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DETERMINANTS OF DEBT STRUCTURE: EMPIRICAL EVIDENCE FROM MALAYSIA

Mazlina Mustapha Faculty of Economics and Management, Universiti Putra Malaysia, 43400 UPM, Serdang, Selangor, Malaysia. mazlina05@gmail.com Hashanah Bt Ismail Faculty of Economics and Management, Universiti Putra Malaysia, 43400 UPM, Serdang, Selangor, Malaysia. hashanah@putra.upm.edu.my Badriyah Bt Minai Faculty of Economics and Management, Universiti Putra Malaysia, 43400 UPM, Serdang, Selangor, Malaysia. badriyah@putra.upm.edu.my
ABSTRACT This paper reports on a study which explores the factors associated with debt structure of public listed companies in Malaysia. Comparisons are made between four main sectors: consumer, construction and property, industrial and trading and services. Based on published secondary data and using regression analyses, various dimensions of debt structure are tested to ensure the robustness of the study, namely total debt ratio, long term debt ratio, short term debt ratio, debt to market value ratio and long term debt to market value ratio. The findings indicate that companies from the construction and property sectors have higher level of debt compared to those in other sectors. The result also indicates that there are significant relationships between debt structure and ownership structure, performance, growth opportunities, and asset tangibility. Size of the companies appear to be significant in all sectors, except for those companies in construction and property sectors. Field of Research: Finance, Capital structure, Financing decisions.

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1. INTRODUCTION Most companies use some debt in their capital structure. Debt structures are claimed to be one of the important determinants of a companys success and motivate its sustainable growth (Madan, 2007) Thus, decisions concerning debt structure are vital for the business survival (Ahmed Sheikh and Wang, 2011). However the selection of debt structure is not easy and any wrong decision may lead the company to financial distress and bankruptcy. Many recent studies have attempted to explain debt structure decisions made by managers. The relationship between debt structure and firm value has been extensively investigated (Abor, 2007; Abor, 2005; Krisman and Moyer, 1997), and various dimension of debt financing in relation to other factors has also been examined, such as debts and compensation (Bryan et al., 2005), information role of debt (Haris and Raviv, 1990), ownership structure and debt (Cespedes, 2010; Bopkin and Arko, 2009; Su, 2010; Berger et al., 1997; Fleming et al., 2005) and debt financing and audit fees (Tauringana and Clarke, 2000; Chow, 1982). However, the findings of these studies do not lead to a consensus with regard to the determinants of debt structure. In addition, it is also claimed that existing literature has not been able to clearly explain the reasons of leverage choice by companies (Rajan and Zingles, 1995; Morri and Cristanziani, 2009). This paper attempts to explore the factors that affect the debt structure of listed companies in Malaysia. Besides being a developing country with an emerging market in Asia, Malaysia is chosen in this study because of its unique concentrated business environment and multicultural population with different ethnic groups. It is claimed that owner-managed firms are common among Malaysian companies (Mat Nor & Sulong, 2007), especially in the form of family businesses (Haniffa & Hudaib, 2006). This claim is further supported by Ow-Yong and Guan (2000) who posit that listed companies in Malaysia evolved from traditional family owned companies, and some of these companies continue to be managed as such. Unlike companies with dispersed shareholdings, these companies are believed to have reduced agency problem and agency costs due to a better match of control and cash flow rights of the shareholders (Abdul Rahman & Mohamed Ali, 2006). It is also argued that capital structure is very much dependent on the dominant nature of the ownership structure (Ezeoha and Okafor, 2010). Hence, among others, this study attempts to examine the effect of this ownership structure, specifically managerial ownership on the debt structure of Malaysian companies by ethnicity. Prior studies also attempted to explain debt structure decisions made by managers in a variety of industries, such as Upneja and Dalbor (2001) in restaurant industry, Morriand Cristanziani (2009) in real estate industry, Karadeniz et al. (2009) in logding industry, Madan (2007) in hotel industry and Ahmad Sheikh and Wang (2011) in manufacturing sectors. It has been observed that organisations are constrained to a certain degree, particularly, in the short run, by opportunities in the industry (Coles et al., 2001). Different industries may have different pattern of expenses and investment in assets structure as well as in information system. It has also been found that controlling for the effect of industry can significantly improve the degree the variables tested being explained by an organisation or individual factors (Eaton & Rosen, 1983). There is also limited study on debt structure of various industries in Malaysian context. Thus this study explores the debt structure of companies in four main industries in Malaysian Stock Exchange, namely consumer sector, construction and property sector, trading and services sector, and industrial sector. Comparisons are made between these four main industries to ensure the robustness of the study. The findings of this research are pertinent to the industry as no explicit study in this area has been conducted in the Malaysian context. The variables used in the study are selected based on prior studies and also by taking into consideration the unique Malaysian business environment. The result of this study would help to lay some groundwork to explore the determinants of debt structure, where a more detailed evaluation could be based. In addition it also provides evidence and confirms the factors affecting the debt structure in developing countries as identified in developed countries.

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The remainder of the paper is structured as follows. Section 2 gives a review of the relevant literature and previous empirical findings. Section 3 describes the sample and methodology used for the study. Section 4 presents and discusses the empirical results and, finally section 5 provides the conclusions of the study.

