This paper empirically examines whether stock prices have a significant effect on different forms of debt in a unique environment that is characterized by high leverage and high reliance on bank debt. Furthermore, firms in Oman are taxed at a flat rate and there are no personal income taxes. Our results show that stock returns have a significant effect on all types of debt. Debt ratios seem to move in line with that mechanistically induced by their stock returns. We also find new evidence that firms do take countermeasures to offset changes in their leverage that stem from equity value variations but at a low speed. Adding previously popular determinants of capital structure has only a modest economic impact on capital structure dynamics. When used with bank debt, stock returns continue to dominate other determinants of capital structure.

This paper empirically examines whether stock prices have a significant effect on different forms of debt in a unique environment that is characterized by high leverage and high reliance on bank debt. Furthermore, firms in Oman are taxed at a flat rate and there are no personal income taxes. Our r...