The effect of peer firms determining firm capital structure: evidence from manufacturing in Malaysia

• Main Author: Ayaz, Muhammad
• Format: Thesis
• Language: English; English; English
• Published: 2019
• Subjects: HG Finance
• 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/

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.