IDEAS home Printed from https://ideas.repec.org/a/sae/globus/v14y2013i2p243-262.html
   My bibliography  Save this article

Factors Affecting Speed of Adjustment to Target Leverage: Malaysia Evidence

Author

Listed:
  • Razali Haron

    (Razali Haron is Assistant Professor at International Islamic University Malaysia, Kulliyyah of Economics and Management Sciences, Department of Finance, Jalan Gombak, Gombak, Kuala Lumpur, Malaysia. E-mail: hrazali@iium.edu.my; razaliharon@yahoo.com.)

  • Khairunisah Ibrahim

    (Khairunisah Ibrahim is Lecturer at International Islamic University Malaysia, Kulliyyah of Economics and Management Sciences, Department of Finance, Jalan Gombak, Gombak, Kuala Lumpur, Malaysia. E-mail: ikhairun@iium.edu.my)

  • Fauzias Mat Nor

    (Fauzias Mat Nor is Professor at Graduate School of Business, Universiti Kebangsaan Malaysia, Selangor, Malaysia. E-mail: fauzias@ukm.my)

  • Izani Ibrahim

    (Izani Ibrahim is Professor at Graduate School of Business, Universiti Kebangsaan Malaysia, Selangor, Malaysia. E-mail: izani@ukm.my)

Abstract

This study focuses on the dynamic aspect of capital structure which is a relatively new area in the finance literature. By employing panel data, 790 of non-financial listed firms in Malaysia are examined for the period 2000–2009. Conducted using the dynamic Partial Adjustment Model and estimated based on the Generalized Method of Moment, this study investigates the existence of target capital structure, speed of adjustment and factors affecting speed of adjustment. There are evidences of target capital structure and firms do adjust to be at their target from time to time with a considerably rapid speed of adjustment, in line with dynamic trade-off theory. Firms in Malaysia are found to be under-adjusted, being below the required adjustment to be at the target within a year. Study on factors affecting speed of adjustment is a new contribution to the literature as no work has been done regarding this issue in Malaysia. This study also analyzes firm-specific factors affecting speed of adjustment. There is strong evidence on the negative relationship between the speed of adjustment and distance from target leverage suggesting fast adjustment if not being far from target. Firm size and profitability significantly influence speed of adjustment for firms in Malaysia.

