Journal of Accounting, Finance and Economics

Vol. 3. No. 2. December 2013. Pp. 72 85

Theoretical Investigation on Determinants of

Government-Linked Companies Capital Structure
Noryati Ahmad1 and Fahmi Abdul Rahim2
This study investigates the capital structure determinants of Malaysian
Government Linked Companies (GLCs) and attempts to link the relevant
capital structure theory related to GLCs. A total of 38 government linked
companies listed in Bursa Main Market 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 long-term 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
pecking 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. Introduction
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 & 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) report that as owner of GLCs, the
government has 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, Wiwattanakantang (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 need to seek an ideal capital structure that
could reduce the cost of capital and reach the optimal level of debt. Eriotis, Vasiliou and
Ventoura-Neokosmidi (2007) state that an inappropriate 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: noryatia@salam.uitm.edu.my
2
Dr Fahmi Abdul Rahim, Faculty of Business Management, Universiti Teknologi, Melaka Branch
Campus, Malaysia, Email: fahmi029@melaka.uitm.edu.my

Ahmad & Rahim

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. Fraser, Zhang and Derashid (2006) argue
that larger and more profitable firms with political patronage tend to resort to debt
financing. Tahir and Miza (2009) 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 (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 Mahmood (2008) and
Ting and Lean (2011) find that growth is not a determinant for capital structure in
Malaysia while Dzolkarnaini (2006) and Mustapha, Ismail and Badriyah (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 Wang (2011) and Bevan and
Danbolt (2004). 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. Literature Review
Evolution of capital structure theories starts off with Modigliani and Millers (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; Sabir & Malik 2012). A company with a
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 will
resort to high debt financing since it can reduce agency costs, taxes and bankruptcy
costs.
73

Ahmad & Rahim

Myers (1984) and Myers and Majluf (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 a 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).
2.1 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
A 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 and Danbolt 2004).
Among studies that are in congruent with pecking order theory are Sheikh and Wang
(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, Vasiliou & Ventoura-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
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
74

Ahmad & Rahim

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), Sheikh and Wang (2011) and Huang and Song (2006) are in tandem with this
theory. In contrast, Bevan and Danbolt (2004) 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 Wang (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, Vasiliou and Ventoura-Neokosmidi (2007) and
Sheikh and Wang (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. Wald
(1999) and Viviani (2008) while those from the developing countries report either
positive or negative relationship. Wiwattanakantang (1999) and Baharuddin et al.
(2011) document a positive relationship while Mazur (2007) and Sheikh and Wang
(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 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
Wang 2011). A positive relationship between GLCs leverages ratios and tangibility of
assets is expected in this study.
75

Ahmad & Rahim

Under static trade off theory profitability is said to be positively related to financial
leverage. Um (2001) explains that a 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 a 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
Wang (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.
In sum, although there are numerous empirical and theoretical researches investigating
the determinants of companys debt policy decision, the relationship between the
explanatory variables and debt ratio are still inconclusive. Most of the studies on
capital structure focus on specific industries like manufacturing, mining and extraction
companies. Ting and Lean (2011) conduct a comparative study on determinants of
capital structure of GLCs and Non GLCs but confined its explanatory variables to only
size, cash flow, tangibility, and profitability and growth opportunities. The authors do
not also highlight the capital structure theories that best explained GLCs and Non
GLCs. Hence this study adds further evidence of determinants of GLCs capital
structure by adding liquidity, non-debt tax shields and interest coverage ratio variables
and attempts to relate the capital structure theories that best explained the debt policy
of Malaysian GLCs.

3. 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 displayed in Table 1.

76

Ahmad & Rahim

Table 1 : Proxies for Dependent and Independent
Variables Studied
Dependent Variables

Proxies

Debt Ratio

Total Debt/Total Assets

Long-Term Debt Ratio

Short-Term Debt Ratio

Long term debt/Total Assets

Short-term debt/Total assets

Independent Variables
Liquidity (LIQi,t)
Tangibility (TANGi,t)
Profitability (PRFi,t)
Firm Size (SIZEi,t)
Firm Growth Opportunities
(GRWi,t)
Non-debt Tax Shield
(NDTSi,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

Pooled ordinary least square (OLS) analysis is utilized to achieve the objectives of the
study. This method is preferred as it gives more precise estimators and test statistics
with more power as well as able to control for individual heterogeneity and reduce
collinearity. In addition, pooled OLS regression models allow testing on all crosssection 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 (Podest 2002).
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:

77

Ahmad & Rahim

Where
and
are proxies for debt ratio, long term debt ratio and short
term debt ratio of
at time t respectively. Liquidity ratio (
, interest coverage
ratio
, size
, growth rate
, tangibility of assets
,
profitability a
and non-debt tax shield
are independent variables of
at time t.
represents the error term.
is the dichotomous variable as
explained in Table 1.
Levin, Lin and James 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. Results
4.1 Descriptive Statistics
Table 2 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

Newbold and Granger (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 & James 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).