2.

LITERATURE REVIEW

2.1 Theories relating to debt structure Since the work of Modigliani and Miller (1958) on capital structure, numerous studies have been carried out in an attempt to explain the capital structure decisions. Many theories have been proposed and studied to link the debt structure decisions and firm specific characteristics. Among others are trade off-theory (Modigliani and Miller, 1958; Zhang and Kanazaki, 2007), pecking order theory (Myers and Majluf, 1984; Myers, 1984; Zhang and Kanazaki, 2007) and agency theory (Jensen and Meckling, 1976). This study will particularly examine the validity of pecking order theory and trade-off theory in relation to the debt structure of Malaysian companies. Modigliani and Miller (1958) is said to be the milestone among the capital structure studies. They claim that market is efficient when there is no tax, thus financing decisions affect neither cost of capital or market value. Later, in their second proposition, they claimed that tax advantage motivates the optimal capital structure, where the companies are said to alter their capital structure to increase the value of their companies (Modigliani and Miller, 2004; Karadeniz et al, 2009; Forsberg, 2004). Trade-off theory asserts that a company may set a target debt to company value, and gradually moves towards it (Karadeniz et al., 2009; Chen, 2004). According to this theory, the increase in debt level will increase the cost of bankruptcy, financial distress and agency, hence decrease the value of the company. Thus, a company needs to find an equilibrium where the level of debt would be able to off set its costs (such as tax advantages of the debts) with the costs of possible financial distress (Chen, 2004; Zhang and Kanazaki, 2007.According to this theory, companies with high growth have more risk and higher financial distress costs, thus growth have an inverse relationship with debt level. However, if a company has higher level of fixed assets to serve as collateral for debt financing, it will give easier access for the company to obtain debt, thus give a positive relationship between asset tangibility and debt level. Larger companies are said to better diversifies, thus have lower possibility of experiencing financial distress, this lead to positive relationship between company size and debt level. And companies with high profit render high level of borrowing capacity,thus resulted in positive relationship of the variables. Another famous theory being associated with debt is the pecking order theory (Myers and Majluf, 1984). Myers and Majluf assert that information asymmetry exist among the investors. Investors are said to generally have less information than insiders, thus resulted in the undervalued of the companies common-shares. This would then lead to positive relationship between growth of the companies and debt level, when the companies have more growth opportunities than the assets they have . Unlike, trade-off theory, companies do not have target capital structure, however, it is assumed that companies would prefer internal to external fund; and prefer debt to equity. They would only use external financing when their internal funds are insufficient (Myers and Majluf, 1984; Myers 1984). Pecking order emphasizes on information assymety. Companies with more fixed assets are said to have less information asymmetry (Myers and Majluf, 1984; Kardeniz et al., 2009). Information asymmetry is also considered to be less severe in larger companies, as a consequent, larger companies cost of capital would be less than that of small companies (Kardeniz et al., 2009). This theory also posits that profitable companies are able to generate internal funds, and do not like to use external funds, if the needs arise for external fund, they would prefer debt to equity. This preference for debt compared to equity is also related to their unwillingness to lose the control of the companies if more equity are issued. And it is claimed that this relationship will be more pronounced in concentrated ownership structure (Cespedes et al., 2010).

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2.2 Determinants of debt structure Various factors and company characteristics have been associated with debt structure, and various theories have been used to explain the relationships. Among others, the factors are company size, profitability, tangibility, growth, ownership and sector clasifications. Size It is argued that companys size is a big explanatory power in determining leverage (Morri and Cristanziani, 2009). They claim that leverage increase as companys size grow, bigger companies are expected to be more diversified, which increase the stability of cash flows and consequently allows heavier use of debt. Furthermore bigger companies would normally have easier access to capital markets and may borrow at more favourable interest rates. This finding is also consistent with an earlier study by Harris and Raviv (1991) who use a cross sectional data discovered that leverage increases with firm size. A recent study on debt determinants of manufacturing industry among Pakistan companies by Ahmed Sheikh and Wang (2011) also find that companys size is positively linked to debt ratio. Serrasquero and Rogao (2009) also find a positive and significant relationship between company size and debt structure of Portugese companies. And this is supported by Cespedes et al. (2010) who finds that larger companies are more leveraged. However, Rajan and Zingales (1995) who conducted a study on G-7 countries find that the company size in one of the countries have significant inverse relationship with leverage, while another three countries have significant positive relationship with leverage, and they conclude that they do not really understand how size is correlated to leverage. Profitability Another variable which is claimed to have an effect on leverage is profitability. Although profitability is argued to have an important impact on leverage, it is unclear whether it has a positive or negative relationship with debt used (Morri and Cristanziani, 2009). Myers and Majluf (1984) predicts that the existence of a negative relationship between these variables. This is based on the argument that more profitable companies will demand less debt than less profitable companies as they are expected to have internal funds available to finance their projects and operations. This is because companies are argued to make their financing decision according to hierarchical order; first, they will use their internal funds; if external finance is required, companies will first issue debt and as a last resort they issue equity (Myers, 1984). Rajan and Zingales (1995) also support this notion by arguing that profitable companies have internally generated funds and the quality of investment opportunities which create opposing effects on the demand for external funds. Recent studies by Abor (2008), Serrasquero and Rogao (2009), Cespedes et al. (2010) and Ahmed Sheikh and Wang (2011) also support this result and find that profitability is negative and significantly related to debt ratio. Upneja and Dalbor (2001) also find that profitable public listed restaurant in the USA do not need long term debt. Tangibility Previous studies find that tangibility is always positively related to leverage (Rajan and Zingales, 1995). This is based on the argument that companies with higher level of collateral can get easier access to debt. Serrasquero and Rogao (2009) and Cespedes et al. (2010) also find a positive and significant relationship between asset tangibility and debt, and they claim that companies with more tangible assets have more collateral to support higher debt level. However, Ahmed Sheik and Wang (2011) find a negative relationship of these variables in their study of Pakistan companies. Abor (2008) who conduct a study on small and medium enterprises (SMEs) also find a negative relationship between asset structure and debt ratio. He argues that this is due to the fact that SMEs with high fixed assets experience stability in their earnings are capable of generating funds internally and would avoid external debt.

