relationship between factors of capital structure

Topics: Corporate finance, Finance, Capital structure Pages: 7 (1811 words) Published: April 20, 2014
Capital plays an important role in business. Every business enterprise, whether big, medium or small, manufacturing, services or industrial, needs capital to carry on its operations smoothly and to achieve its targets organization’s objective. Capital Structure means how an organization or company manage their capital or obtain financial resources to manage their business well. Business adopts different types of capital structures in order to meet the internal needs and an external need which is satisfying the shareholders. In order to make a decision about the capital structures, several factors need to been consider in making a good decision for the company. There are a lot of factors that related in determinants of capital structure. This study refers for the determinants of capital structure in manufacturing company which been carried out in Malaysia.

The issues of determinants of capital structure had been explained by several capital structure theories. There are Modigliani–Miller theory (M&M theory), trade off theory, agency theory and pecking order theory. Furthermore, the factors that influence the capital structure had been debated for a long time until now. There’s a number of researchers had been research and carried out this issues for over the years. However, all the research been done did not give the satisfactory answers towards this issues.

In additional, this research chooses January 1999 to December 2009 to observe the determinants of capital structure of manufacturing company in Malaysia. Therefore, this research use data stream to find the balance sheet and income statement of the listed manufacturing company in Malaysia. 1.1 BACKGROUND OF STUDY

The background of the study is about the relationship between several factors of organization with the firm’s choice of capital structure. The several factors include size of firms, growth opportunity, profitability, sales growth, liquidity of firm and assets growth.

he capital structure had been discus in numerous studies in various sectors in economy. For the manufacturing sector the study had been done by Long and Malitz (1985) and Titman and Wessels (1988). In determine the characteristics of the firm affects the capital structure decision has a numbers of factors that related with. A false decision making about capital structure may lead the firm to bankruptcy or financial distress. A firm need to choose the best financing that suitable and will sustain their business further.

This study is related with different type of theories. These theories carry the imperfections of capital structure in the real world. Modigliani and Miller (1985) were the pioneer in develop the theory of capital structure. This theory states that, in the absence of taxes, bankruptcy costs, and asymmetric information, a company’s value is unaffected by how it is financed, regardless of whether the company’s capital consists of equities or debt, or a combination of these, or what the dividend policy is. Next is the Trade- Off Theory which allow the bankruptcy cost occurred. It also state that there is an advantages and cost of financing with debt. However it do not explain differences within the same industry.

Other than that, the Agency Cost also one of the capital structure theory. This is a theory explaining the relationship between principals, such as a shareholders, and agents, such as a company's executives. Lastly is Pecking Order theory which suggests that the firm must have a particular preference order for financing choices of their business (Myers, 1984). Myers also argues that the equity is a less preferred means to raise capita because when a manaqger issues new equity, investors will think that the firm is overvalued and the manager are taking the advantages of the over valuation.

The 1997 financial crisis, which originated in Thailand, affected the region’s country...
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