Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Theoretical Investigation on Determinants of
Government-Linked Companies Capital Structure
Noryati Ahmad 1 and Fahmi Abdul Rahim2
This study investigates the capital structure determinants of Malaysian
Government Link ed Companies (GLCs) and attempts to link the relevant
capital structure theory related to GLCs. A total of 38 government link ed
companies listed in Bursa Main Mark et are analyzed covering the period
from 2001 until 2010. Using pooled ordinary least square method, the
results show that size has significantly positive relationship to all the
dependent variables (debt ratio, long term debt ratio and short-term debt
ratio). Growth is positively related to debt ratio, while liquidity is negatively
related to both debt ratio and short term debt ratio. Interest coverage
ratio and tangibility ratio have significantly positive relationship with longterm debt ratio, while profitability is inversely related to long-term debt
ratio. A negative relationship between tangibility and short term debt ratio
is found in the study. Non-debt tax shield appears not to have significant
relationship with the leverage of GLCs. Generally GLCs’ capital
structures are supported by both trade off theory and peck ing order
theory while there is little evidence to support agency cost theory. In
addition GLCs with debt ratio of more than 40% is significant in explaining
debt policy decision of GLCs.
JEL Codes: G30, G32 and G38
1. Background of study
Incorporation of Malaysian Government Linked Companies (GLCs) started in the year
2004. The performance of Malaysian GLCs have attracted attention of various
interested parties because they are directly or indirectly owned by government
(through the Ministry of Finance Incorporated) or through the Government Linked
Investment Company (GLIC) (Mohd Saleh, Kundari and Alwi, 2011). GLCs companies
have played a vital role in Malaysia’s economy growth as they accounted for one-third
of the FTSE KLCI Composite Index. Lau and Tong (2008) reports that as owner of
GLCs, the government is in the capacity to make major decision on matters like
appointment of the board of directors and top management, corporate strategy,
financing, acquisition and investment. In his study, Wiwattanakatang (1999) finds that
GLCs are highly leveraged because they can easily get access to secured loans.
Capital structure decision of GLCs is crucial to the financial well-being of the company.
Similar to other domestic companies, GLCs needs to seek an ideal capital structure
that could reduce the cost of capital and reach the optimal level of debt. Eriotis,
Vasiliou and Neokosmidi (2007) state that inappropriate on debt policy decision can
trigger financial distress and lead to bankruptcy. What are the determinants of such an
optimal capital structure? These are the common questions asked when making
financial decision relating to capital structure.
1
Associate Professor Dr Noryati Ahmad, Arshad Ayub Graduate Business School, Universiti Teknologi MARA,
Malaysia, Email: noryatia@salam.uitm.edu.my
2
Dr Fahmi Abdul Rahim, Faculty of Business Management, Universiti Teknologi MARA, Melaka City Campus,
Malaysia
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Numerous studies have existed in an attempt to explain optimal capital structure of
companies. Yet, there has been no fast rule to assist the financial manager to attain
efficient mixture of equity and debt capital. Donald, Hao and Chek (2006) argue that
larger and more profitable firms with political patronage tend to resort to debt
financing. Wan Tahir (2004) finds Malaysian GLCs fail to optimize the use of their
capital and are highly geared. In addition many researchers are attracted to
investigate factors affecting capital structure decisions of company. Generally
empirical results show that the choice of capital structure studies differs from sector
to sector basis (Muzir, 2011; Sabir and Malik, 2012), between private and public
companies (Ting and Lean, 2011), between large and small companies and the
direction of the explanatory variables on the leverage measured. For example
Suhaila and Wan Mahmood (2008) and Ting and Lean (2011) find that growth is not
a determinant for capital structure in Malaysia while Dzolkarniani (2006) and
Mustapha,Ismail and Minai (2011) discover growth to be positively related to
leverage. This setting provides an opportunity to examine and identify factors that
determine the debt policy decision of Malaysian GLCs. This study also extends the
research work of Ting and Lean (2011) by including additional variables like non-debt
tax shield and interest coverage ratio that they have not included but have been
highlighted by previous literature to be among the factors that determine firm’s capital
structure. Furthermore, this study utilizes different financial leverage measurements
proposed by Sheikh and Zongjun (2011) and Bevan and Danbolt (2002). They claim
that a clearer understanding of the capital structure of a company can be derived by
using long term debt and short term as proxies Last but not least this study attempts
to identify the capital structure theory that would explain Malaysian GLCs capital
structure decision policy.
