A study of alternative capital structure theories in the Malayasian context
This thesis examines the relevance of the western capital structure theories – the static trade-off theory and the pecking order model - in providing plausible explanation of Malaysian corporate financing decisions from 1991 to 2000. To achieve this objective, the empirical analyses have been divided into three parts: (1) the first analysis examines the determinants of capital structure based on the Malaysian proposed factors and the theory-related attributes. (2) The second part tests the static trade-off theory (via target-adjustment model) and the pecking order model, separately and jointly, in seeking the applicability of the theory descriptions. (3) The final analysis evaluates the performance of the developed models when judged on explanatory power. The empirical analyses of the thesis adapt Shyam-Sunder and Myers' (1999) model specifications and the subsequent criticisms by Chirinko and Singha (2000), with several revisions and adjustments to fit our enquiry. Descriptive exploration on the data finds six distinct financing patterns, which range from 'no-leverage' financing to 'all-leverage' financing. When these patterns are descriptively linked to the theoretical predictions, it seems that both the static trade-off and the pecking order models do have some relevance in providing overall description of Malaysian firms' financing behaviour. These preliminary inferences are empirically tested using a panel data framework. The results suggest strong association between industry and firms' financing decisions, even if there are possibilities that some results may not show the significant relation. For other capital structure determinants, the findings support the general claim that most leverage-related factors identified in the developed economy also apply to other countries as well, despite institutional differences. The findings also indicate that the descriptions of both models are relevant in explaining firms' financing decisions. In addition, the findings embrace the semi-strong assumption of the pecking order model, and the negative relation between past profitability and changes in debt level. To test the power of the developed models, the model specifications are fitted to several hypothetical financing series. The fitted tests conclude that the stronger performance of the pecking order model than in the target-adjustment model, as claimed by Shyam-Sunder and Myers (1999), is a limited view. The results show that the pecking order model has generated a false fit (cc) when it incorrectly fits the target-adjustment series just as well as its own pecking order series. On the other hand, the tests have demonstrated the power of the target-adjustment model. The procedure in generating the series, the underlying assumption of the pecking order model, the subjective proxies for leverage predictors and the different background of the sample may be the plausible contributing factors to these findings. Based on descriptive exploration and panel data study, this thesis concludes that the descriptions of both the static trade-off theory and the pecking order model are consistent with Malaysian firms' financing decisions. However, the answer to which model can better describe firms' financing behaviour remains inconclusive.