Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1

Theoretical Investigation on Determinants of Government-Linked Companies Capital Structure

Noryati Ahmad 1 and Fahmi Abdul Rahim2
This study investigates the capital structure determinants of Malaysian Government Link ed Companies (GLCs) and attempts to link the relevant capital structure theory related to GLCs. A total of 38 government link ed companies listed in Bursa Main Mark et are analyzed covering the period from 2001 until 2010. Using pooled ordinary least square method, the results show that size has significantly positive relationship to all the dependent variables (debt ratio, long term debt ratio and short-term debt ratio). Growth is positively related to debt ratio, while liquidity is negatively related to both debt ratio and short term debt ratio. Interest coverage ratio and tangibility ratio have significantly positive relationship with longterm debt ratio, while profitability is inversely related to long-term debt ratio. A negative relationship between tangibility and short term debt ratio is found in the study. Non-debt tax shield appears not to have significant relationship with the leverage of GLCs. Generally GLCs capital structures are supported by both trade off theory and peck ing order theory while there is little evidence to support agency cost theory. In addition GLCs with debt ratio of more than 40% is significant in explaining debt policy decision of GLCs.

JEL Codes: G30, G32 and G38

1. Background of study
Incorporation of Malaysian Government Linked Companies (GLCs) started in the year 2004. The performance of Malaysian GLCs have attracted attention of various interested parties because they are directly or indirectly owned by government (through the Ministry of Finance Incorporated) or through the Government Linked Investment Company (GLIC) (Mohd Saleh, Kundari and Alwi, 2011). GLCs companies have played a vital role in Malaysias economy growth as they accounted for one -third of the FTSE KLCI Composite Index. Lau and Tong (2008) reports that as owner of GLCs, the government is in the capacity to make major decision on matters like appointment of the board of directors and top management, corporate strategy, financing, acquisition and investment. In his study, Wiwattanakatang (1999) finds that GLCs are highly leveraged because they can easily get access to secured loans. Capital structure decision of GLCs is crucial to the financial well-being of the company. Similar to other domestic companies, GLCs needs to seek an ideal capital structure that could reduce the cost of capital and reach the optimal level of debt. Eriotis, Vasiliou and Neokosmidi (2007) state that inappropriate on debt policy decision can trigger financial distress and lead to bankruptcy. What are the determinants of such an optimal capital structure? These are the common questions asked when making financial decision relating to capital structure.
1

Associate Professor Dr Noryati Ahmad, Arshad Ayub Graduate Business School, Universiti Teknologi MARA, Malaysia, Email: [email protected]
2

Dr Fahmi Abdul Rahim, Faculty of Business Management, Universiti Teknologi MARA, Melaka City Campus, Malaysia

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Numerous studies have existed in an attempt to explain optimal capital structure of companies. Yet, there has been no fast rule to assist the financial manager to attain efficient mixture of equity and debt capital. Donald, Hao and Chek (2006) argue that larger and more profitable firms with political patronage tend to resort to debt financing. Wan Tahir (2004) finds Malaysian GLCs fail to optimize the use of their capital and are highly geared. In addition many researchers are attracted to investigate factors affecting capital structure decisions of company. Generally empirical results show that the choice of capital structure studies differs from sector to sector basis (Muzir, 2011; Sabir and Malik, 2012), between private and public companies (Ting and Lean, 2011), between large and small companies and the direction of the explanatory variables on the leverage measured. For example Suhaila and Wan Mahmood (2008) and Ting and Lean (2011) find that growth is not a determinant for capital structure in Malaysia while Dzolkarniani (2006) and Mustapha,Ismail and Minai (2011) discover growth to be positively related to leverage. This setting provides an opportunity to examine and identify factors that determine the debt policy decision of Malaysian GLCs. This study also extends the research work of Ting and Lean (2011) by including additional variables like non-debt tax shield and interest coverage ratio that they have not included but have been highlighted by previous literature to be among the factors that determine firms capital structure. Furthermore, this study utilizes different financial leverage measurements proposed by Sheikh and Zongjun (2011) and Bevan and Danbolt (2002). They claim that a clearer understanding of the capital structure of a company can be derived by using long term debt and short term as proxies Last but not least this study attempts to identify the capital structure theory that would explain Malaysian GLCs capital structure decision policy. This paper is structured as follows: Section 1 provides a brief background of the study. Section 2 discusses and reviews the capital structure theories and empirical evidences. Section 3 explains the data and methodology employed. Section 4 discusses the findings and section 5 concludes.