This paper is structured as follows: Section 1 provides a brief background of the
study. Section 2 discusses and reviews the capital structure theories and empirical
evidences. Section 3 explains the data and methodology employed. Section 4
discusses the findings and section 5 concludes.
2. Capital Structure Theories and Empirical Evidences
Evolution of capital structure theories starts off with Modigliani and Miller (1958)
study on capital structure. Also known as capital structure irrelevance theory, it
argues that the capital structure of a company has no impact on its value but rather
the type of investment decision made does. This theory was heavily criticized as it
fails to account for other factors like the advantage of tax shield, bankruptcy costs
and agency costs. The work of Modigliani and Miller prompts the development of
other theories of capital structure specifically static trade-off, pecking order, and
agency cost theories
Static trade-off theory explains that debt policy decision of a company is identified
after the company weights the benefits and costs of using debt to finance. Optimal
capital structure is achieved through the net advantage of using debt financing. It
further argues that this advantage compensates the financial distress and bankruptcy
costs associated with debt financing (Altman, 1984 and Sabir, 2012). Company with
low level of debt will be able to increase the firm value if more debt financing is used.
However when the firm value is already maximized then using more debt will not
benefit the firm but rather incur additional costs. Hence highly profitable companies
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
will resort to high debt financing since it can reduce agency costs, taxes and
bankruptcy costs.
Myers and Majluf (1984) and Myers (1984) were the advocates of pecking order
theory. The theory explains that company will use its internal sources of financing
first before seeking external financing like debt because it is cheaper to source
internally and is aware that different form of capital has different costs (Myers, 1984).
Highly profitable company tends to prefer low level of debt financing since it has
sufficient internal funds. On the other hand, company with low profitability prefers to
use debt instead of equity financing because it is cheaper. In addition, if company
runs out of internal funds, then it prefers to use debt rather equity since the cost of
debt is relatively cheaper.
Managers are hired by stockholders to manage the company. However there may be
times when managers make decision that will be at the expense of the stockholders.
Consequently costs need to be borne by stockholders due to mismatch of interest
between these two parties (Jensen and Meckling, 1976). It is said that debt financing
could reduce this conflict of interest and hence agency costs. From the agency cost
theory perspective, debt financing is preferred to equity because debt investors have
the right to take legal action against management who failed to pay their due interest
payments. Fearing of losing his job, management will act in the interest of the
organization to ensure that debt investors’ interest payments are made (Grossman
and Hart, 1982).
Capital Structure Determinants, Theories and Hypotheses
Previous empirical findings have identified liquidity, interest coverage ratio, size,
growth opportunity, tangibility of assets, profitability and non-debt tax shield as
factors influencing company’s capital structure decision. The following section
reviews variables identified in previous literatures relates them to capital structure
theories and hypothesizes the relationship between these explanatory variables and
financial leverage
Company that is highly liquid would seek debt financing due to its capacity to pay any
debt obligation due. As a result, a positive relationship is hypothesized between
financial leverage and liquidity. This concurs with the trade-off theory. Pecking order
theory tends to differ with this relationship. It is argued that if company has so much
cash flow then it will use internal funds for any new investments rather than resort to
debt financing. Company’s liquidity is related to short-term debt financing and is
theoretically predicted to show a negative relationship (Bevan dan Danbolt, 2000).
Among studies that are in congruent with pecking order theory are Sheikh and
Zongjun (2011), Viviani, (2008) and Mazur, (2007). It is anticipated that an inverse
relationship exist between GLCs leverage ratios and liquidity ratio.
