Corporate Choice Between Straight Debt And Convertible Debt In Malaysian Capital Market
Malaysia capital market financing is developing along with the economy. It is aimed to meet the expanding financing needs. This study is interested to examine the firm specific characteristics that determine corporate choice between straight debt and convertible debt. 136 debt offerings are ident...
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| Main Author: | |
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| Format: | Thesis |
| Language: | English English |
| Published: |
2008
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| Subjects: | |
| Online Access: | http://etd.uum.edu.my/340/1/Khaw_Lee_Hwei.pdf http://etd.uum.edu.my/340/2/Khaw_Lee_Hwei.pdf http://etd.uum.edu.my/340/ |
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| Summary: | Malaysia capital market financing is developing along with the economy. It is aimed
to meet the expanding financing needs. This study is interested to examine the firm
specific characteristics that determine corporate choice between straight debt and
convertible debt. 136 debt offerings are identified as the sample for the study,
consisting of 107 straight debts and 27 convertible debts from year 2001 through
2007. Nine predetermined explanatory variables namely tax consideration, debt ratio,
tangibility, firm size, growth opportunities, profitability, net operating cash flow
(NOCF), interest coverage and board of listing are analysed by using binary logistic
regression.Tax consideration is proxied by non debt tax shield and debt tax shield in
which they are regressed separately. This study also introduces two additional
explanatory variables i.e. interest coverage and board of listing. Initially, only two
explanatory variables are found to be statistically significant i.e. debt ratio and
growth opportunities, denoted by market-to-book ratio. Subsequently, the predictive
quality of each equation is examined and found that there is an existence of
multicollinearity. As a result, corrective analysis is presented. It illustrates that non
debt tax shield; debt ratio and firm size are statistically significant. These results
explain that tax consideration, debt ratio and firm size influence the corporate choice
when deciding between straight debt and convertible debt. It is reported that firms
with higher non debt tax shield are more likely to issue straight debt which is in
contrast to the tradeoff theory. This shows that firms in Malaysia are also utilising
the potential tax benefit from non debt item such as depreciation in addtion to tax
deductible interest payment. Therefore, the empirical results from this study do not
completely conform to the tradeoff theory. As for debt ratio, the finding is consistent
with the implications of the financial distress and tax benefits hypotheses in which
firms with higher debt ratio have a tendency to issue equity-like instrument, i.e. convertible debt. Conversely firms with lower debt ratio would issue straight debt.
Results also show that firms with larger firm size are more likely to issue straight
debt whereas firms with smaller firm size are more likely to issue convertible debt.
This postulates a positive relation between firm size and debt which is also
consistent with tradeoff theory since larger firms have been shown to have lower
bankruptcy risk and relatively lower bankruptcy cost. In addition to the above
results, it is discovered that non debt tax shield is more appropriate to represent tax
consideration in the Malaysia capital market instead of debt tax shield.This study
also introduces two additional explanatory variables i.e. interest coverage and board
of listing of companies in Bursa Malaysia. However, both variables are insignificant,
thus they could not explain the choice between straight debt and convertible debt. |
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