2. Capital Structure Theories and Empirical Evidences

Evolution of capital structure theories starts off with Modigliani and Miller (1958) study on capital structure. Also known as capital structure irrelevance theory, it argues that the capital structure of a company has no impact on its value but rather the type of investment decision made does. This theory was heavily criticized as it fails to account for other factors like the advantage of tax shield, bankruptcy costs and agency costs. The work of Modigliani and Miller prompts the development of other theories of capital structure specifically static trade-off, pecking order, and agency cost theories Static trade-off theory explains that debt policy decision of a company is identified after the company weights the benefits and costs of using debt to finance. Optimal capital structure is achieved through the net advantage of using debt financing. It further argues that this advantage compensates the financial distress and bankruptcy costs associated with debt financing (Altman, 1984 and Sabir, 2012). Company with low level of debt will be able to increase the firm value if more debt financing is used. However when the firm value is already maximized then using more debt will not benefit the firm but rather incur additional costs. Hence highly profitable companies 2

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
will resort to high debt financing since it can reduce agency costs, taxes and bankruptcy costs. Myers and Majluf (1984) and Myers (1984) were the advocates of pecking order theory. The theory explains that company will use its internal sources of financing first before seeking external financing like debt because it is cheaper to source internally and is aware that different form of capital has different costs (Myers, 1984). Highly profitable company tends to prefer low level of debt financing since it has sufficient internal funds. On the other hand, company with low profitability prefers to use debt instead of equity financing because it is cheaper. In addition, if company runs out of internal funds, then it prefers to use debt rather equity since the cost of debt is relatively cheaper. Managers are hired by stockholders to manage the company. However there may be times when managers make decision that will be at the expense of the stockholders. Consequently costs need to be borne by stockholders due to mismatch of interest between these two parties (Jensen and Meckling, 1976). It is said that debt financing could reduce this conflict of interest and hence agency costs. From the agency cost theory perspective, debt financing is preferred to equity because debt investors have the right to take legal action against management who failed to pay their due interest payments. Fearing of losing his job, management will act in the interest of the organization to ensure that debt investors interest payments are made (Grossman and Hart, 1982). Capital Structure Determinants, Theories and Hypotheses Previous empirical findings have identified liquidity, interest coverage ratio, size, growth opportunity, tangibility of assets, profitability and non-debt tax shield as factors influencing companys capital structure decision. The following section reviews variables identified in previous literatures relates them to capital structure theories and hypothesizes the relationship between these explanatory variables and financial leverage Company that is highly liquid would seek debt financing due to its capacity to pay any debt obligation due. As a result, a positive relationship is hypothesized between financial leverage and liquidity. This concurs with the trade-off theory. Pecking order theory tends to differ with this relationship. It is argued that if company has so much cash flow then it will use internal funds for any new investments rather than resort to debt financing. Companys liquidity is related to short-term debt financing and is theoretically predicted to show a negative relationship (Bevan dan Danbolt, 2000). Among studies that are in congruent with pecking order theory are Sheikh and Zongjun (2011), Viviani, (2008) and Mazur, (2007). It is anticipated that an inverse relationship exist between GLCs leverage ratios and liquidity ratio. Interest coverage ratio is another explanatory variable to be considered in this study. Following Eriotis, Vasilou and Neokosmidi (2007), the equation is expressed as net income before taxes divided by interest payment. The ratios can be calculated as expressed below: Interest Coverage Ratio equal to net income before tax interest charges. Harris and Raviv (1990) suggest that interest coverage ratio has negative correlation with leverage. They conclude that an increase in debt will increase the 3

