The Relevance of Capital Structure Theories on Bursa Malaysia

1Raja Rehan

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Abstract:

This study attempts to explore sectorial specific capital structure determinants for listed Malaysian firms and examine whether their outcomes are in relevance with capital structure theories. Within the framework of Modigliani and Miller theory, Trade off theory and Pecking Order theory, the core objective of the study is to investigate sectorial specific capital structure determinants such as current assets, sales, total assets, earning per share, fixed assets and return on equity with capital structure formulation and to find if any of these capital structure theories are applicable in this case. Capital structure is measured by debt equity ratio and used as a variable of interest. Based on the key capital structure theories, theoretical conceptual framework is designed, which is tested in the Malaysian context. Using time series data collected from Bloomberg database, the empirical investigation is the first effort to analyze in-depth sectorial specific capital structure determinant by evaluating largest sample set in context of Malaysia. The large-scale investigation is carried out on 459 listed firms from eleven various sectors of Bursa Malaysia main market over the observed period of 2005-2016. The methodology is based on Multiple Regression model, which is used for examining sectorial specific determinants of capital structure. The findings are slightly surprising and the empirical results show that each capital structure determinant has a different effect in specific sectors. This thus confirms the robust presence of Modigliani and Miller theory in Bursa Malaysia main market. These results may benefit financial managers and policy makers to develop a comprehensive strategy to enhance organizational performance.

Keywords:

Capital Structure Theories, Multiple Regression, Modigliani and Miller Theory, Time Series Data, Bursa Malaysia

Paper Details
Month3
Year2020
Volume24
IssueIssue 7
Pages2518-2532