Capital Structure Determinants: Malaysian Evidence

Abstract

The present study analyses the capital structure choice of Malaysian firms for the period 1993 - 2003. Debt levels have increased substantially after the 1997 East Asian Financial Crisis. Analysis shows that tangibility has no significant influence on leverage in both pre-crisis and post-crisis periods. This finding contradicts the findings of earlier studies. Similarly profitability does not appear to have any influence on leverage during both pre-crisis and post-crisis periods. Size has significant negative influence on leverage in both pre and post crisis periods. One plausible reason could be that investors have more information about large companies and are willing to supply equity to these firms as suggested by information based theories of capital structure. Growth as expected has significant negative influence on leverage in both periods. This is consistent with information based theories of capital structure that suggest that growth firms face more uncertainty compared to stable mature firms and may therefore choose to have less leverage. Tax-based explanations of capital structure suggest that presence of non-debt tax shields obviates the need for leverage. However, analysis shows that NDTS has positive impact on leverage in both periods thus rendering tax-based explanations untenable in the Malaysian context. Liquidity has significant negative influence during the pre-crisis period while it has no significant influence during the post-crisis period. Volatility has significant influence on leverage though the degree of influence appears to be small in both periods. Stock price performance has negative influence on leverage in both periods indicating possible equity offerings rather than debt offerings as firms may be timing their equity issues. Thus there is support for information based explanations of capital structure.