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
probability of the company to default. Therefore, interest coverage ratio acts as a proxy of default probability which implies that a lower interest coverage ratio indicates a higher debt ratio. The relationship is in support of static trade-off theory. On the other hand, Baral (2004) argues that a positive relationship between interest coverage ratio and leverage can exist. Hence it is expected that an increase in interest coverage ratio will affect leverage negatively. Large companies prefer to go for debt financing and are less likely to go bankrupt (. Due to their size, they are able to use debt financing since their earnings are more stable. Static trade off theory supports this argument. Empirical evidences by Zou and Xiao, (2006), Sheik and Zongjun (2011) and Huang and Song (2002) are in tandem with this theory. In contrast, Bevan and Danbolt (2002) and Chen (2004) findings support the pecking order theory where they report a negative relationship between size and leverage. A negative relationship exists due to the reason that large firms do not have serious problem of information asymmetry and therefore can afford to issue equity rather than debt instruments. Long term debt and short term debt have negative relationship with size of the company (Titman and Wessels, 1988). Generally the results from previous literature are still mixed. In this study, the expectation on the effect of GLCs size on leverage is positive. Sheikh and Zoujun (2011) and Song (2005) find that growth is a good factor for explaining the capital structure decision of the firm. Based on the pecking order theory, when company is faced with growth opportunities, it will tend to source for debt financing rather than issuing new equity. The rationale behind such decision is that issuing new equity increases the asymmetric information related costs that could be reduced through issuing of debt. Hence pecking order theory postulates a positive relationship between growth and financial leverage. However both static trade-off theory and agency theory predict a negative relationship between financial leverage and growth opportunities. According to static trade-off theory, since growth opportunities are considered as intangible assets and therefore cannot be collateralized, company will reduce the use of debt financing. Under agency theory, management has the tendency to channel the companys wealth to the shareholders is greater if the growth opportunities are greater. In order to mitigate the agency problems, company with high growth potential should seek equity financing rather than debt financing. Results from Eriotis,Vasilio. and Ventoura-Neokosmidi, (2007) and Sheikh and Zongjun (2011) supported these two theories. A positive relationship between GLCs leverages ratios and growth opportunities is hypothesized. Static trade off theory states that companies will be in a position to provide collateral if they have high level of tangible assets. Companies that default on their debt can use these tangible assets as collateral and hence avoid being bankrupt. Hence it is hypothesize that there is a positive relationship between tangibility and financial leverage. Most empirical evidence in developed confirms this relationship. (Rajan and Zingales, 1995, Wald, 1999 and Vivian, 2008) while those from the developing countries report either positive or negative relationship. Wiwattanakantang (1999) and Baharuddin, Khamis, Wan Mahmood and Dollah (2011) document a positive relationship while Mazur (2007) and Sheikh and Zongjun (2011) however find negative relationship between these two variables. Nuri (2000) explains that the inconsistency in the results is due to different form of debt being used in the studies 4

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
conduct. A positive relationship exists if long-term debt is used while an inverse relationship is observed if company uses more short-term debt (Sogorb-Mira, 2005 and Ting and Lean, 2011). This negative relationship is in line with the agency cost theory that postulates that company tends to use debt financing if it is not highly collateralized to prevent agency conflicts (Titman and Wessels, 1988 and Sheikh and Zongjun, 2011). A positive relationship between GLCs leverages ratios and tangibility of assets is expected in this study. Under static trade off theory profitability is said to be positively related to financial leverage. Um (2001) explains that profitable company is capable of higher debt capacity that results in benefitting from higher tax shields. Hence, it is expected that a positive relationship should exist between profitability and financial leverage. Besides management will choose debt financing over equity financing since debt cost is cheaper On contrary, pecking order theory suggests an inverse relationship between profitability and financial leverage because it is argued that company prefers to source for internal funds first before going for external financing. Similar findings are documented by Sabir and Malik (2012) and Sheikh and Wang (2011). Hence, this study expects profitable GLCs to use less debt financing. The decision to increase financial leverage depends on whether the tax deductions are on depreciation and investment tax credits (DeAngelo and Masulis, 1980). If major proportion of tax deduction is due to depreciation instead of borrowing then there is a negative relationship between non-debt tax shields and financial leverage (Song, 2005). On the other hand, Pettit and Singer (1985) have argued that large company is inclined to seek debt financing since large company have more tax deductible items. This is in line with the pecking order theory. As a proxy for non-debt tax shield this study will use annual depreciation divided by the total assets (Song, 2005). Furthermore Sheikh and Zongjun (2011) find inverse relationship between non-debts tax shield and short-term debt. Hence it is hypothesized that non-debt tax shield has positive relationship with GLCs leverage .

3. DATA AND METHODOLOGY

Data The sample population of this study is Malaysia GLCs listed in Bursa Malaysia. Data is collected from the annual financial report and the period of analysis is from 2001 to 2010. Initially 44 government linked companies are identified but due to lack of information and some companies being dissolved, merged and or acquired by others companies as well as unavailability of complete data, only 38 companies are included in our sample. This study also excluded GLCs in the banking, insurance and investment sectors as their nature of business may not be comparable to the capital structure of those non financial GLCs. The proxies use for the dependent variables and explanatory variables are based on the previous literature and are display in Table 1.

