conventional bond and their variables is assessed using partial adjustment models, Difference-GMM and System-GMM. The results of the study can be summarized as follows: Firms issuing bond increase their debt faster. Retiring debt is quicker in conventional bond than in issuing sukuk. With bond issuance the increase in debt has a less negative impact on the firm's profitability. Moreover, it is observed that the greater the size of firm issuing bond, the higher the volume of the bond it issues. Companies which own more tangible fixed assets can borrow more than other firms.