78

Ahmad & Rahim

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
GRW

INCOV

LIQ

NDTS

PRF

SIZE

TANG

INCOV 0.1209
1
(0.0183)** -LIQ

0.0457
(0.3737)

0.2014
1
(0.0001)*** --

NDTS

0.0721
(0.1606)

0.0923
(0.0722)*

PRF

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

SIZE

0.0393
(0.4440)

TANG 0.0320
(0.5335)

-0.0305
(0.5521)

1
--0.0056
(0.9123)

1
--

0.4910
0.2151
0.2887
0.1436
1
(0.0000)*** (0.0000)*** (0.0000)*** (0.0050)*** -0.3145
0.0898
(0.0000)*** (0.0804)*

0.1877
0.1073
0.5928
1
(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 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.
79

Ahmad & Rahim

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

Model 2
LDR

Model 3
SDR

Coefficient
t-Statistic
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

Coefficient
t-Statistic
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

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***
0.1319
1.6076
0.1079
0.7005
0.8952
0.3707

na

na

na

R-squared

0.0287
0.6102
0.5417
0.5439
4.4790
0.0000
0.5068

-0.1237
-2.0478
0.0406
0.7208
13.082
0.0000
0.6793

0.0644
2.7911
0.0053
0.5103
2.5232
0.0116
0.4790

Model 4
DR with
Dummy
Coefficient
t-Statistic
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

Adjusted R-squared

0.5065

0.6791

0.4787

0.6370

F-statistic

1668.53

3438.61

1492.81

2535.83

Prob(F-statistic)

0.0000

0.0000

0.0000

0.0000

Durbin-Watson stat

2.2846

1.9955

2.2725

2.2057

Explanatory Variables

LIQ

INCOV

SIZE

GRW

TANG

PRF

NDTS

DUMMY

AR(1)

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

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 et al., 2011)
80

Ahmad & Rahim

and (Morri and Cristanziani ,2009). However the results are inconsistent with Ting
and Lean (2011) in which the authors find size to be negatively related to debt ratio
and short term debt ratio respectively.
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 (2004) liquidity ratio variable is more relevant to short term debt than long
term debt since company tends to use short term debt to finance their current
assets. A significantly negative relationship exists between liquidity and short term
debt ratio. This shows that GLCs will reduce short term borrowing if they have higher
the liquidity ratio (arlija & Harc 2012). 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 relationships between profitability and debt ratio as well as short term
debt ratio (SDR) but there is a 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 consistent 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
higher growth opportunities. On the other hand, growth opportunities are not
significantly related to long term debt ratio for GLCs. A plausible explanation is that
growth potential GLCs prefer short term financing instead of long term financing to
finance investments on long-lasting assets. This finding supports both the static trade
off theory and agency theory. This finding supports both the static trade off theory and
agency theory. In addition, our result is in contrast with Ting and Lean (2011) that find
no relationship between the two variables for GLCs but positive relationship for Non
GLCs.

81

Ahmad & Rahim

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 (2004), 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
Wang 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 as their form of external financing.

5. Conclusion
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. Overall results from this study indicate that several
determinants affect capital structure of GLCs. Liquidity and profitability are negatively
related to debt ratio while size and growth opportunities are positively related. This
suggests that being large companies and have potential to grow, GLCs has the
capacity to source for debt financing.
The most important finding in this study is that the debt policy decision of GLCs
becomes more apparent when GLCs capital structure policy is decomposed into long
term debt ratio and short term debt ratio. Tangibility, size and interest coverage ratio
are positively significant for long term debt ratio model. This suggests GLCs tend to
seek long term financing if they have higher tangible assets and higher interest
coverage ratio. In addition, investors are willing to invest in GLCs since they have more
collateral than small firms. The relationship between profitability and long term debt
ratio is inversely related.
On the other hand, short term debt ratio has significantly negative relationship with
liquidity and tangibility variables. This shows that an increase in liquidity reduces the
short term borrowing of GLCs as the companies can use its current assets to pay its
obligations. GLCs will also resort to short term financing rather than long term
financing if they have lower tangible assets. Significantly positive relationship between
growth opportunities and short term debt implies that GLCs make use of short-term
financing to finance its investments.
Non debt tax shield is statistically insignificant in all of the models estimated. This
confirms that tax shield is not an important motivation for GLCs to use debt financing.
82

