Target Capital Structure and Speed of Adjustment : A Dynamic Evidence from Shariah Approved Firms in Malaysia

The present investigation refers to the determinants of the capital structure, using the technique of multiple regression through Panel Data of open capital companies in the stock exchanges of Argentina, Brazil and Chile, in order to know the behavior of determinants of the capital structure in relation to Trade-Off Theory (TOT) and Pecking Order Theory (POT). The POT offers the existence of a hierarchy in the use of sources of resources, while the TOT considers the existence of a target capital structure that would be pursued by the company. Sixteen accounting variables were used, in which five are dependent (related to indebtedness) and eleven are independent variables (explaining the determinants of the capital structure). It is observed that, with the use of the Panel Data, the determinants that seem to influence in a more accentuated way the levels of debt of the companies are: current liquidity, tangibility, return to shareholders, return of assets, sales growth, asset growth, market-to-book and business risk measured by the volatility of benefits. Suggestions for future research include the use of Panel Data to analyze other factors that may influence indebtedness, mainly taxes and dividends, as well as a deeper analysis of factors that may influence the speed of adjustment towards the supposed objective level.

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Heterogeneity and Asymmetry in Speed of Leverage Adjustment: The Indian Experience

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091516500193 ◽

2016 ◽

Vol 19 (03) ◽

pp. 1650019 ◽

Cited By ~ 1

Author(s):

Surenderrao Komera ◽

P. J. Jijo Lukose

Keyword(s):

Capital Structure ◽

Cash Flow ◽

Emerging Market ◽

Adjustment Costs ◽

Group Affiliation ◽

Cross Sectional ◽

Speed Of Adjustment ◽

Business Group Affiliation ◽

Optimal Leverage ◽

Target Leverage

In this paper, we examine firms' capital structure adjustment behavior and estimate their “speed of adjustment” toward optimal leverage ratios by employing a dynamic, partial adjustment model. We find that sample firms on an average offset half of the deviation from their target leverage ratios in less than one and half (1.41) years. Such evidence suggests optimal capital structure behavior among sample firms. Further, we report cross sectional heterogeneity and asymmetry in speed of adjustment estimates, resulting from varied leverage adjustment costs across the sample firms. We find higher speed of adjustment estimates among larger sample firms suggesting higher leverage adjustment costs for smaller firms. Business group affiliation does not seem to influence the costs of sample firms' leverage adjustment. Over-levered firms report higher speed of adjustment estimates, suggesting that sample firms do not consider debt financing as a “disciplining mechanism” for managers. Further, we find lower speed of adjustment estimates for sample firms with higher cash flow, implying that Indian markets do not actively accommodate firms' cash flow needs. Thus, our findings reveal complex asymmetric information problems and consequent varied leverage adjustment costs among emerging market firms.

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Investigating Capital Structure Speed of Adjustment (SOA) of Indonesian Companies for Corporate Value

Global Journal of Flexible Systems Management ◽

10.1007/s40171-020-00235-9 ◽

2020 ◽

Vol 21 (3) ◽

pp. 215-231

Author(s):

G. Oka Warmana ◽

I. Ketut Rahyuda ◽

Ida Bagus Anom Purbawangsa ◽

Ni Luh Gede Sri Artini

Keyword(s):

Capital Structure ◽

Corporate Value ◽

Speed Of Adjustment

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The Speed of Adjustment to the Target Market Value Leverage Is Slower Than You Think

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109019000516 ◽

2019 ◽

Vol 55 (6) ◽

pp. 1946-1977 ◽

Cited By ~ 1

Author(s):

Qie Ellie Yin ◽

Jay R. Ritter

Keyword(s):

Capital Structure ◽

Empirical Evidence ◽

Stock Price ◽

Market Value ◽

Target Market ◽

Price Changes ◽

Trade Off ◽

Price Fluctuations ◽

Speed Of Adjustment ◽

The Capital Structure

In the capital structure literature, speed of adjustment (SOA) estimates are similar whether book or market leverage is used. This robustness is suspect, given the survey evidence that firms target their book leverage and the empirical evidence that they don’t issue securities to offset market leverage changes caused by stock price changes. We show that existing market SOA estimates are substantially upward biased due to the passive influence of stock price fluctuations. Controlling for this bias, the SOA estimate is 16% for book leverage and 10% for market leverage, implying that the trade-off theory is less important than previously thought.

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Capital Structure Deviation and Speed of Adjustment

SSRN Electronic Journal ◽

10.2139/ssrn.1927698 ◽

2011 ◽

Author(s):

Tarun K. Mukherjee ◽

Wei Wang

Keyword(s):

Capital Structure ◽

Speed Of Adjustment

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Determinants of Capital Structure for Malaysian Shariah-Compliant Firms: The Impact of Revised Screening Methodology

International Journal of Banking and Finance - Vol. 15, Number 2, 2020 ◽

10.32890/ijbf2019.14.0.9911 ◽

2020 ◽

Author(s):

Norfhadzilahwati Rahim ◽

Fauzias Mat Nor ◽

Nurainna Ramli ◽

Ainulashikin Marzuki

Keyword(s):

Capital Structure ◽

Financial Stability ◽

Panel Data Analysis ◽

Negative Relationship ◽

Large Firms ◽

Method Of Moment ◽

Speed Of Adjustment ◽

Lagged Dependent Variable ◽

Target Leverage ◽

The Impact

This study investigates two main objectives. Firstly, the determinants of capital structure were examined for each sector among Malaysian Shariah-compliant firms, and whether the inclusion of Islamic debt (leverage 1 and leverage 2) has led to different results due to changes in the screening methodology. Secondly, this paper analyzes the target Capital Structure and Speed of Adjustment for both before and after the Revised Screening Methodology. This study employs panel data analysis by using generalized method of moment (GMM). The sample consists of 192 Shariah-compliant companies in Malaysia during the period of 1999 to 2017. The results demonstrated that the firm has target capital structure and identified specific determinants that have affected the capital structure of Shariah-compliant firms in Malaysia. Moreover, the findings have also revealed certain implications toward large firms. Large firms tend to generate more income and profit, however at the same time, these firms require more debt to support investment activities. Hence, with regards to profitability, this study identified a negative relationship between profitability and leverage for Shariah-compliant firms for all sectors. Shariah-compliant firms with high profitability will use a lower leverage in their financial activities. Thus, the results strongly support the pecking order theory. Other than that, this study found that the lagged dependent variable (lagged leverage 1 and leverage 2) presented a positive significance, and concluded that the speed of adjustment takes approximately 2 years. This suggests that the Shariah-compliant firms close approximately by 30% to 70% of the gap between current and target capital structure within one and two years. Furthermore, the findings on the target leverage level imply that after the revised screening methodology was introduced in November 2013, the speed of adjustment became faster than before the implementation of the new screening methodology. Thus, it is important for management to maintain the target leverage during financial decision making, which in turn strengthens the firm’s Shariah-compliant financial stability and sustainability, and continue to remain listed as Shariah-compliant securities. This paper provides an overview of capital structure behaviour in Malaysia.

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