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Growth Myers (1984) claims that growth opportunities are positively related to debt ratio of a company. This argument is consistent with pecking order theory which posits that there is information asymmetry between the investors and the managers of the company, which would result in the shares of the company being under-valued by the market. Being poorly informed, investors are subject to high risk faced with the possibility of the company being in less favourable position than managers claim, and so investors penalize the companies market value (Myers and Majluf, 1984). A number of studies report a positive relationship between market to book value and debt ratio (Dalbor and Upneja, 2001). This finding is supported by Cespedes et al. (2010) who finds a positive relationship between leverage and growth. On the contrary, Rajan and Zingales (1995) find a negative relationship between growth and debt ratio. Recent studies by Karadeniz et al. (2009) and Ahmed Sheikh and Wang (2011) find that growth opportunities do not appear to be related to the debt ratio of Turkish lodging companies and Pakistan manufacturing companies respectively. A study on Portugese companies also reveals that growth has no relationship with debt ratio (Serrasquero and Rogao, 2009). Managerial ownership Type of ownership structure of a company is expected to have some degree of influence on corporate financing pattern, however, the degree and direction of such relationship remain contestable (Ezeoha and Okafor, 2010; Rajan and Zingales, 1995). This study is unique in that it takes into consideration the Malaysian unique business environment which is claimed to be owner-managed and multi-races, thus this study concentrates on the effect of managerial ownership by its ethnicity groups. Cespedes et al. (2010) argues that ownership-concentrated companies avoid issuing equity because they do not want to share the control rights and risk losing the control of their companies, thus they prefer to issue debt rather than equity. They find a positive relationship between leverage and ownership concentration. This argument is actually consistent with pecking order theory which posits that companies would consider internal financing before they use external financing, and they would prefer debt financing compared to equity (Myers, 1984). Cenpedes et al. further argue that this effect would be more important or visible in concentrated business environment, such as family businesses.

3. DATA AND METHODOLOGY 3.1 Data and sample Data is hand-collected from the annual reports of Malaysian public listed companies. The annual reports are obtained from the Bursa Malaysias website. This exploratory study uses a cross sectional data. In total, there are 235 companies randomly selected from various sectors, namely consumer, trading and services, construction, property and industrial. The analysis is conducted by using linear regression models.

3.2. Models and Variable definition In order to estimate the effects of independent variables on debt ratio, and to take into account of both short and long term structures, the leverage is measured in various ways: (1) (2) (3) (4) (5) Total debt ratio : (long term debt + current liabilities) /total assets; Long term capital structure : long term debt /total assets; Short term debt ratio : short term debt / total assets Debt to market value : (long term debt + current liabilities) / Market value of the company Long term debt to market value : long term debt / Market value of the company

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The first measure of leverage, debt ratio reflects total debt, whether in short term or long term. Rajan and Zingales (1995) claim that this is a more appropriate definition of leverage as this is viewed as a proxy for what is left for shareholders in the case of liquidation. Furthermore, it is also claimed that short term debt in developing countries represent significant portion of the companies total debts (Ahmed Sheikh and Wang , 2011). It includes short term financing such as bank overdrafts, which at times can effectively become a source of long term financing although it is more risky from the companys perspective because it is repayable in demand (Omran and Pointon, 2009). Alternatively, the second and third leverage measures are trying to examine the long-term and short term effect (as done by Ezeoha and Okafor, 2010; Omran and Pointon, 2009). It is also claimed that study of short term financing has been neglected in prior studies (Omran and Pointon, 2009), thus this paper attempts to address this issue. This study also consider the market value of equity (as done by Cespedes et al. 2010) which is reflected in the fourth and fifth measures. The independent variables of the study are selected based on the literature. The variables include managerial ownership according to ethnicity, size, profitability, tangibility and growth. The model used in this study also includes some control variables, namely, complexity of the business, risk, listing status and sectors. The following model is used in this study: LEVERAGE = i - b1MGROWNMALi + b2MGROWNFORi + b3MGROWNCHIi + b4SIZEi + b5PROFITi + b6GROWTHi + b7TANGIBILITYi + b8RISKi + b9 COMPLEXi + b11LISTSTATi + b12CONSUMERi + b13CONSTPROPi + b 10 RECINV + b14TRADINGi + B15INDUSTRIALi + i = Total debts / total assets =Intercept =Percentage of Malay executive directors shareholdings =Percentage of Foreign executive directors shareholdings =Percentage of Chinese executive directors shareholdings =natural logarithm of total assets =1 if have loss in current year, and 0 otherwise; =(Inventories and Receivables)/ Total assets =natural logarithm of no of subsidiaries (including its head-office) =Profit before interest and tax / Total Assets =Market value of the firm / Total assets =Fixed assets /Total assets =1 if listed in the main board, and 0 otherwise; =1 if the company is in consumer sector, and 0 otherwise; =1 if the company is in construction or property sector and 0 otherwise; =1 if the company is in trading or services sector and 0 otherwise; =1 if the company is in industrial sector and 0 otherwise; = error term

