Abstract
Very limited studies have been done on the capital structure of property firms in Malaysia emphasizing on the presence of target capital structure and the affecting determinants and also the speed of adjustment to target leverage. Thus, this study aims to investigate these issues among the property firms in Malaysia by using a dynamic model. This study finds that these property firms do practice target capital structure which is influenced by certain firm characteristics like non-debt tax shield, asset structure, profitability, firm size, growth opportunity and liquidity in their capital structure and they also time their security issuance. Being deviated from target from time to time these property firms partially adjust indicating a support for the dynamic trade-off theory. There are also influences of the pecking order and the market timing theories in the capital structure decisions of these property firms. This study contributes to the literature by offering insights of the capital structure practice and the adjustment speed to target capital structure of property firms in Malaysia and fills the gap in the literature.
Highlights
The body of knowledge has been recording an extensive work on capital structure ever since the influential paper by Modigliani and Miller (1958)
This study finds that these property firms do practice target capital structure which is influenced by certain firm characteristics like non-debt tax shield, asset structure, profitability, firm size, growth opportunity and liquidity in their capital structure and they time their security issuance
This study investigates the dynamic aspects of capital structure on the existence of target capital structure and the speed of adjustment to target capital structure of property firms in Malaysia
Summary
The body of knowledge has been recording an extensive work on capital structure ever since the influential paper by Modigliani and Miller (1958). Many researches have explored the capital structure of firms from different sectors of the economy, such as property (Ooi, 1999) manufacturing (Mukherjee & Mahakud, 2010) and construction firms (San & Heng, 2012). Researchers show interest in making comparison studies on the capital structure decisions among the various sectors in the economy of either on an individual country (Salim & Yadav, 2012) or even cross-country (Le & Ooi, 2012). Three dominant theories have been discussed and examined throughout the development of capital structure studies, which are the trade-off theory (TOT), the pecking order theory (POT), the agency theory and the market timing theory. The TOT theory argues that optimal capital structure is achievable when the cost of debt is traded off with the benefits of debt. Examples of leverages related costs taken into account in some empirical corporate financing investigations can be found in Scott (1977) where he incorporates bankruptcy costs; agency costs by Jensen and Meckling (1976) and in DeAngelo and Masulis (1980) on the loss of non-debt tax shield
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