Capital Structure Determinants : The Malaysian Manufacturing Industry ’ s Evidence

The debate on capital structure determinants and firm value is no stranger to the world’s corporate financial studies. Many theoretical and empirical researches have addressed these issues, but there has yet to be a unanimous accepted theory. The first modern theory of capital structure developed by Modigliani and Miller [32] debates that the choice between debt and equity financing has no effect on the firm value. This debt irrelevance theorem which is based on restrictive assumptions, however do not hold in reality. Consequently, the choice of capital structure becomes an important matter in determining the value a firm. Furthermore, according to Myers [33] debt becomes the measurement for capital structure and conflict between debt holders and shareholders arises only in existance of default risk. If debt is default-free, debt holders have no interest in the income, value or risk of the firm. However, if possibility of default is significant, then shareholders can attain benefits at the expense of debt holders. Hence, the managers can bring into play numerous options while transferring value from debt holders to shareholders. Pecking order theory [13], predicts that firms prefer to use internal financing when available and will choose debt over equity when external financing is required. Manufacturing industry is very important to the development of Malaysia. Manufacturing sector is one of the goods-producing industries supersector group. The manufacturing sector includes authorized engaged in the mechanical, physical or chemical transformation of materials, substances, or compnents into new products. Manufacturing industries are significant for an economy as they engage a large share of the workers force and make materials needed by sectors of strategic significance such as global infrastructure and defense. From the Department of Statistics Malaysia, Malaysia’s manufacturing production experienced a huge decline between the years 2008 to 2009, due to the effect of the global financial crisis. Malaysia’s manufacturing production averaged only 5.20 percent from 1991 until 2016. Brownbill [8] states that a stunt in employment suggests that firms were more careful towards the outlook of the Malaysian economy. The report states that the decrease in demand encouraged firms to reduce inventories, which subsequently reduces firm’s income and ability to pay debt. This shows worsening operating conditions in Malaysia’s manufacturing sector. Malaysia’s target export is to achieve between 4 and 4.5 percent of growth in gross domestic product per year. However, with the slowing global demand and weakening Ringgit value the export advantages of Malaysia have been negated. Malaysia's trade balance fell to RM6.8 billion in the last quarter, down from RM11.4 billion in the final three months of 2015. Hence, it is of the utmost importance to study the determinants of capital structure as it would help manufacturing firms in Malaysia to strategically balance between equity and debt as their source of capital for day-to-day operations and future growth. Furthermore, capital structure is very important as it can affect the shareholder’s return. Therefore, issues that are related to capital structure have to be figure out quickly because it is directly influence the firm’s performance.