Interest coverage ratio is another explanatory variable to be considered in this study.
Following Eriotis, Vasilou and Neokosmidi (2007), the equation is expressed as net
income before taxes divided by interest payment. The ratios can be calculated as
expressed below: Interest Coverage Ratio equal to net income before tax interest
charges. Harris and Raviv (1990) suggest that interest coverage ratio has negative
correlation with leverage. They conclude that an increase in debt will increase the
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
probability of the company to default. Therefore, interest coverage ratio acts as a
proxy of default probability which implies that a lower interest coverage ratio
indicates a higher debt ratio. The relationship is in support of static trade-off theory.
On the other hand, Baral (2004) argues that a positive relationship between interest
coverage ratio and leverage can exist. Hence it is expected that an increase in
interest coverage ratio will affect leverage negatively.
Large companies prefer to go for debt financing and are less likely to go bankrupt (.
Due to their size, they are able to use debt financing since their earnings are more
stable. Static trade off theory supports this argument. Empirical evidences by Zou
and Xiao, (2006), Sheik and Zongjun (2011) and Huang and Song (2002) are in
tandem with this theory. In contrast, Bevan and Danbolt (2002) and Chen (2004)
findings support the pecking order theory where they report a negative relationship
between size and leverage. A negative relationship exists due to the reason that
large firms do not have serious problem of information asymmetry and therefore can
afford to issue equity rather than debt instruments. Long term debt and short term
debt have negative relationship with size of the company (Titman and Wessels,
1988). Generally the results from previous literature are still mixed. In this study, the
expectation on the effect of GLCs size on leverage is positive.
Sheikh and Zoujun (2011) and Song (2005) find that growth is a good factor for
explaining the capital structure decision of the firm. Based on the pecking order
theory, when company is faced with growth opportunities, it will tend to source for
debt financing rather than issuing new equity. The rationale behind such decision is
that issuing new equity increases the asymmetric information related costs that could
be reduced through issuing of debt. Hence pecking order theory postulates a positive
relationship between growth and financial leverage. However both static trade-off
theory and agency theory predict a negative relationship between financial leverage
and growth opportunities. According to static trade-off theory, since growth
opportunities are considered as intangible assets and therefore cannot be
collateralized, company will reduce the use of debt financing. Under agency theory,
management has the tendency to channel the company’s wealth to the shareholders
is greater if the growth opportunities are greater. In order to mitigate the agency
problems, company with high growth potential should seek equity financing rather
than debt financing. Results from Eriotis,Vasilio. and Ventoura-Neokosmidi, (2007)
and Sheikh and Zongjun (2011) supported these two theories. A positive relationship
between GLCs leverages ratios and growth opportunities is hypothesized.
Static trade off theory states that companies will be in a position to provide collateral
if they have high level of tangible assets. Companies that default on their debt can
use these tangible assets as collateral and hence avoid being bankrupt. Hence it is
hypothesize that there is a positive relationship between tangibility and financial
leverage. Most empirical evidence in developed confirms this relationship. (Rajan
and Zingales, 1995, Wald, 1999 and Vivian, 2008) while those from the developing
countries report either positive or negative relationship. Wiwattanakantang (1999)
and Baharuddin, Khamis, Wan Mahmood and Dollah (2011) document a positive
relationship while Mazur (2007) and Sheikh and Zongjun (2011) however find
negative relationship between these two variables. Nuri (2000) explains that the
inconsistency in the results is due to different form of debt being used in the studies
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
conduct. A positive relationship exists if long-term debt is used while an inverse
relationship is observed if company uses more short-term debt (Sogorb-Mira, 2005
and Ting and Lean, 2011). This negative relationship is in line with the agency cost
theory that postulates that company tends to use debt financing if it is not highly
collateralized to prevent agency conflicts (Titman and Wessels, 1988 and Sheikh and
Zongjun, 2011). A positive relationship between GLCs leverages ratios and tangibility
of assets is expected in this study.
