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Capital Structure and Investment Behaviour of Malaysian Firms in the 1990s: a study of corporate governance before the crisis

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  • Megumi Suto

Abstract

This is an empirical study analysing the corporate finance and governance structure in Malaysia before and after the financial crisis of 1997, utilising the agency cost approach. The contribution of this paper is to link the corporate governance mechanism with the role of banks and corporate ownership structure peculiar to Malaysia, taking into account the institutional framework and historical background of the Malaysian financial system, such as government protection for the banking sector and the social dispersion of corporate ownership related to the Malay First policy. Based on data for 375 non–financial KLSE (Kuala Lumpur Stock Exchange) listed companies during fiscal years 1995–99, our analysis is organised into three parts. Characteristics of corporate finance in Malaysia in the 1990s using aggregated time–series data are outlined, followed by an examination of the determinants of capital structure via cross–sectional regressions in terms of dependency on banks and ethnic ownership structure, controlling ownership concentration, availability of internal funds, corporate size, industry effects, etc. We then estimate simple investment functions with panel data in order to examine the effects of debt financing on corporate investments before the crisis. Empirical results show the following. Firstly, the commitment of banks to finance corporate debt as well as lending obviously increased debt ratios. Secondly, increasing ownership by native Malays, both the direct and indirect holding of corporate shares, played no significant role in disciplining corporate management. However, ownership concentration mitigated conflict between managers and owners. Foreign ownership also contributed to a reduction in the agency cost of equity financing in financial liberalisation. Finally, high dependency on debt led to excessive corporate investment before the crisis. These results imply that the concentration of risks on the banking sector and social policy advocating the dispersion of corporate ownership weakened the corporate governance mechanism, thereby exacerbating the distress of Malaysia's corporate sector during the financial crisis.

Suggested Citation

  • Megumi Suto, 2003. "Capital Structure and Investment Behaviour of Malaysian Firms in the 1990s: a study of corporate governance before the crisis," Corporate Governance: An International Review, Wiley Blackwell, vol. 11(1), pages 25-39, January.
    • Handle: RePEc:bla:corgov:v:11:y:2003:i:1:p:25-39
    DOI: 10.1111/1467-8683.00299
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    1. Claudiu Tiberiu Albulescu, 2020. "Investment Behaviour and Firms’ Financial Performance: A Comparative Analysis Using Firm-Level Data from the Wine Industry," International Journal of Management, Knowledge and Learning, International School for Social and Business Studies, Celje, Slovenia, vol. 9(1), pages 75-94.
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    3. Fumiharu Mieno, 2006. "Fund Mobilization and Investment Behavior in Thai Manufacturing Firms in the Early 1990s," Asian Economic Journal, East Asian Economic Association, vol. 20(1), pages 95-122, March.
    4. Rahimah Mohamed Yunos Author_Email: rahim221@johor.uitm.edu.my & Malcolm Smith & Zubaidah Ismail & Syahrul Ahmar Ahmad, 2011. "Inside Concentrated Owners, Board Of Directors And Accounting Conservatism," Annual Summit on Business and Entrepreneurial Studies (ASBES 2011) Proceeding 2011-053-178, Conference Master Resources.
    5. Hafezali Iqbal Hussain & Azlan Ali & Hassanudin Mohd Thas Thaker & Mohsin Ali, 2019. "Firm Performance and Family Related Directors: Empirical Evidence from an Emerging Market," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 13(2), June.
    6. Johl, Shireenjit & Subramaniam, Nava & Mat Zain, Mazlina, 2012. "Audit Committee and CEO Ethnicity and Audit fees: Some Malaysian evidence," The International Journal of Accounting, Elsevier, vol. 47(3), pages 302-332.
    7. Rashid, Mamunur & Nur Khoirunnisaa Pg Hj Johari, Dk Siti & Izadi, Selma, 2023. "National culture and capital structure of the Shariah compliant firms: Evidence from Malaysia, Saudi Arabia and Pakistan," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 949-964.
    8. Uwalomwa UWUIGBE, 2014. "Corporate governance and capital structure: evidence from listed firms in Nigeria stock exchange," The Journal of Accounting and Management, Danubius University of Galati, issue 1, pages 5-14, April.
    9. Muniandy, Balachandran & Ali, Muhammad Jahangir, 2012. "Development of financial reporting environment in Malaysia," Research in Accounting Regulation, Elsevier, vol. 24(2), pages 115-125.
    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. Detthamrong, Umawadee & Chancharat, Nongnit & Vithessonthi, Chaiporn, 2017. "Corporate governance, capital structure and firm performance: Evidence from Thailand," Research in International Business and Finance, Elsevier, vol. 42(C), pages 689-709.
    12. Abd Halim Ahmad & Nur Adiana Hiau Abdullah, 2013. "Investigation of optimal capital structure in Malaysia: a panel threshold estimation," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 30(2), pages 108-117, May.
    13. Niloufar Rezaie Nejad & Shaista Wasiuzzaman, 2015. "Multilevel Determinants of Capital Structure: Evidence from Malaysia," Global Business Review, International Management Institute, vol. 16(2), pages 199-212, April.
    14. Sin-Huei Ng & Tze San Ong & Boon Heng Teh, 2019. "An Agency Perspective on Firm Diversification, Efficiency and Performance: Evidence From Malaysia," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(6), pages 24-41, October.
    15. Mieno, Fumiharu & 三重野, 文晴 & ミエノ, フミハル, 2004. "Fund Mobilisation and Investment Behavior in Thai Manufacturing Firms in the Early 1990s," CEI Working Paper Series 2004-14, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    16. Bany-Ariffin, A.N. & Mat Nor, Fauzias & McGowan Jr., Carl B., 2010. "Pyramidal structure, firm capital structure exploitation and ultimate owners' dominance," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 151-164, June.
    17. 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.
    18. Omer Bin Thabet & Fekri Ali Shawtari & Abdullah Mohammed Ayedh & Fazlin Ali, 2017. "Capital Structure of Malaysian Shariah-Compliant Firms هيكلية رأس المال الشركات الماليزية المتوافقة مع الشريعة الإسلامية," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 30(1), pages 105-116, January.
    19. Shehu Usman Hassan Author_Email: Shehu.Hassanus.usman@gmail.com, 2011. "Determinants Of Capital Structure In The Nigerian Listed Insurance Firms," International Conference on Management (ICM 2011) Proceeding 2011-054-160, Conference Master Resources.
    20. Khalil Jebran & Shihua Chen, 2023. "Can we learn lessons from the past? COVID‐19 crisis and corporate governance responses," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 421-429, January.
    21. Noor Afza Amran* & Zaimah Abdullah & Rokiah Ishak, 2018. "Gender Diversity and Ownership Structure of Malaysian Firms in the Real Estate Sector," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 915-923:6.
    22. Oehmichen, Jana, 2018. "East meets west—Corporate governance in Asian emerging markets: A literature review and research agenda," International Business Review, Elsevier, vol. 27(2), pages 465-480.
    23. Amran Rasli & Chin Fei Goh & Saif-Ur-Rehman Khan, 2013. "Demystifying the role of a state ownership in corporate governance and firm performance: Evidence from the manufacturing sector in Malaysia," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 31(2), pages 233-252.
    24. 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.

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