The Role of Tax in Moderating Capital Structure Dynamics and their Effect on Financial Stability and Profitability: Evidence from Malaysian Telecom Companies

Faiza Saleem

Journal of Tax Reform, 2025, vol. 11, issue 2, 306-321

Abstract: Corporate taxation is a very important issue that can be discussed in politics and academics because it plays a vital role in the country’s economic growth and helps in making investment decisions and corporate strategies. The financial performance of the firm can be enhanced by understanding and implementation of tax structures appropriately. This study focused on the moderating role of the effective tax rate (ETR) in the association between capital structure (CS), financial stability (FST), and profitability (PRO) in Malaysian telecommunications companies listed in Bura Malaysia. This study also examines the direct effect of capital structure on financial stability and profitability. The study utilized annual data from four major telecommunications companies from 2009 to 2023 and employed ordinary least squares (OLS), a fixed effect (FE) method, and robust regression analyses in order to determine the association among these variables. The study findings showed that effective tax rate significantly moderates the association between capital structure with both financial stability and profitability, indicating that tax considerations play a critical role in shaping financial outcomes. Greater effective tax rates may compel corporations to improve their capital structure to reduce their tax obligations, influencing financing and investment decisions. In addition, capital structure is also considered an important determinant in explaining financial stability and profitability of the firm. These results provide valuable insights for financial managers and policymakers in optimizing capital structures in order to enhance firm financial stability and profitability while navigating the exceptional challenges of the Malaysian market. Future investigations should explore the long-term implications of these relationships across different industries and economic environments and promote more effective tax policies.

Keywords: effective tax rate; capital structure; financial stability; profitability (search for similar items in EconPapers)
JEL-codes: G01 G12 G32 H25 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:aiy:jnljtr:v:11:y:2025:i:2:p:306-321

DOI: 10.15826/jtr.2025.11.2.203

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