Suggested Citation

  • Razali Haron & Khairunisah Ibrahim & Fauzias Mat Nor & Izani Ibrahim, 2013. "Factors Affecting Speed of Adjustment to Target Leverage: Malaysia Evidence," Global Business Review, International Management Institute, vol. 14(2), pages 243-262, June.
    • Handle: RePEc:sae:globus:v:14:y:2013:i:2:p:243-262
    DOI: 10.1177/0972150913477469
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0972150913477469
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0972150913477469?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 1-24, March.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Huang, Rongbing & Ritter, Jay R., 2009. "Testing Theories of Capital Structure and Estimating the Speed of Adjustment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(2), pages 237-271, April.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. Heshmati, Almas, 2001. "The Dynamics of Capital Structure: Evidence from Swedish Micro and Small Firms," SSE/EFI Working Paper Series in Economics and Finance 0440, Stockholm School of Economics.
    6. Kayo, Eduardo K. & Kimura, Herbert, 2011. "Hierarchical determinants of capital structure," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 358-371, February.
    7. Faulkender, Michael & Flannery, Mark J. & Hankins, Kristine Watson & Smith, Jason M., 2012. "Cash flows and leverage adjustments," Journal of Financial Economics, Elsevier, vol. 103(3), pages 632-646.
    8. Nigel Driffield & Sarmistha Pal, 2010. "Evolution of capital structure in east Asia—corporate inertia or endeavours?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 173(1), pages 1-29, January.
    9. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    10. Deesomsak, Rataporn & Paudyal, Krishna & Pescetto, Gioia, 2004. "The determinants of capital structure: evidence from the Asia Pacific region," Journal of Multinational Financial Management, Elsevier, vol. 14(4-5), pages 387-405.
    11. repec:bla:jfinan:v:53:y:1998:i:1:p:131-162 is not listed on IDEAS
    12. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
    13. Philippe Gaud & Elion Jani & Martin Hoesli & André Bender, 2005. "The Capital Structure of Swiss Companies: an Empirical Analysis Using Dynamic Panel Data," European Financial Management, European Financial Management Association, vol. 11(1), pages 51-69, January.
    14. Zhaoxia Xu, 2009. "The Impact of Market Timing on Canadian and U.S. Firms' Capital Structure," Staff Working Papers 09-1, Bank of Canada.
    15. Loof, Hans, 2004. "Dynamic optimal capital structure and technical change," Structural Change and Economic Dynamics, Elsevier, vol. 15(4), pages 449-468, December.
    16. Deesomsak, Rataporn & Paudyal, Krishna & Pescetto, Gioia, 2009. "Debt maturity structure and the 1997 Asian financial crisis," Journal of Multinational Financial Management, Elsevier, vol. 19(1), pages 26-42, February.
    17. de Jong, Abe & Kabir, Rezaul & Nguyen, Thuy Thu, 2008. "Capital structure around the world: The roles of firm- and country-specific determinants," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1954-1969, September.
    18. 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.
    19. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
    20. Brounen, Dirk & de Jong, Abe & Koedijk, Kees, 2006. "Capital structure policies in Europe: Survey evidence," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1409-1442, May.
    21. Aydin Ozkan, 2001. "Determinants of Capital Structure and Adjustment to Long Run Target: Evidence From UK Company Panel Data," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1‐2), pages 175-198, January.
    22. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    23. Wiwattanakantang, Yupana, 1999. "An empirical study on the determinants of the capital structure of Thai firms," Pacific-Basin Finance Journal, Elsevier, vol. 7(3-4), pages 371-403, August.
    24. Laurence Booth & Varouj Aivazian & Asli Demirguc‐Kunt & Vojislav Maksimovic, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, February.
    25. Mark T. Leary & Michael R. Roberts, 2005. "Do Firms Rebalance Their Capital Structures?," Journal of Finance, American Finance Association, vol. 60(6), pages 2575-2619, December.
    26. de Miguel, Alberto & Pindado, Julio, 2001. "Determinants of capital structure: new evidence from Spanish panel data," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 77-99, March.
    27. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    28. repec:bla:jfinan:v:43:y:1988:i:1:p:1-19 is not listed on IDEAS
    29. Wolfgang Drobetz & Gabrielle Wanzenried, 2006. "What determines the speed of adjustment to the target capital structure?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(13), pages 941-958.
    30. Qian, Yanmin & Tian, Yao & Wirjanto, Tony S., 2009. "Do Chinese publicly listed companies adjust their capital structure toward a target level?," China Economic Review, Elsevier, vol. 20(4), pages 662-676, December.
    31. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
    32. repec:bla:jfinan:v:44:y:1989:i:1:p:19-40 is not listed on IDEAS
    33. Aydin Ozkan, 2001. "Determinants of Capital Structure and Adjustment to Long Run Target: Evidence From UK Company Panel Data," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1-2), pages 175-198.
    34. Drobetz, Wolfgang & Pensa, Pascal & Wanzenried, Gabrielle, 2006. "Firm Characteristics and Dynamic Capital Structure Adjustment," Working papers 2006/10, Faculty of Business and Economics - University of Basel.