Where: LEVERAGE MGROWNMAL MGROWNFOR MGROWNCHI SIZE RISK RECINV COMPLEX PROFIT GROWTH TANGIBILITY LISTSTAT CONSUMER CONSTPROP TRADING INDPROP i

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4. FINDINGS AND DISCUSSIONS 4.1. Descriptive statistics

Table 1 presents the descriptive statistics of the dependent and independent variables. The ratio of total debt to total assets ranges from 1.565% to 731% with the average of 45.18%. These statistic indicates that some of the sample companies are highly leveraged as the maximum ratio stands at 731%, and the range between the minimum and maximum is closed to 729%. Further investigation of the details indicate that this may be due to high usage of short term debts of these companies, as their short term ratio ranges from 0.92% to 731%, however their average is only 31.54%. The average long term debt to total assets is 13.65%, while the average of long term debt to market ratio is 14.68%. Detailed examination of the portion of short term and long term debt used by the sample companies indicate that on average Malaysian companies use about 32% of long term debt and 68% percent of short term debts to finance their business operations. This proportion is similar to another study of developing country which find that short term debts represent 76% of the total debt employed by Pakistan companies (Ahmed Sheikh and

Table 1 : Descriptive summary statistics

Variable Total debt ratio (LEVERAGE) Long term capital structure Short term debt ratio Total debt to market value ratio Long term debt to market ratio MGROWNMAL MGROWNFOR MGROWNCHI SIZE PROFIT GROWTH TANGIBILITY RISK REVINV COMPLEX LISTSTAT CONSUMER CONSTPROP TRADING INDUSTRIAL N 235 235 235 235 235 235 235 235 235 235 235 235 235 235 235 235 235 235 235 235 Mean 0.4518 0.1365 0.3154 0.4603 0.1468 0.0685 0.0363 0.2309 19.744 0.0101 1.0515 0.3444 0.2000 0.3088 2.4998 0.7400 0.1400 0.1800 0.1900 0.3500 Minimum 0.0156 0.0000 0.0092 0.0118 0.0000 0.0000 0.0000 0.0000 16.720 -3.017 0.3081 0.0043 0 0.0019 0.0000 0 0 0 0 0 Maximum 7.3140 0.9317 7.3141 0.9863 0.9328 0.8637 0.6308 0.8117 24.8991 0.2037 7.9680 0.9800 1 0.8046 6.0981 1 1 1 1 1 Range 7.2984 0.9317 7.3048 0.9746 0.9328 0.8637 0.6308 0.8117 8.1788 3.2209 7.6599 0.9757 1 0.8027 6.0981 1 1 1 1 1 Std Dev 0.5121 0.1514 0.5081 0.2403 0.1584 0.1533 0.1188 0.2381 1.4171 0.2258 0.7092 0.2227 0.3980 0.1945 0.9091 0.4370 0.3530 0.3870 0.3940 0.4790

Variable definition:
LEVERAGE = Total debts / total assets; Long term debt capital structure = Long term debt to total Assets; Short term debt ratio = Short term debt to total Assets; Debt to market value ratio = Total debt to market value; Long term debt to market value ratio = Long term debt to market value; MGROWNMAL= Malay executive directors shareholdings(%); MGROWNFOR= Foreign executive directors shareholdings(%); MGROWNCHI= Chinese executive directors shareholdings (%); SIZE = Total assets(ln); RISK=Current year loss (Dummy); RECINV=(Inventories and Receivables) / Total assets; COMPLEX= number of subsidiaries(ln); PROFIT =EBIT/Total Assets; GROWTH =Market value of the firm / Total assets; TANGIBILITY=Fixed assets /Total assets; LISTSTAT = Board listing (Dummy); CONSUMER= Company is in consumer sector (Dummy); CONSTPROP = Company is in construction or property sector (Dummy); TRADING = Company is in trading or services (Dummy); INDPROP = Company is in industrial sector(Dummy)

