The effect of peer firms determining firm capital structure: evidence from manufacturing in Malaysia
The purpose of this study is to investigate the impact of peer firms’ financial policies (capital structure) on target firm financing behaviour (capital structure), and to empirically test whether non-linear relationship of profitability with capital structure and growth opportunities exists. In...
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| Format: | Thesis |
| Language: | English English English |
| Published: |
2019
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| Subjects: | |
| Online Access: | http://eprints.uthm.edu.my/86/1/24p%20MUHAMMAD%20AYAZ.pdf http://eprints.uthm.edu.my/86/2/MUHAMMAD%20AYAZ%20COPYRIGHT%20DECLARATION.pdf http://eprints.uthm.edu.my/86/3/MUHAMMAD%20AYAZ%20WATERMARK.pdf http://eprints.uthm.edu.my/86/ |
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| Summary: | The purpose of this study is to investigate the impact of peer firms’ financial policies
(capital structure) on target firm financing behaviour (capital structure), and to
empirically test whether non-linear relationship of profitability with capital structure
and growth opportunities exists. In order to achieve this, panel data techniques (static
and dynamic) using the sample of 169 public listed firms from manufacturing sector
over the period of 6 years (2011-2016) were used. The results showed that firm capital
structure responses to the capital structure decisions of the peer firms, which suggests
that firm in manufacturing sector does not make its capital decisions in isolation and
peer firms decisions impact subject firm own decisions. The findings further reveal
that peer effects mainly exists through the actions (actual capital structure policies) of
peer firms rather than their characteristics and peer effect is the most important factor
(determinant) of capital structure than prior identified factors. Moreover, the results
demonstrate that a non-linear relationship of profitability with book leverage and
growth opportunities exists. The non-linear relationship posits that at the optimal level,
capital structure and growth opportunities increased firm profitability. However, when
leverage and growth opportunities reach beyond the optimal level, a positive
relationship switches to negative. Consequently, switching from positive to negative
indicates non-linear relationship. The overall results are consistent with the previous
studies of peer effects and non-linearity of profitability with capital structure and
growth opportunities. Thus, this provides evidence that managers of the firms in
manufacturing industry of Malaysia do not rationally weigh their peer financial
policies; on the other hand, using higher debt in firm capital structure is associated
with higher agency cost of debt. Moreover, the findings of the present study contribute
into the literature of peer effects by validating, and extending the theoretical
understanding for academic researchers’ as well as for managers and policy makers. |
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