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Table 1 : Proxies for Dependent and Independent Variables Studied
Dependent Variables Debt Ratio Long-Term Debt Ratio Short-Term Debt Ratio Proxies Total Debt/Total Assets Long term debt/Total Assets Short-term debt/Total assets

Independent Variables Liquidity (LIQi,t ) Tangibility (TANGi,t ) Profitability (PRFi,t ) Firm Size (SIZE i,t ) Firm Growth Opportunities (GRWi,t) Non-debt Tax Shield (NDTS i,t ) Interest Coverage Ratio (INCOV) Dummy Debt Ratio (D40)

Proxies Current Assets/Liabilities Fixed assets/Total assets Return on equity ratio Logarithm of Total Sales Annual percentage change in total assets Annual depreciation/Total assets Net Income before tax/Interest Payment Debt ratio > 40% = 1 and Debt ratio < 40% = 0

Four pooled ordinary least square (OLS) regression models are estimated to analyze GLCs capital structure determinants. Model 1, 2 and 3 use debt ratio (DR), long term debt ratio (LTR) and short term debt ratio (STR) as dependent variables respectively. Model 4 includes a dichotomous variable equal to unity if GLCs have a debt ratio greater than 40% and zero otherwise. The inclusion of the dichotomous variable is to determine whether GLCs that have debt ratio of more than 40% make significant contribution in explaining GLCs debt ratio. These models are specified as follows:

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Where and are proxies for tdebt ratio, long term debt ratio and short term debt ratio of GLC i at time t respectively. Liquidity ratio (. , , interest coverage ratio , size , growth rate , tangibility of assets , profitability a and non-debt tax shield are the independent variables of GLC i at time t. i,t is the error term. is the dichotomous variable as indicated in the Table 1 Pooled OLS regression models allow testing on all cross-section units through time which is better off than just testing all cross-section units at one point of time or one cross-section at a given point of time (Podesta, 2000). Levin, Lin and Chu (2002) (LLC) group and individual unit root tests, multicollinearity test, serial correlation test and heteroskedasticity test are run before four models are estimated.

4. Empirical Findings
4.1 Descriptive statistics Table 2 below describes the statistics of both the dependent and independent variables in the sample of this study. On average the debt ratio of GLCs is 44% while the long-term debt ratio is 22% and short-term debt is 25% respectively. This indicates that the GLCs are almost equally financed by debt and equity. In terms of liquidity, GLCs have on average liquidity ratio of 1.7 times and interest coverage ratio of 0.8 times. The mean value of GLCs size is 8.22. The minimum value of profitability is -1.17 to a maximum value of 0.23. In relation to tangibility, fixed assets represent 50% of the total assets of GLCs. GLCs experience on average a growth rate of 18% during the period studied.
Table 2: Descriptive statistics of the variables
Variables DR LTR STR LIQ INCOV SIZE GRW TANG PROFIT NDTS Mean 0.444684 0.221270 0.254584 1.771779 0.858262 8.224979 0.176741 0.508906 0.036432 0.019159 Median 0.019159 0.179331 0.226881 1.385213 1.062101 8.885489 0.033747 0.535839 0.041752 0.013601 SD 0.277137 0.210163 0.211215 1.762410 0.512221 2.580289 0.771734 0.245764 0.094659 0.023023 Minimum 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 -0.964903 0.000000 -1.166284 0.000000 Maximum 2.676300 1.063000 2.356967 12.37959 2.407551 10.53205 7.311859 0.945988 0.225036 0.148717

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Granger and Newbold (1974) argue that if the series contain unit root then the estimated regression can provide spurious results. Hence it is essential to conduct unit root test to avoid having spurious estimation. Levin, Lin and Chu (2002) propose to use Levin-Lin-Chu (LLC) unit root test if it is found that the pooled data (N) is larger than the time section studied (T). Result of LLC unit root test indicates all the series have no unit root (Table 3).
Table 3: Results of Levin, Lin and Chu Group and Individual Unit Root Test
Method Levin, Lin & Chu Series DR LTR STR GRW INCOV LIQ NDTS PRF SIZE TANG Statistic -40.6696 t-Stat -10.899 -7.1491 -11.012 -19.432 -11.693 -9.7903 -6.1692 -15.306 -11.138 -9.3708 P-value 0.0000*** P-value 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000***

