The determinants of capital structure: Evidence from public listed companies in Malaysia, Singapore and Thailand

Abstract

We investigate the determinants of capital structure of public listed companies on Bursa Malaysia, Singapore Stock Exchange and Thailand Stock Exchange from 2004 to 2013. We also investigate how firm-specific factors such as profitability, firm size, tangibility of assets and depreciation to total assets along with the macroeconomic factor such as inflation influence the capital structure decisions of public listed companies. Our findings support capital structure theories such as trade-off and pecking order theories and are consistent with prior empirical studies. We find all the factors examined in this study provide strong explanatory power for the capital structure decisions of the sampled public listed companies across all three countries. We find profitability has a significant negative influence on capital structure for Malaysia and Singapore but insignificant for Thailand. While, firm size has a significant positive influence on capital structure for all countries. Our findings also suggest that tangibility of assets has a significant positive influence on capital structure for Malaysia and Singapore while insignificant for Thailand. The depreciation to total assets indicates a negative influence on capital structure across all the three countries. Our study should be of interest to top managers who wish to have optimal capital structure to improve the firm performance.

Keywords:

• capital structure
• profitability
• firm size
• net tangible asset
• depreciation to asset
• inflation

JEL classifications:

• G31
• G32

Public Interest Statement

We found profitability has a negative influence on the level of leverage for Malaysia and Singapore while it has an insignificant impact on Thailand. Firm size has a significant positive relationship with leverage for all the three countries while tangibility of assets has significant positive influence in Malaysia and Singapore but not for Thailand. Depreciation to total assets has a negative relationship with leverage for all three countries while inflation has a significant positive impact in Malaysia and Thailand but not for Singapore. These results are interesting because shareholders, external investors and corporate managers can have a better understanding of how capital structures are determined in each of these countries and plan their financing strategies accordingly to facilitate prudent decisions while banks may find the results useful in evaluating the firms’ performance in light of these variables before giving loans.

Additional information

Notes on contributors

Jacinta Chan Phooi M’ng

Jacinta Chan Phooi M’ng specializes in investment decisions and risk management, and is actively researching algorithmic investment decisions and their timings.

Mahfuzur Rahman

Mahfuzur Rahman studies the relevance of psychological biases in individual investment behaviour. He models behavioral factors in investigating financial decision making, financial risk tolerance, and portfolio diversification.

Selvam Sannacy

Selvam Sannacy is interested in investigating on different tax treatments of leverage in capital structure and the determination of capital structure for corporations.