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Wang, 2009). This results show that Malaysian companies use a lot of short term debts compared to their long term debts. This finding also confirm the claim by Demirguc-Kunt and Maksimovic (1999) that a major different between developing and developed countries is that developing countries have substantially lower amount of long term debt and higher amount of short term debt. The mean percentage of shareholdings by the Malay, Foreign and Chinese managers are 6.85%, 3.63% and 23.10% respectively. These ethnic groups are claimed to be among the groups which dominate much of the socio economics in Malaysia (Che Ahmad et al., 2006). The average Tobins Q , which represent the growth is approximately 1.05, while the average profitability (proxied by Return on assets) is about 0.01. The asset tangibility ranges from 0.43% to 98%, and the mean is 34.44%. Table 2 presents the descriptive statistics of leverage measures according to sectors. The sectors examined are the four main industries in Malaysian Stock Exchange, which are Consumer Sector, Construction and Property Sectors, Trading and Service Sectors, and Industrial sectors. Those companies in other sectors are categories as others in this study. Table 2 indicates that the companies in Trading and Services sectors have the highest average total liabilities, long term liabilities and short term liabilities, and followed by those companies from Construction and Property sectors. However, based on the ratios (in Table 2) and reflected in Figure 1, it appears that, except for long term debt to total assets ratio, the means for other measures of leverage show that companies from Construction and Property Sectors are highly leverage compared to companies from other sectors. From column 3 of Table 2, it indicates that the average debt ratio for companies in Construction and properties sectors is 63.22% compared to 43.67% , 43.50% and 40.25% of average debt ratio for companies from consumer, trading and services and Industriall sectors respectively. The statistics for short term debt leverage, total debt to market value ratio, and long term debt to market value ratio of the companies also indicate similar pattern. This high leverage may be due to their nature of activities which require a lot of capital expenditure.

Table 2 : Statistic by sectors (average)

Consumer Average by industry (N = 34)

Construction and Property (N = 43)

Trading and Services (N = 44)

Industrial (N = 83)

Total debt to total assets Long term debt to total assets Short term debt ratio Total debt to market value ratio Long term debt to market ratio Total liabilities (RM) Total long term liabilities (RM) Total short term liabilities (RM)

0.4367 0.0697 0.3670 0.4383 0.0724 159,327,203 27,387,543 132,745,176

0.6322 0.1699 0.4623 0.5874 0.2069 1,128,228,387 705,333,127 439,298,356

0.4350 0.1924 0.2426 0.4723 0.1964 2,365,411,083 1,691,035,633 674,375,449

0.4025 0.1125 0.2900 0.4371 0.1170 233,007,995 108,820,084 125,498,997

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Figure 1: Mean of the leverage measures by sectors

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Table 3 : Correlation matrix MGROWNMA L MGROWNCH I MGROWNFO R INDUSTRIAL

1 .337* 1

TANGIBILIT Y

CONSUMER

LEVERAGE

CONSPROP
1 1 -.230** -.350**

COMPLEX

LISTSTAT

GROWTH

Variable

LEVERAGE MGROWNMAL MGROWNFOR MGROWNCHI SIZE PROFIT GROWTH TANGIBILITY RISK RECINV COMPLEX LISTSTAT CONSUMER CONSTPROP TRADING INDUSTRIAL

1 .122 -.087 -.086 -.056 -.851** .631** -.043 .236** .017 .146* -.111 -.012 .167* -.023 -.071 1 -.085 -.220** -.015 -.075 .017 -.013 .081 -.004 .005 -.072 -.145* .028 .024 .005 1 -.194** .021 .065 -.063 -.043 -.092 .042 -.112 .052 .110 .015 -.093 .031 1 -.203** .073 -.169** .085 .030 .170** -.017 -.118 .090 -.035 -.091 .060 1 .198** .045 .048 -.233** -.397** .523** .467** -.164* .178** .160* -.239** 1 -.498** .100 -.429** .053 -.049 .181** .034 -.157* .056 .045 1 .029 .008 .000 -.040 .057 .115 -.050 -.057 -.039 1 -.055 -.245** -.157* -.067 .081 -.507** .055 .137* 1 .005 -.039 -.277** -.111 .072 -.022 .039 1 -.143* -.235** .182** -.189** -.031 .246** 1 .207** -.092 .253** .185** -.282** 1 -.037 .176** .012 -.241** .

-.195** -.200** -.304**

Notes: *** significant at 1% level; ** significant at 5% level ; (See variable definition in Table 1)

* significant at 10% level

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RECINV

PROFIT

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Prior to estimating the coefficients of the model, the sample data are also tested for multicollinearity. The results are presented in Table 3. The result indicates that the correlations between the independent variables are fairly small and below the threshold value of 0.8 (Gujarati, 2003, p. 359), thus giving no cause of concern about the problem of multicollinearity among the variables.