*** denotes significance at the 1% levels

Spearman rank correlation coefficient test is used to check for multicollinearity. Sekaran and Bougie (2010) explain that correlation of 0.70 and above shows the presence of mullticollinearity. Results of correlation coefficient test indicate the absence of multicollinearity among the independent variables (Table 4).
Table 4: Spearman rank correlation test

GRW

INCOV

LIQ

NDTS

PRF

SIZE

TANG

GRW

INCOV 0.1209 1 (0.0183**) -LIQ 0.0457 0.2014 1 (0.3737) (0.0001***) --0.0305 (0.5521) 1 --0.0056 (0.9123) 1 --

NDTS 0.0721 0.0923 (0.1606) (0.0722*) PRF

0.0916 0.5117 0.0674 (0.0744*) (0.0000***) (0.1896)

SIZE

0.0393 0.4910 0.2151 0.2887 0.1436 1 (0.4440) (0.0000***) (0.0000***) (0.0000***) (0.0050***) --

TANG 0.0320 0.3145 0.0898 0.1877 0.1073 0.5928 1 (0.5335) (0.0000***) (0.0804*) (0.0002***) (0.0364**) (0.0000***) -***.** and * denotes significance at the 1%, 5% and 10% levels. ( ) indicates p-value.

The estimated equations are also tested for the presence of serial correlation and heteroskedasticity. Durbin-Watson statistics based on the initial estimation indicate 8

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
that all three models have serial correlation problem. To overcome this problem, autoregressive error lag one (AR(1)) was included in all the models.The problem of heteroskedasticity can occur in a cross sectional data. In dealing with heteroskedasticity, we run the pooled OLS regression models using cross-section weights to allow for different variances for each company. 4.2 Results of the Estimated Pooled OLS Models Table 5 displays the estimation results of the pooled OLS regression models.
Table 5: Estimated Results
Dependent Variable Model 1 DR Coefficient tStatistic p-value -0.0471 -5.2531 0.0000*** 0.0315 1.1017 0.2706 0.0478 5.6867 0.0000*** 0.0250 2.4100 0.0160** 0.1426 1.3860 0.1658 -0.2238 -1.5616 0.1184 0.9789 0.9292 0.3528 na Model 2 LDR Coefficient tStatistic p-value 0.0016 0.2864 0.7745 0.0444 2.3281 0.0199** 0.0177 2.1566 0.0310** 0.0007 0.1860 0.8524 0.3592 6.3989 0.0000*** -0.2553 -2.3637 0.0181** -0.1343 -0.2801 0.7793 na Model 3 SDR Coefficient t-Statistic p-value -0.0474 -5.0303 0.0000*** -0.0299 -1.3524 0.1763 0.05061 9.6852 0.0000*** 0.0238 2.8240 0.0047*** -0.2669 -3.1488 0.0016*** 0.131993 1.607676 0.1079 0.7005 0.8952 0.3707 na Model 4 With Dummy Coefficient tStatistic p-value -0.0166 -2.5162 0.0119** 0.0132 0.6560 0.5118 0.0269 5.0586 0.0000*** 0.0013 0.1972 0.8436 0.0595 0.8973 0.3696 -0.1979 -1.8520 0.0640* 1.0898 1.3845 0.1662 0.3029 13.569 0.0000*** 0.0166 0.8583 0.3907 0.3630 2.6433 0.0082*** 0.6373 0.6370 2535.83 0.0000 2.2057

Explanatory Variables LIQ

INCOV

SIZE

GRW

TANG

PRF

NDTS

DUMMY

AR(1)