    35. Fan, Joseph P.H. & Wei, K.C. John & Xu, Xinzhong, 2011. "Corporate finance and governance in emerging markets: A selective review and an agenda for future research," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 207-214, April.
    36. Yaiza García Padrón & Rosa María Cáceres Apolinario & Octavio Maroto Santana & María Concepción Verona Martel & Lourdes Jordán Sales, 2005. "Determinant factors of leverage: An empirical analysis of Spanish corporations," Journal of Risk Finance, Emerald Group Publishing, vol. 6(1), pages 60-68, January.
    37. Ralph de Haas & Marga Peeters, 2006. "The dynamic adjustment towards target capital structures of firms in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(1), pages 133-169, March.
    38. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    39. Jalilvand, Abolhassan & Harris, Robert S, 1984. "Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study," Journal of Finance, American Finance Association, vol. 39(1), pages 127-145, March.
    40. Rashid Ameer, 2013. "Financial liberalization and firms’ capital structure adjustments evidence from Southeast Asia and South America," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(1), pages 1-32, January.
    41. Sulagna Mukherjee & Jitendra Mahakud, 2010. "Dynamic adjustment towards target capital structure: evidence from Indian companies," Journal of Advances in Management Research, Emerald Group Publishing Limited, vol. 7(2), pages 250-266, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Biswajit Ghose & Kailash Chandra Kabra, 2019. "Capital Structure Dynamics and Financing Imbalance: Evidence from an Emerging Economy," Emerging Economy Studies, International Management Institute, vol. 5(2), pages 103-124, November.
    2. Biswajit Ghose, 2017. "Impact of Business Group Affiliation on Capital Structure Adjustment Speed: Evidence from Indian Manufacturing Sector," Emerging Economy Studies, International Management Institute, vol. 3(1), pages 54-67, May.
    3. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    4. G. Oka Warmana & I. Ketut Rahyuda & Ida Bagus Anom Purbawangsa & Ni Luh Gede Sri Artini, 2020. "Investigating Capital Structure Speed of Adjustment (SOA) of Indonesian Companies for Corporate Value," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 21(3), pages 215-231, September.
    5. Yildirim, Ramazan & Masih, Mansur & Bacha, Obiyathulla Ismath, 2018. "Determinants of capital structure: evidence from Shari'ah compliant and non-compliant firms," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 198-219.
    6. Biswajit Ghose & Kailash Chandra Kabra, 2020. "Does Growth Affect Firms’ Leverage Adjustment Speed? A Study of Indian Firms," Business Perspectives and Research, , vol. 8(2), pages 139-155, July.
    7. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    8. M. E. Bontempi & L. Bottazzi & R. Golinelli, 2015. "Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity," Working Papers wp988, Dipartimento Scienze Economiche, Universita' di Bologna.
    9. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Dynamic capital structure and political patronage: The case of Malaysia," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 117-128.
    10. Morais, Flávio & Serrasqueiro, Zélia & Ramalho, Joaquim J.S., 2022. "Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms," Research in International Business and Finance, Elsevier, vol. 62(C).
    11. Mohamed, Hisham Hanifa & Masih, Mansur & Bacha, Obiyathulla I., 2015. "Why do issuers issue Sukuk or conventional bond? Evidence from Malaysian listed firms using partial adjustment models," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 233-252.
    12. Biswajit Ghose & Kailash Chandra Kabra, 2018. "Dynamic Capital Structure Adjustments and Business Group Affiliations: Indian Evidence," Business Perspectives and Research, , vol. 6(1), pages 27-41, January.
    13. Temimi, Akram & Zeitun, Rami & Mimouni, Karim, 2016. "How does the tax status of a country impact capital structure? Evidence from the GCC region," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 71-89.
    14. Sardo, Filipe & Serrasqueiro, Zélia & Armada, Manuel Rocha, 2022. "The importance of owner loans for rebalancing the capital structure of small knowledge-intensive service firms," Research in International Business and Finance, Elsevier, vol. 61(C).
    15. Vo, Xuan Vinh, 2017. "Determinants of capital structure in emerging markets: Evidence from Vietnam," Research in International Business and Finance, Elsevier, vol. 40(C), pages 105-113.
    16. Firano, Zakaria & Filali adib, Fatine, 2022. "Optimal Capital structure and financial stability," MPRA Paper 115790, University Library of Munich, Germany, revised 2022.
    17. Biswajit Ghose & Kailash Chandra Kabra, 2019. "Firm Profitability and Adjustment of Capital Structure: Indian Evidence," Vision, , vol. 23(3), pages 297-308, September.
    18. Bolaji Tunde Matemilola & Rubi Ahmad, 2015. "Debt financing and importance of fixed assets and goodwill assets as collateral: dynamic panel evidence," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(2), pages 407-421, April.
    19. Víctor M. González & Francisco González, 2011. "Firm size and capital structure: Evidence using dynamic panel data," Post-Print hal-00730234, HAL.
    20. Miguel Acedo-Ramírez & Juan Ayala-Calvo & José Rodríguez-Osés, 2013. "Capital structure of small companies in the Spanish footwear sector: relevant factors," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 4(2), pages 155-173, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:globus:v:14:y:2013:i:2:p:243-262. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.imi.edu/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.