The Influence of Industry, Size and Earnings on Capital Structure of Malaysian Listed Companies

Abstract

This paper examines the nature of capital structure of 109 listed Malaysian firms for the period from 1986 t0 1995. Three ratios (debt 10 equity, common equity to total assets and total debt to total assets) are used to measure financial leverage. The results are consistent with the pecking order theory for only five industries out of ten. The results show significant difference in terms of industry class but very litle in relation to effect of size for Malaysian companies under study. The inter-industry tests reveal that the industrial groups do not necessarily have homogeneous leverage policies and that they are significantly different in the case of debt to equity ratio and total debt 10 total assets ratio. To test the relationship between earings volatility and capital structure, ordinary least square regression is used. The results show significant relationship between earnings volatility and capital structure. The results reinforced the earlier research in this area in the Malaysian context that leverage is negatively related to eamings.