R-squared Adjusted R-squared F-statistic Prob(F-statistic) Durbin-Watson stat

0.0287 0.6102 0.5417 0.5439 4.4790 0.0000 0.5068 0.5065 1668.53 0.0000 2.2846

-0.1237 -2.0478 0.0406 0.7208 13.082 0.0000 0.6793 0.6791 3438.61 0.0000 1.9955

0.0644 2.7911 0.0053 0.5103 2.5232 0.0116 0.4790 0.4787 1492.81 0.0000 2.2725

***.** and * denotes significance at the 1%, 5% and 10% levels .

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Size The results indicate that size is a significant determinant of GLCs capital structure for all the three models and are positively related. This implies that banks readily provide short term or long term loans to GLCs since they have more collateral than small companies. The finding appears to support the static trade off theory that suggest larger companies are less likely to face bankruptcy (Dawood, Muostafa and El-Hennawi, 2011 and Morri and Cristanziani, 2009). Liquidity Ratio The liquidity ratio variable is both negative and significant for debt ratio and short term debt ratio but insignificant for long term debt ratio. As pointed out by Bevan and Danbolt (2000) liquidity ratio variable is more relevant to short term debt because company tends to use short term debt to finance their current assets. Hence it can be concluded that Malaysian GLCs prefer to use short term debt to finance its working capital rather long-term debt. The empirical result between liquidity ratio and short term debt concurs with the pecking order theory. Interest Coverage Ratio Interestingly the coefficient on interest coverage ratio (INCOV) is significant at the 0.05 level for long-term debt ratio and positvely related. Interest coverage ratio indicates companys capability to meet its interest payment from its operating profits. Baral (2004) explains that this relationship is possible because GLCs with higher INCOV ratio have more than enough cash flows required to service their debt and would not mind seeking more debt financing (Baral, 2004). However Baral (2004) use the debt capacity theory to explain the positive relationship between interest coverage ratio and long-term debt. Another plausible reason is that since GLCs are government owned, therefore there is a tendency for these companies to deviate from the financial fundamentals when changing their long term debt levels (Ting and Lean, 2011). Profitability There are no relationship between profitability and debt ratio as well as short term debt ratio (SDR) but negative relationship with long term debt ratio (LDR). The result confirms the findings of Huang and Song (2006) and Ting and Lean (2011) and is in support of pecking order theory. It appears that as GLCs become more profitability, these companies tend to raise fund through equity while decreasing the level of debt financing. A profit-making GLCs are able to attract equity investor and at the same time the ability to pay off their previous debt. Growth Opportunities Growth opportunities are significantly and positively related to both debt ratio (DR) and short-term debt ratio (SDR). This result is in line with Myers (1984). He argues that banks willing to lend money to company that has good growth opportunities. The probable justification of such result is the most of the Malaysian GLCs have yet to achieve their optimum growth potential and will seek external financing to realized 10

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
higher growth opportunities. On the other hand, growth opportunities are not significant in explaining capital structure for GLCs. A plausible explanation is that growth potential GLCs use short term financing instead of long term financing due to finance investments long-lasting assets. This finding supports both the static trade off theory and agency theory. In addition, our result is in contrast with the studies of both Suhaila and Wan Mahmood (2008) and Ting and Lean (2011) that find no relationship between the two variables. Tangibility of Assets Tangibility of assets is not the determinant for GLCs capital structure, when debt ratio is used as a proxy. However when this study decomposes the leverage ratio into short term and long term debt, a significant positive relationship exists between tangiblity and long term debt. However an inverse is found for short term debt ratio. This finding is consistent with those of Bevan and Danbolt (2000), Sogorb-Mira (2005) and Ting and Lean (2011). This suggests that GLCs with higher tangible assets are more likely to use long term debt rather than short-term debt to prevent agency conflicts (Sheikh and Zongjun, 2011). In this regard, our finding provides support for agency cost theory. Non-debt tax shields Based on the theoretical discussion in the earlier section, non-debt tax shields (NDTS) is expected to have either a positive or negative relationship. However the estimated results obtained from all the three models reveal insignificant relationship. This implies that NDTS is not the capital structure determinants for Malaysian GLCs. As mentioned earlier in previous section, this study also included a dichotomous variable, D40, in our pooled OLS regression model 4 to investigate whether GLCs with debt ratio of more than 40% have significant influence on debt policy decision. Based on the estimated result, the dichotomous variable is significant implying that GLCs with 40% debt structure prefer to seek debt financing rather then other form of external financing.

5. Summary and Conclusions

The objective of this study is to empirically investigate the determinants of capital structure of 38 Malaysian Government Linked Companies over a 10-year period starting from 2001 to 2010. Three types of leverage proxies are used. Empirical evidences report significant differences in the factors determining the three leverage proxies. Overall, the analysis results indicate that size is positively related to all types of debt ratios. Tangibility of assets are inversely related to short term debt ratio and directly related to long term debt ratio. Liquidity ratio and growth opportunities are positively related only to debt ratio and short term debt ratio. Non debt tax shields are not related to any of the three debt proxies. Only profitability is negatively related to long term debt. Interestingly interest coverage ratio has positive relationship with long term debt which does not support any of the capital structure theories discussed. Generally the findings support both static trade off theory and pecking order theory for Malaysian GLCs studied. 11

Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
It is recommended that future research on capital structure of GLCs could include segmenting the GLCs into different sectors to capture the industry effect. In addition a comparative study on determinants of GL Cs capital structure from different countries can also be conducted.

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Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
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