Under static trade off theory profitability is said to be positively related to financial
leverage. Um (2001) explains that profitable company is capable of higher debt
capacity that results in benefitting from higher tax shields. Hence, it is expected that
a positive relationship should exist between profitability and financial leverage.
Besides management will choose debt financing over equity financing since debt
cost is cheaper On contrary, pecking order theory suggests an inverse relationship
between profitability and financial leverage because it is argued that company
prefers to source for internal funds first before going for external financing. Similar
findings are documented by Sabir and Malik (2012) and Sheikh and Wang (2011).
Hence, this study expects profitable GLCs to use less debt financing.
The decision to increase financial leverage depends on whether the tax deductions
are on depreciation and investment tax credits (DeAngelo and Masulis, 1980). If
major proportion of tax deduction is due to depreciation instead of borrowing then
there is a negative relationship between non-debt tax shields and financial leverage
(Song, 2005). On the other hand, Pettit and Singer (1985) have argued that large
company is inclined to seek debt financing since large company have more tax
deductible items. This is in line with the pecking order theory. As a proxy for non-debt
tax shield this study will use annual depreciation divided by the total assets (Song,
2005). Furthermore Sheikh and Zongjun (2011) find inverse relationship between
non-debts tax shield and short-term debt. Hence it is hypothesized that non-debt tax
shield has positive relationship with GLCs leverage.
3. DATA AND METHODOLOGY
Data
The sample population of this study is Malaysia GLCs listed in Bursa Malaysia. Data
is collected from the annual financial report and the period of analysis is from 2001 to
2010. Initially 44 government linked companies are identified but due to lack of
information and some companies being dissolved, merged and or acquired by others
companies as well as unavailability of complete data, only 38 companies are
included in our sample. This study also excluded GLCs in the banking, insurance and
investment sectors as their nature of business may not be comparable to the capital
structure of those non financial GLCs. The proxies use for the dependent variables
and explanatory variables are based on the previous literature and are display in
Table 1.
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Table 1 : Proxies for Dependent and Independent
Variables Studied
Dependent Variables
Proxies
Debt Ratio
Total Debt/Total Assets
Long-Term Debt Ratio
Short-Term Debt Ratio
Long term debt/Total Assets
Short-term debt/Total assets
Independent Variables
Liquidity (LIQi,t )
Tangibility (TANGi,t )
Profitability (PRFi,t )
Firm Size (SIZE i,t )
Firm Growth Opportunities
(GRWi,t)
Non-debt Tax Shield
(NDTS i,t )
Interest Coverage Ratio
(INCOV)
Dummy Debt Ratio (D40)
Proxies
Current Assets/Liabilities
Fixed assets/Total assets
Return on equity ratio
Logarithm of Total Sales
Annual percentage change in
total assets
Annual depreciation/Total
assets
Net Income before tax/Interest
Payment
Debt ratio > 40% = 1 and Debt
ratio < 40% = 0
Four pooled ordinary least square (OLS) regression models are estimated to
analyze GLCs capital structure determinants. Model 1, 2 and 3 use debt ratio
(DR), long term debt ratio (LTR) and short term debt ratio (STR) as dependent
variables respectively. Model 4 includes a dichotomous variable equal to unity
if GLCs have a debt ratio greater than 40% and zero otherwise. The inclusion
of the dichotomous variable is to determine whether GLCs that have debt ratio
of more than 40% make significant contribution in explaining GLCs debt ratio.
These models are specified as follows:
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Where
and
are proxies for tdebt ratio, long term debt ratio and
short term debt ratio of GLC i at time t respectively. Liquidity ratio (.
, , interest
coverage ratio
, size
, growth rate
, tangibility of assets
, profitability a
and non-debt tax shield
are the
independent variables of GLC i at time t. εi,t is the error term.
is the dichotomous
variable as indicated in the Table 1
Pooled OLS regression models allow testing on all cross-section units through time
which is better off than just testing all cross-section units at one point of time or one
cross-section at a given point of time (Podesta, 2000). Levin, Lin and Chu (2002)
(LLC) group and individual unit root tests, multicollinearity test, serial correlation test
and heteroskedasticity test are run before four models are estimated.
