The Determinant of Capital Structure of SMEs in Malaysia: Evidence from Enterprise 50 (E50) SMEs

Abstract

Capital structure have implications in determining the ability and success of a firm, especially to small andmedium-sized enterprises (SMEs). This paper analyses the capital structure of SMEs in Malaysia focusing onEnterprise 50 (E50) SMEs. E50 is an annual awards program initiated by government and organized by SMECorporation & Deloitte Malaysia since 1997 to recognize the 50 best SME companies in Malaysia based on theirperformances and potential to succeed. The secondary data from Companies Commission of Malaysia has beencollected for the study. The study employed regression analysis on 334 companies, utilised the accounting datafor the five year period of 2005 to 2009. Capital structure is the Dependent Variable referring to debt ratio of thecompanies, decomposed into Long Term Debt ratio and Short term Debt ratio. The Independent Variables (IV)are age; size; tangibility; liquidity; profitability; growth and taxation. Two theories of capital structure haveguided this study i.e. the Trade-Off Theory and the Pecking Order Theory. The study found that size is importantif we decomposed the debt into longand short term. In addition, asset tangibility, liquidity and profitability arethe main capital structure determinants for SMEs. Age and growth are important for a long term, while taxationis not an important consideration in capital structure decision.