Ahmad & Rahim

It is also important to highlight that several findings from this study contradicts with
those of Ting and Lean (2011) specifically for size and growth opportunities. The
inclusion of liquidity, interest coverage ratio and non-debt tax shield variables have
improved the adjusted R-squared for the four models estimated. This indicates that the
variables are the determinants of the GLCs capital structure. Finally, this study finds
that the debt structure policy of Malaysian GLCs is best explained by the both static
trade off theory and pecking order theory.
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 GLCs capital structure from different countries can also be conducted.

References
Altman, EI 1984, 'A further empirical investigation of the bankruptcy cost question', The
Journal of Finance, vol. 39, no. 4, pp. 1067-89.
Baharuddin, NS, Khamis, Z, Mahmood, WMW & Dollah, H 2011, 'Determinants of
capital structure for listed construction companies in Malaysia', Journal of Applied
Finance and Banking, vol. 1, no. 2, pp. 115-32.
Baral, KJ 2004, 'Determinants of capital structure: A case study of listed companies of
Nepal', Journal of Nepalese Business Studies, vol. 1, no. 1, pp. 1-13.
Bevan, AA & Danbolt, J 2004, 'Testing for inconsistencies in the estimation of UK
capital structure determinants', Applied Financial Economics, vol. 14, no. 1, pp.
55-66.
Chen, JJ 2004, 'Determinants of capital structure of Chinese-listed companies', Journal
of Business research, vol. 57, no. 12, pp. 1341-51.
Dawood, MH, Muostafa, El-Sayeda, I & El-Hennawi, MS 2011, 'The determinants of
capital structure in lised Egyptian Corporations', Middle Eastern Finance and
Economics, no. 9, pp. 3-29.
DeAngelo, H & Masulis, RW 1980, 'Optimal capital structure under corporate and
personal taxation', Journal of financial Economics, vol. 8, no. 1, pp. 3-29.
Dzolkarnaini, MN 2006, 'Capital control regime and capital structure determinants: A
Malaysian case', Malaysian Accounting Review, vol. 5, no. 1, pp. 1-41.
Eriotis, N, Vasiliou, D & Ventoura-Neokosmidi, Z 2007, 'How firm characteristics affect
capital structure: an empirical study', Managerial Finance, vol. 33, no. 5, pp. 32131.
Fraser, DR, Zhang, H & Derashid, C 2006, 'Capital structure and political patronage:
The case of Malaysia', Journal of Banking & Finance, vol. 30, no. 4, pp. 1291308.
Grossman, SJ & Hart, OD 1982, 'Corporate financial structure and managerial
incentives', The economics of information and uncertainty, University of Chicago
Press, pp. 107-40.
Harris, M & Raviv, A 1990, 'Capital structure and the informational role of debt', The
Journal of Finance, vol. 45, no. 2, pp. 321-49.
Huang, G & Song, FM 2006, 'The determinants of capital structure: evidence from
China', China Economic Review, vol. 17, no. 1, pp. 14-36.
Jensen, MC & Meckling, WH 1976, 'Theory of the firm: Managerial behavior, agency
costs and ownership structure', Journal of financial Economics, vol. 3, no. 4, pp.
305-60.

