Abstract
This study investigates two main objectives. Firstly, the determinants of capital structure were examined for each sector among Malaysian Shariah-compliant firms, and whether the inclusion of Islamic debt (leverage 1 and leverage 2) has led to different results due to changes in the screening methodology. Secondly, this paper analyzes the target Capital Structure and Speed of Adjustment for both before and after the Revised Screening Methodology. This study employs panel data analysis by using generalized method of moment (GMM). The sample consists of 192 Shariah-compliant companies in Malaysia during the period of 1999 to 2017. The results demonstrated that the firm has target capital structure and identified specific determinants that have affected the capital structure of Shariah-compliant firms in Malaysia. Moreover, the findings have also revealed certain implications toward large firms. Large firms tend to generate more income and profit, however at the same time, these firms require more debt to support investment activities. Hence, with regards to profitability, this study identified a negative relationship between profitability and leverage for Shariah-compliant firms for all sectors. Shariah-compliant firms with high profitability will use a lower leverage in their financial activities. Thus, the results strongly support the pecking order theory. Other than that, this study found that the lagged dependent variable (lagged leverage 1 and leverage 2) presented a positive significance, and concluded that the speed of adjustment takes approximately 2 years. This suggests that the Shariah-compliant firms close approximately by 30% to 70% of the gap between current and target capital structure within one and two years. Furthermore, the findings on the target leverage level imply that after the revised screening methodology was introduced in November 2013, the speed of adjustment became faster than before the implementation of the new screening methodology. Thus, it is important for management to maintain the target leverage during financial decision making, which in turn strengthens the firm’s Shariah-compliant financial stability and sustainability, and continue to remain listed as Shariah-compliant securities. This paper provides an overview of capital structure behaviour in Malaysia.
Highlights
In the arena of corporate finance, capital structure is a very important aspect of a company’s investment choice as this will affect the company’s value and financial risk
The main objectives for this study are to examine the determinants of capital structure for each sectors among Malaysian Shariah-compliant firms, and whether the inclusion of Islamic debt has led to different results due to changes in the screening methodology
This study seeks to investigate the motive behind the reduced number of Shariah-compliant firms in November 2013, for which these companies have had high levels of conventional debt that surpassed the benchmarks set by the Securities Commission Malaysia
Summary
In the arena of corporate finance, capital structure is a very important aspect of a company’s investment choice as this will affect the company’s value and financial risk. The limit set for the financial ratio benchmarks is 33 percent, whereby a firm is required to have 33 percent of its holdings of cash or cash equivalents in conventional deposits or accounts, and conventional debts or borrowings for companies listed as Shariah-compliant firms. This study examines two objectives; firstly, to investigate the determinants of capital structure for each sector among Malaysian Shariah-compliant firms, and whether the inclusion of Islamic debt (leverage 1 and leverage 2) has led to different results due to changes in the screening methodology. This paper is organized as follows; the session presents a literature review on the revised Shariah screening methodology, capital structure and speed of adjustment based on previous research. The last section summarizes the conclusion and discussion of the research
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