4.2 The results Main model The primary result of the study is presented in Table 4. Column two of Table 4 presents the multiple regression analysis used to test the main model. The adjusted R squared for the model is 0.819 and the F-value of 71.351 is significant (p< 0.000). The value of the adjusted R squared is very high, as well as statistically significant, which suggests that it is a good predictive model of debt structure for Malaysian data. It means more than 81% of the variation in the debt structure can be explained by the model. This adjusted R squared is also very much higher compared to a similar study by Rajan and Zingales(1995) and Omran and Pinton (2009). Rajan and Zingales conducted a study on G-7 countries and the explanatory variables of the countries explain from the range of 12% to 30% of the debt structure of those countries, and, Omran and Pinton who study the debt structure of Egypt using similar measures obtain the adjusted R-squared between 27% to 43%. The result of the main model in column 2 of Table 4 indicates that profitability is negatively related to debt structure. It appears that profitable companies in Malaysia use less debt compared to less profitable companies, and this is consistent with earlier findings in developed countries (Cespedes et al., 2010; Upneja and Dalbor, 2001) as well as recent studies in developing countries (Abor, 2008; and Ahmed Sheikh and Wang, 2011; Chen, 2004). This result also corroborates the arguments of the pecking order theory that profitable company are able to generate internal funds, and would prefer to use internal financing before applying for external debt or issuing shares(Myers, 1984; Myers and Majluf, 1984; Rajan and Zingales, 1995). The results further indicate that ownership by Malay managers, growth opportunities and asset tangibility are positively related to debt structure, however size of the company is not significant in the main model. This result support the pecking order theory which posits that Malay managers in control of their companies do not want to lose the control of their companies, thus, if the companies need to use external financing, they would prefer to use debt financing rather than issuing shares. This finding is consistent with earlier studies by Cespedes et al. (2010) and Bopkin and Arko ( 2009). This result may be more pronounced in Malaysian business environment which is said to be very concentrated and originated from family businesses (Mat Nor and Sulong, 2007; Hanifa and Hudaib, 2006). And this is consistent with Cespedes et al (2010) who argue that in a more concentrated business environment, the more likely that the shareholders will issue debt instead of equity when the company needs more fund, and would be more visible in companies which have high percentage of family ownership, such as evidenced in their study of American Latin companies. However, the results appear to suggest that managerial ownership by foreign and Chinese directors are not significantly related to total debt structure. These insignificant results deserves further analysis in future research. Asset tangibility is significant and positively related to the debt structure of Malaysian companies. These result is consistent with prior studies which argue that companies with high asset tangibility can get easier access to debt and can provide collateral for their debts compared to those with less asset tangibility (Cespedes et al., 2010; Chen, 2004). It also corroborates the arguments of trade-off theory that companies with higher level of tangible assets are more able to offer collateral security and turn more to debt (Serrasquero and Rogao, 2009) Growth opportunities is also significant and positively related to the debt structure of Malaysian companies. This result further support the pecking order theory. The theory posits that information asymmetry between the investors and mangers of the company will result in the shares of the companies to be undervalued (Myers, 1984).

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This result is also consistent with findings from earlier studies in developed countries (Cespedes et al., 2010; Upneja and Dalbor, 2001), and it adds to the literature of developing countries, as studies in these countries appear to indicate either no relationship or inconclusive findings (Karadeniz et al 2009; Ahmed Sheikh and Wang, 2011). Detailed examination of the standard coefficient of the regression analysis reveals that profitability with beta of 0.751 are the highest contributor to the debt structure for Malaysian companies. Followed by growth (beta = 0.269), and asset tangibility (beta = 0.136). Unlike Portugese companies(Serrasqeuiro and Ragao, 2009), size of the companies (beta = 0.045) is not the main contributor to debt structure in this country. Additional tests Further tests using other measures of leverage are also carried out, where the main model is re-estimated with the other four leverage measures as shown in column three (long term debt ratio), four (short term debt ratio), five (debt to market value ratio) and six (long term debt to market value ratio) of Table 4. It appears that, consistent with the main model, ownership by Malay managers are significant and positively related to debt structure in all alternatives, except when short term debt ratio is used as the dependent variable. This results suggest that, unlike long term debt decisions, decisions relating to short term debt are not affected by the percentage of control by Malay managers. Variable relating to ownership by Chinese managers remain insignificant in all alternatives. However, ownership by foreign managers appear to be significant and negatively related to debt structure, especially relating to long term debt decisions and when using the market value measures of the companies. Another variable which is significant in all alternatives is asset tangibility. Even though size of companies is not significant in the main model, but it appears to be significant and positively related to debt structure when it is broken down into short tem and long term structure. It also shows significant relationship with market value measures. Profit appear to be significant and negatively related to debt structure in all alternatives except when the long term structure decisions are involved. This result suggest that profitability of the companies does not effect their decisions relating to long term debts. Growth show a positive and significant relationship with debt structure, however it is not significant when the dependent variable is long term debt ratio. Among the control variables, variables relating to risk, the ratio of inventories and receivables to total assets and variable for construction and properties sectors are significant in all alternatives. Companies in construction and property sectors appear to be highly leverage compared to companies in other sectors when analysed using all leverage measures. This results are consistent with the earlier statistic in Table 2 and as shown in Figure 1. Overall, the long term debt financing is shown to be mainly a function of ownership control, size of the company and asset tangibility (refer column 3 and 6 of Table 4). These variables explain 42.3 percent of the variation in the long term debt to total assets (the R-squared being 38.3 percent and 38.3 percent when adjusted), and about 40 percent of the variation in the long term debt to market value (the R-squared being 39.7 percent and 35.6 percent when adjusted). These results support the notion that, the bigger the company, their requirement for the capital for expansion would be higher and higher asset backing would provide an advantage to be used as collateral for the long term debt financing as posited by trade-off theory. Interestingly, the result for the ownership control for both long term debt measures indicate that the higher the percentage of control by Malay managers, the higher the long term debt ratio, on the contrary, the higher the percentage of control by foreign managers indicate that they would require less long term debt to total assets. As mentioned in earlier part of the paper, Malaysian listed companies originated from family businesses and still be administered as such after they are listed (Ow-Yong and Guan, 2000). This result appear to support pecking order theory and suggest that Malay managers do not want to lose control of their family businesses by issuing shares and would prefer to issue debt after using their internal funds, resulted in positive relationship at 1 percent level of significance. On the other hand, foreign managers are