83

Ahmad & Rahim

Lau, Y & Tong, CQ 2008, 'Are Malaysian government-linked companies (GLCs)
creating value', International Applied Economics and Management Letters, vol. 1,
no. 1, pp. 9-12.
Levin, A, Lin, CF & James Chu, CS 2002, 'Unit root tests in panel data: asymptotic and
finite-sample properties', Journal of Econometrics, vol. 108, no. 1, pp. 1-24.
Mazur, K 2007, 'The determinants of capital structure choice: evidence from Polish
companies', International Advances in Economic Research, vol. 13, no. 4, pp.
495-514.
Modigliani, F & Miller, MH 1958, 'The cost of capital, corporation finance and the theory
of investment', The American economic review, vol. 48, no. 3, pp. 261-97.
Mohd-Saleh, N, Kundari, S & Alwi, A 2011, 'The timeliness of recognizing accounting
income in Malaysia: The influence of government linked companies
transformation programme', Asian Journal of Accounting and Governance, vol. 2,
pp. 41-50.
Morri, G & Cristanziani, F 2009, 'What determines the capital structure of real estate
companies?: An analysis of the EPRA/NAREIT Europe Index', Journal of Property
Investment & Finance, vol. 27, no. 4, pp. 318-72.
Mustapha, M, Ismail, H & Badriyah, B 2011, 'Determinats of Debt Structure: Empirical
Evidence from Malaysia', International Conference on Bus. Econ. Res.(2nd Icber
2011) Proceeding, pp. 2523-40.
Myers, SC 1984, 'The capital structure puzzle', The Journal of Finance, vol. 39, no. 3,
pp. 574-92.
Myers, SC & Majluf, NS 1984, 'Corporate financing and investment decisions when
firms have information that investors do not have', Journal of financial Economics,
vol. 13, no. 2, pp. 187-221.
Newbold, P & Granger, C 1974, 'Spurious regressions in econometrics', Journal of
Econometrics, vol. 2, no. 2, pp. 111-20.
Nuri, J 2000, 'A study of capital structure in the UK: Hotel and Retail Industries', Surrey
University.
Pettit, R & Singer, R 1985, 'Small business finance: a research agenda', Financial
Management, vol. 14, pp. 97-112.
Podest, F 2002, 'Recent developments in quantitative comparative methodology: The
case of pooled time series cross-section analysis', DSS Papers Soc, pp. 3-02.
Sabir, M & Malik, QA 2012, 'Determinants of Capital Structure: A study of oil and gas
sector of Pakistan', Interdisciplinary Journal of Contemporary Research in
Business, vol. 3, no. 10, pp. 395-400.
arlija, N & Harc, M 2012, 'The impact of liquidity on the capital structure: a case study
of Croatian firms', Business Systems Research, vol. 3, no. 1, pp. 30-6.
Sekaran, U & Bougie, R 2010, 'Research methods for business: A skill building
approach. Wiley', London.
Sheikh, NA & Wang, Z 2011, 'Determinants of capital structure: An empirical study of
firms in manufacturing industry of Pakistan', Managerial Finance, vol. 37, no. 2,
pp. 117-33.
Sogorb-Mira, F 2005, 'How SME uniqueness affects capital structure: Evidence from a
19941998 Spanish data panel', Small Business Economics, vol. 25, no. 5, pp.
447-57.
Song, HS 2005, Capital Structure Determinants An Empirical Study of Swedish
Companies, Royal Institute of Technology, CESIS-Centre of Excellence for
Science and Innovation Studies.
Suhaila, MK & Mahmood, WM 2008, 'Capital Structure and Firm Characteristics: Some
Evidence from Malaysian Companies'.
84

Ahmad & Rahim

Tahir, W & Miza, WM 2009, 'Determinants of dividend payout ratio: evidence from
Malaysian Government-Linked Companies (GLCs)', Universiti Teknologi MARA.
Ting, IWK & Lean, HH 2011, 'Capital Structure of Government-Linked Companies In
Malaysia', Asian Academy of Management Journal of Accounting and Finance,
vol. 7, no. 2, pp. 137-56.
Titman, S & Wessels, R 1988, 'The determinants of capital structure choice', The
Journal of Finance, vol. 43, no. 1, pp. 1-19.
Um, T 2001, 'Determination of capital structure and prediction of bankruptcy in Korea',
Cornell University.
Viviani, JL 2008, 'Capital structure determinants: an empirical study of French
companies in the wine industry', International Journal of Wine Business
Research, vol. 20, no. 2, pp. 171-94.
Wald, JK 1999, 'How firm characteristics affect capital structure: an international
comparison', Journal of Financial Research, vol. 22, no. 2, pp. 161-87.
Wiwattanakantang, Y 1999, 'An empirical study on the determinants of the capital
structure of Thai firms', Pacific-Basin Finance Journal, vol. 7, no. 3, pp. 371-403.
Zou, H & Xiao, JZ 2006, 'The financing behaviour of listed Chinese firms', The British
Accounting Review, vol. 38, no. 3, pp. 239-58.

85