4. Empirical Findings
4.1 Descriptive statistics
Table 2 below describes the statistics of both the dependent and independent
variables in the sample of this study. On average the debt ratio of GLCs is 44% while
the long-term debt ratio is 22% and short-term debt is 25% respectively. This
indicates that the GLCs are almost equally financed by debt and equity. In terms of
liquidity, GLCs have on average liquidity ratio of 1.7 times and interest coverage ratio
of 0.8 times. The mean value of GLCs size is 8.22. The minimum value of profitability
is -1.17 to a maximum value of 0.23. In relation to tangibility, fixed assets represent
50% of the total assets of GLCs. GLCs experience on average a growth rate of 18%
during the period studied.
Table 2: Descriptive statistics of the variables
Variables
Mean
Median
SD
Minimum
Maximum
DR
0.444684
0.019159
0.277137
0.000000
2.676300
LTR
0.221270
0.179331
0.210163
0.000000
1.063000
STR
0.254584
0.226881
0.211215
0.000000
2.356967
LIQ
1.771779
1.385213
1.762410
0.000000
12.37959
INCOV
0.858262
1.062101
0.512221
0.000000
2.407551
SIZE
8.224979
8.885489
2.580289
0.000000
10.53205
GRW
0.176741
0.033747
0.771734
-0.964903
7.311859
TANG
0.508906
0.535839
0.245764
0.000000
0.945988
PROFIT
0.036432
0.041752
0.094659
-1.166284
0.225036
NDTS
0.019159
0.013601
0.023023
0.000000
0.148717
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Granger and Newbold (1974) argue that if the series contain unit root then the
estimated regression can provide spurious results. Hence it is essential to conduct
unit root test to avoid having spurious estimation. Levin, Lin and Chu (2002) propose
to use Levin-Lin-Chu (LLC) unit root test if it is found that the pooled data (N) is
larger than the time section studied (T). Result of LLC unit root test indicates all the
series have no unit root (Table 3).
Table 3: Results of Levin, Lin and Chu Group and Individual Unit Root Test
Method
Levin, Lin & Chu
Series
DR
LTR
STR
GRW
INCOV
LIQ
NDTS
PRF
SIZE
TANG
Statistic
-40.6696
t-Stat
-10.899
-7.1491
-11.012
-19.432
-11.693
-9.7903
-6.1692
-15.306
-11.138
-9.3708
P-value
0.0000***
P-value
0.0000***
0.0000***
0.0000***
0.0000***
0.0000***
0.0000***
0.0000***
0.0000***
0.0000***
0.0000***
*** denotes significance at the 1% levels
Spearman rank correlation coefficient test is used to check for multicollinearity.
Sekaran and Bougie (2010) explain that correlation of 0.70 and above shows the
presence of mullticollinearity. Results of correlation coefficient test indicate the
absence of multicollinearity among the independent variables (Table 4).
Table 4: Spearman rank correlation test
GRW
GRW
INCOV
LIQ
NDTS
PRF
SIZE
TANG
1
INCOV 0.1209
1
(0.0183**) -LIQ
0.0457
0.2014
1
(0.3737) (0.0001***) --
NDTS 0.0721
0.0923
(0.1606) (0.0722*)
-0.0305
(0.5521)
1
--
PRF
0.0916
0.5117
0.0674
(0.0744*) (0.0000***) (0.1896)
-0.0056
(0.9123)
1
--
SIZE
0.0393
0.4910
0.2151
0.2887
0.1436
1
(0.4440) (0.0000***) (0.0000***) (0.0000***) (0.0050***) --
TANG 0.0320
0.3145
0.0898
0.1877
0.1073
0.5928
1
(0.5335) (0.0000***) (0.0804*) (0.0002***) (0.0364**) (0.0000***) -***.** and * denotes significance at the 1%, 5% and 10% levels. ( ) indicates p-value.