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Table 4: Results of OLS estimation

Variables

Total Debt ratio

Long term capital structure

-0.989*** (-6.469) 0.194*** (3.635) -0.140* (-2.013) -0.012 (-0.323) 0.056*** (6.713) 0.027 (0.544) 0.01 (0.059) 0.156*** (3.410) 0.047** (2.024) -0.093** (-1.830) -0.010 (-0.937) -0.043** (-1.997) 0.025 (0.771) 0.086*** (2.635) 0.062** (2.170) 0.033 (1.224) 0.423 0.383 10.686 0.000000

Short term debt financing

Debt to market ratio

Long term debt to market ratio

-0.800*** (-4.892) 0.218*** (3.809) -0.118* (-1.580) -0.005 (0.120) 0.049*** (5.578) -0.065 (-1.226) -0.050*** (-3.274) 0.155*** (3.184) 0.033* (1.325) -0.115** (-2.113) -0.010 (-0.822) -0.039* (-0.714) 0.025 (0.743) 0.103*** (2.942) 0.056** (1.832) 0.025 (0.876) 0.397 0.356 9.606 0.000000

CONSTANT MGROWNMAL MGROWNFOR MGROWNCHI SIZE PROFIT GROWTH TANGIBILITY RISK RECINV COMPLEX LISTSTAT CONSUMER CONSTPROP TRADING INDUSTRIAL R-squared Adj R-squared F-Statistics P-value

-0.455* (-1.621) 0.218** (2.227) -0.043 (-0.338) 0.019 (0.284) 0.016 (1.078) -1.703*** (-18.655) 0.194*** (7.447) 0.314*** (3.747) -0.118*** (-2.796) 0.357*** (3.810) 0.056*** (2.751) -0.036 (-0.909) 0.022 (0.377) 0.215*** (3.588) 0.071* (1.360) 0.038 (0.777) 0.830 0.819 71.351 0.000000

0.534** (2.182) 0.024 (0.281) 0.097 (0.870) 0.031 (0.527) -0.039*** (-2.955) -1.730*** (21.695) 0.193*** (8.488) 0.158** (2.161) -0.165*** (-4.463) 0.450*** (5.503) 0.066*** (3.734) 0.007 (0.206) -0.003 (-0.050) 0.129** (2.463) 0.009 (0.202) 0.005 (0.125) 0.868 0.859 96.272 0.000000

-0.351* (-1.428) 0.158** (1.835) -0.178* (-1.592) -0.017 (-0.287) 0.030** (2.244) -0.466*** (-5.822) -0.141*** (-6.161) 0.235*** (3.206) 0.069** (1.855) 0.352*** (4.282) 0.048*** (2.717) -0.032 (-0.942) 0.094** (1.840) 0.198*** (3.778) 0.039 (0.855) 0.043 (1.002) 0.400 0.367 10.029 0.000000

Notes: *** significant at 1% level; ** significant at 5% level ; (See variable definition in Table 1)

* significant at 10% level

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Table 5: Results by sector

Variables

Consumer

Construction and Property

-0.454** (-1.654) 0.214** (2.208) -0.056 (-0.441) 0.010 (0.156) 0.019 (1.244) -1.708*** (-18.789) 0.263*** (7.397) 0.302** (3.639) -0.119*** (-2.829) 0.371*** (4.119) 0.058*** (2.910) -0.042 (-1.091)

Trading and Services

-0.441* (-1.558) 0.230** (2.313) -0.038 (-0.295) 0.037 (0.540) 0.023* (1.501) -1.760*** (-19.035) 0.179*** (6.824) 0.137** (1.898) -0.117*** (-2.706) 0.278*** (3.122) 0.062*** (3.004) -0.031 (-0.777)

Industrial

CONSTANT MGROWNMAL MGROWNFOR MGROWNCHI SIZE PROFIT GROWTH TANGIBILITY RISK RECINV COMPLEX LISTSTAT CONSUMER CONSTPROP TRADING INDUSTRIAL R-squared Adj R-squared F-Statistics P-value

-0.414* (-1.455) 0.222** (2.216) -0.028 (-0.214) 0.039 (0.569) 0.022* (1.385) -1.755*** (-18.963) 0.182*** (6.871) 0.143** (1.982) -0.120*** (-2.759) 0.286*** (3.196) 0.063*** (3.074) -0.030 (-0.766) -0.032 (-0.724)

-0.434* (-1.535) 0.230** (2.313) -0.039 (-0.297) 0.036 (0.527) 0.023* (1.518) -1.759*** (-19.045) 0.179*** (6.814) 0.144** (1.994) -0.117*** (-2.701) 0.292*** (3.209) 0.060*** (2.870) -0.034 (-0.864)

0.174*** (3.647) 0.002 (0.049) -0.023 (-0.689) 0.819 0.809 83.549 0.000000 0.829 0.819 89.407 0.000000 0.818 0.808 83.310 0.000000 0.905 0.819 83.526 0.000000

Notes: *** significant at 1% level; ** significant at 5% level ; (See variable definition in Table 1)

