Political Connections and Capital Structure in the GCC Banks

Abstract

This chapter investigates the impact of political connections on capital structure choices in GCC banks. Applying the generalized method of moments (GMM) shows that neither the pecking order theory nor the trade-off theory conclusively predicts capital structure in the GCC banks. The results show that GCC banks adjust toward the optimal leverage with a speed equal to 43%. However, politically connected banks have the fastest speed of adjustment (60%) as it has often had large amounts of capital, which in sequence cut transaction costs and accelerate the speed of adjustment. The main drivers of capital structure choices are profitability, growth, coverage ratio, and size. We find that size and growth are positively associated with the banks’ leverage while the risk is negatively affected by leverage.