The estimated equations are also tested for the presence of serial correlation and
heteroskedasticity. Durbin-Watson statistics based on the initial estimation indicate
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
that all three models have serial correlation problem. To overcome this problem,
autoregressive error lag one (AR(1)) was included in all the models.The problem of
heteroskedasticity can occur in a cross sectional data. In dealing with
heteroskedasticity, we run the pooled OLS regression models using cross-section
weights to allow for different variances for each company.
4.2 Results of the Estimated Pooled OLS Models
Table 5 displays the estimation results of the pooled OLS regression models.
Table 5: Estimated Results
Dependent Variable
Model 1
DR
Coefficient tStatistic
p-value
-0.0471
-5.2531
0.0000***
0.0315
1.1017
0.2706
0.0478
5.6867
0.0000***
0.0250
2.4100
0.0160**
0.1426
1.3860
0.1658
-0.2238
-1.5616
0.1184
0.9789
0.9292
0.3528
na
Model 2
LDR
Coefficient tStatistic
p-value
0.0016
0.2864
0.7745
0.0444
2.3281
0.0199**
0.0177
2.1566
0.0310**
0.0007
0.1860
0.8524
0.3592
6.3989
0.0000***
-0.2553
-2.3637
0.0181**
-0.1343
-0.2801
0.7793
na
Model 3
SDR
Coefficient
t-Statistic
p-value
-0.0474
-5.0303
0.0000***
-0.0299
-1.3524
0.1763
0.05061
9.6852
0.0000***
0.0238
2.8240
0.0047***
-0.2669
-3.1488
0.0016***
0.131993
1.607676
0.1079
0.7005
0.8952
0.3707
na
R-squared
0.0287
0.6102
0.5417
0.5439
4.4790
0.0000
0.5068
-0.1237
-2.0478
0.0406
0.7208
13.082
0.0000
0.6793
0.0644
2.7911
0.0053
0.5103
2.5232
0.0116
0.4790
Model 4
With Dummy
Coefficient tStatistic
p-value
-0.0166
-2.5162
0.0119**
0.0132
0.6560
0.5118
0.0269
5.0586
0.0000***
0.0013
0.1972
0.8436
0.0595
0.8973
0.3696
-0.1979
-1.8520
0.0640*
1.0898
1.3845
0.1662
0.3029
13.569
0.0000***
0.0166
0.8583
0.3907
0.3630
2.6433
0.0082***
0.6373
Adjusted R-squared
0.5065
0.6791
0.4787
0.6370
1668.53
3438.61
1492.81
2535.83
Prob(F-statistic)
0.0000
0.0000
0.0000
0.0000
Durbin-Watson stat
2.2846
1.9955
2.2725
2.2057
Explanatory Variables
LIQ
INCOV
SIZE
GRW
TANG
PRF
NDTS
DUMMY
C
AR(1)
F-statistic
***.** and * denotes significance at the 1%, 5% and 10% levels .
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Proceedings of 3rd Asia-Pacific Business Research Conference
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Size
The results indicate that size is a significant determinant of GLCs capital structure
for all the three models and are positively related. This implies that banks readily
provide short term or long term loans to GLCs since they have more collateral than
small companies. The finding appears to support the static trade off theory that
suggest larger companies are less likely to face bankruptcy (Dawood, Muostafa
and El-Hennawi, 2011 and Morri and Cristanziani, 2009).
Liquidity Ratio
The liquidity ratio variable is both negative and significant for debt ratio and short
term debt ratio but insignificant for long term debt ratio. As pointed out by Bevan
and Danbolt (2000) liquidity ratio variable is more relevant to short term debt
because company tends to use short term debt to finance their current assets.
Hence it can be concluded that Malaysian GLCs prefer to use short term debt to
finance its working capital rather long-term debt. The empirical result between
liquidity ratio and short term debt concurs with the pecking order theory.
Interest Coverage Ratio
Interestingly the coefficient on interest coverage ratio (INCOV) is significant at the
0.05 level for long-term debt ratio and positvely related. Interest coverage ratio
indicates company’s capability to meet its interest payment from its operating profits.
