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The Relationship between Economic Growth and Capital Structure of Listed Companies: Evidence of Japan, Malaysia, and Pakistan

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  • Muhammad Mahmud

    (Institute of Business Administration, Karachi.)

Abstract

Corporate enterprise is a natural outcome of capitalism in the course of economic development. The underwriter firms and banks etc. initially meet the capital requirements of such enterprise. Later on it is the stock exchange that carries out redistribution of shares of the enterprise. Corporate decisions on capital structure policy have long been a subject of debate and still remain an unresolved issue. The traditional view of capital structure was that it results in the weighted average cost of capital being U-shaped, which means that there exists as an optimal mix between debt and equity, at which point a firm’s value is maximised. However, Modigliani-Miller (1958), in a world of no tax and no financial distress, proved that capital structure is irrelevant to explaining firm values. When company taxes are considered, the benefits from tax shield leads Modigliani-Miller (1963) to conclude that the value maximising capital structure is extreme leverage. In a subsequent paper Miller (1977), by introducing both corporate tax and personal taxes into the model, points towards irrelevance of capital structure for any particular firm.

Suggested Citation

  • Muhammad Mahmud, 2003. "The Relationship between Economic Growth and Capital Structure of Listed Companies: Evidence of Japan, Malaysia, and Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 42(4), pages 727-750.
    • Handle: RePEc:pid:journl:v:42:y:2003:i:4:p:727-750
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    File URL: http://www.pide.org.pk/pdf/PDR/2003/Volume4/727-750.pdf
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    References listed on IDEAS

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    1. Toy, Norman & Stonehill, Arthur & Remmers, Lee & Wright, Richard & Beekhuisen, Theo, 1974. "A Comparative International Study of Growth, Profitability, and Risk as Determinants of Corporate Debt Ratios in the Manufacturing Sector," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(5), pages 875-886, November.
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    4. Johnson, Shane A., 1997. "An Empirical Analysis of the Determinants of Corporate Debt Ownership Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(1), pages 47-69, March.
    5. Ferri, Michael G & Jones, Wesley H, 1979. "Determinants of Financial Structure: A New Methodological Approach," Journal of Finance, American Finance Association, vol. 34(3), pages 631-644, June.
    6. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    7. repec:bla:jfinan:v:44:y:1989:i:1:p:19-40 is not listed on IDEAS
    8. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
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    Cited by:

    1. Muhammad Mahmud & Gobind M. Herani & Prof. A. W. Rajar, 2009. "Economic Factors Influencing Corporate Capital Structure in Three Asian Countries: Evidence from Japan, Malaysia and Pakistan," Indus Journal of Management & Social Science (IJMSS), Department of Business Administration, vol. 3(1), pages 9-17, June.
    2. Sophee Sulong & Qasim Saleem & Zeeshan Ahmed, 2018. "The Role of Stock Market Development in Influencing the Firms Performance: A Study Based on Pakistan Stock Market," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(12), pages 104-104, December.
    3. Petra Růčková & Nicole Škuláňová, 2022. "What Firm-Specific and Macroeconomic Determinants of Financial Structure Affect Transport and Storage Companies from Selected European Countries?," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2022(2), pages 5-32.
    4. Siti Nur Aqilah Ab Wahab & Nur Ainna Ramli, 2014. "The Determinants of Capital Structure: An Empirical Investigation of Malaysian Listed Government Linked Companies," International Journal of Economics and Financial Issues, Econjournals, vol. 4(4), pages 930-945.
    5. Bojana Vukovic & Suncica Milutinovic & Nikola Milicevic & Dejan Jaksic, 2020. "The Analysis of Indebtedness of Retail Companies in the Balkan Countries," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 83-104.
    6. Umar Farooq & Jaleel Ahmed & Shamshair Khan, 2021. "Do the macroeconomic factors influence the firm's investment decisions? A generalized method of moments (GMM) approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 790-801, January.

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