* significant at 10% level

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not very concerned about the control, are more focused on the well-being of the companies as a whole and do not have anything against issuing of shares, thus give a negative relationship at 10 percent level of significance. The result indicates that short term debt decision of the Malaysian companies is an excellent fit with an R-squared of 0.868 (0.859 adjusted), and is significantly affected by the size of the company, profitability, growth and tangibility. None of the ownership structure is significant, which suggest that ownership by managers do not influence this decisions. This finding is consistent with a study by Omran and Pointon (2009) who find that size and growth are the main contributor to short term financing ratio. Column 5 of Table 4 shows that total debt to market ratio is 40% explained by the ownership structure, size of the company, growth and asset tangibility. This result is similar to the result in the main model, except that in this analysis, ownership by foreign manager and size are significant, while these variables are not significant in the earlier model. Analysis by sectors Table 5 presents the analysis of the relationship between the dependent and independent variables according to sectors, using the first measure of leverage. The companies are categorized into their respective sectors, namely Consumer sector, Construction and Property sector, Trading and Services sector, and Industrial sector. The adjusted R squared for the sectors range from 80.8% to 81.9%, and the F values are statistically significant(refer Table 5). The results indicate that, consistent with the result in the main model, profitability is negative and significantly related to debt structure of the companies in all sectors. Again this support the pecking order theory. Growth, asset tangibility and ownership by Malay managers are also positively significant and related to debt structure in all sectors. However, ownership by foreign and Chinese managers remain insignificant in all sectors. For company size, in the main model, it is not significant, however, when the companies are categorised into their respective sectors, this variable is positively significant in all sectors, except for construction and property sector. Consistent with the result in the main model, risk, complexity, and the ratio of receivables and inventories to total assets are also significantly related to debt structure in all sectors. Companies in construction and property sector appear to be highly leverage compared to companies in other sectors. This may be explained by their activities which require huge capital at both investment and operating stages, which may force the companies to obtain more debt financing.

5. CONCLUSION The major purpose of this study is to explore the factors that affect the debt structure of Malaysian companies. The results indicate that profitability, asset tangibility, growth and ownership structure affect the debt structure. However size is only a significant variable when the companies are further categorised into their respective sectors. The result also suggest that companies in construction and property sectors are more leveraged compared to companies in other sectors. These results are consistent with prior studies in developed countries and add to the literature of studies in developing countries. The findings appear to suggest that the capital structure of Malaysian companies can be explained in light of the theoretical relationship, by pecking order theory (influence of profitability, ownership structure and growth on debt) and the trade-off theory (influence of size and tangibility of assets on debt).

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However, the conclusions drawn from this study should be interpreted in a limited way, which would potentially represent opportunities for further investigation in future research. First, this study is a cross sectional study, where it uses one year data only. Future research could extend the study to include more years of data, thus longitudinal studies can be conducted and further investigation can be analyzed. Secondly, further investigation can be carried out to examine the influence of ownership by foreign and Chinese managers on debt, as this study finds insignificant relationships of these variables on debt in the main model. Furthermore, this study only examines one type of ownership structure which is the managerial ownership. Future research can also examine other forms of ownership structure which is unique to Malaysian business environment, such as ownership by large shareholders and government-link companies. REFERENCES: Abdul Rahman, R., & Mohamed Ali, F. H. (2006). Board, audit committee, culture and earnings management: Malaysia evidence. Managerial Auditing Journal, 21(7), 783-804. Abor, J. (2005). The effect of capital structure on profitability: empiricalanalysis of listed firms in Ghana. Journal of Risk Finance, 6(5), 438-445. Abor, J. (2007). Agency theories determinants of debt levels : evidence from Ghana. Review of Accounting and Finance, 7(2), 183-192. Abor, J. (2008). Debt policy and performance of SMEs: Evidence from Ghana and South African firms. The Journal of Risk Finance, 8(4), 364-379. Ahmed Sheikh, N., & Wang, Z. (2011). Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan. Managerial Finance, 37(2),117-133. Berger, P. G., Ofek, E., & Yermack, D. L. (1997). Managerial entrenchment and capital structure decisions. The Journal of Finance, LII(4), 1411-1438. Bokpin, G.A., & Arko, A. C. (2009). Ownership structure, corporate governance and capital structure decisions of firms: Empirical evidence from Ghana. Studies in Economics and Finance, 26(4), 246-256. Bryan, S., Nash, R., & Patel, A. (2005). Can the agency costs of debts and equity explain the changes in executive compensation during the 1990s? Journal of Corporate Finance, 2005, 1-20. Cespedes, J., Gonzalez, M. & Molina, C.A. (2010). Ownership and capital structure in Latin America. Journal of Business Research, 63, 248-254. Che Ahmad, A., Houghton, K. A., & Mohamad Yusof, N. Z. (2006). The Malaysian market for audit services: Ethnicity, multinational companies and auditor choice. Managerial Auditing Journal, 21(7), 702-723 Chen, J.J. (2004). Determinants of capital structure of Chinese listed companies. Journal of Business Research, 57, 1341- 1351. Chow, C. W. (1982). The demand for external auditing: size, debt and ownership influences. The Accounting Review, IVII(2), 272-291.

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