Baral (2004) explains that this relationship is possible because GLCs with higher
INCOV ratio have more than enough cash flows required to service their debt and
would not mind seeking more debt financing (Baral, 2004). However Baral (2004)
use the debt capacity theory to explain the positive relationship between interest
coverage ratio and long-term debt. Another plausible reason is that since GLCs are
government owned, therefore there is a tendency for these companies to deviate
from the financial fundamentals when changing their long term debt levels (Ting and
Lean, 2011).
Profitability
There are no relationship between profitability and debt ratio as well as short term
debt ratio (SDR) but negative relationship with long term debt ratio (LDR). The result
confirms the findings of Huang and Song (2006) and Ting and Lean (2011) and is in
support of pecking order theory. It appears that as GLCs become more profitability,
these companies tend to raise fund through equity while decreasing the level of debt
financing. A profit-making GLCs are able to attract equity investor and at the same
time the ability to pay off their previous debt.
Growth Opportunities
Growth opportunities are significantly and positively related to both debt ratio (DR)
and short-term debt ratio (SDR). This result is in line with Myers (1984). He argues
that banks willing to lend money to company that has good growth opportunities. The
probable justification of such result is the most of the Malaysian GLCs have yet to
achieve their optimum growth potential and will seek external financing to realized
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
higher growth opportunities. On the other hand, growth opportunities are not
significant in explaining capital structure for GLCs. A plausible explanation is that
growth potential GLCs use short term financing instead of long term financing due to
finance investments long-lasting assets. This finding supports both the static trade off
theory and agency theory. In addition, our result is in contrast with the studies of both
Suhaila and Wan Mahmood (2008) and Ting and Lean (2011) that find no
relationship between the two variables.
Tangibility of Assets
Tangibility of assets is not the determinant for GLCs capital structure, when debt ratio
is used as a proxy. However when this study decomposes the leverage ratio into
short term and long term debt, a significant positive relationship exists between
tangiblity and long term debt. However an inverse is found for short term debt ratio.
This finding is consistent with those of Bevan and Danbolt (2000), Sogorb-Mira
(2005) and Ting and Lean (2011). This suggests that GLCs with higher tangible
assets are more likely to use long term debt rather than short-term debt to prevent
agency conflicts (Sheikh and Zongjun, 2011). In this regard, our finding provides
support for agency cost theory.
Non-debt tax shields
Based on the theoretical discussion in the earlier section, non-debt tax shields
(NDTS) is expected to have either a positive or negative relationship. However the
estimated results obtained from all the three models reveal insignificant relationship.
This implies that NDTS is not the capital structure determinants for Malaysian GLCs.
As mentioned earlier in previous section, this study also included a dichotomous
variable, D40, in our pooled OLS regression model 4 to investigate whether GLCs
with debt ratio of more than 40% have significant influence on debt policy decision.
Based on the estimated result, the dichotomous variable is significant implying that
GLCs with 40% debt structure prefer to seek debt financing rather then other form of
external financing.
5. Summary and Conclusions
The objective of this study is to empirically investigate the determinants of capital
structure of 38 Malaysian Government Linked Companies over a 10-year period
starting from 2001 to 2010. Three types of leverage proxies are used. Empirical
evidences report significant differences in the factors determining the three leverage
proxies. Overall, the analysis results indicate that size is positively related to all types
of debt ratios. Tangibility of assets are inversely related to short term debt ratio and
directly related to long term debt ratio. Liquidity ratio and growth opportunities are
positively related only to debt ratio and short term debt ratio. Non debt tax shields are
not related to any of the three debt proxies. Only profitability is negatively related to
long term debt. Interestingly interest coverage ratio has positive relationship with long
term debt which does not support any of the capital structure theories discussed.
Generally the findings support both static trade off theory and pecking order theory
for Malaysian GLCs studied.
11
Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
It is recommended that future research on capital structure of GLCs could include
segmenting the GLCs into different sectors to capture the industry effect. In addition
a comparative study on determinants of GLC’s capital structure from different
countries can also be conducted.
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