The Impact of Corporate Financing Decision on Corporate Performance in the Absence of Taxes: Panel Data from Kuwait Stock Market

Abstract

This study examines the relationship between financing decisions such as capital structure, capital budgeting techniques and dividend policy along with the firm’s attributes. We examined the impact of industrial sectors and financial performance using the panel data of 80 listed companies in Kuwait. The results of this study suggest that, contrary to the Trade-off Theory of capital structure, there is a negative association between the level of debt and financial performance. This can be attributed to the high cost of borrowing and the underdeveloped nature of the debt market in Kuwait. Given the unique tax environment in Kuwait, using debt does not seem to be sufficient to outweigh the costs of using debt, including the high interest cost.

The empirical findings also show that short-term debt has a significant and negative relationship with both accounting measure of performance ROA, while there is no impact of long-term impact. Because there is an inactive and underdeveloped bond market, firms tend to involve more short-term loans than long-term loans, which lead to the risk of refinancing their debt.

Keywords: Corporate Performance, Capital Budgeting, Capital Structure, Dividend Policy, Debt Maturity, Kuwait

JEL Classification: D7