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Determinants of capital structure and firm financial performance—A PLS-SEM approach: Evidence from Malaysia and Indonesia

Nur Ainna Ramli, Hengky Latan and Grace T. Solovida

The Quarterly Review of Economics and Finance, 2019, vol. 71, issue C, 148-160

Abstract: We examine the impact of capital structure determinants on firm financial performance together with the mediation effect of firm leverage in Malaysia and Indonesia over the period of 1990–2010. Our results show that certain of the capital structure determinants directly affect firm financial performance. We also observe that only the Malaysian sample has a positive significant correlation between firm leverage and firm financial performance. Malaysian firms use external financing instead of internal financing to heighten performance. Our results also show that firm leverage plays a mediating role in Malaysia but not for the Indonesian sample. The asset structure, growth opportunities, liquidity, non-debt tax shield and interest rate are the attributes that were indirectly influenced by firm leverage on firm financial performance. Further analysis for multi-group analysis (MGA) in PLS was also used to test the equality of the parameter estimates. We observe that certain attribute coefficients in the determinants of capital structure and firm financial performance are significantly different between Malaysia and Indonesia.

Keywords: Capital structure; Leverage; Firm performance; Indonesia; Malaysia; PLS (search for similar items in EconPapers)
JEL-codes: G14 G10 M41 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.qref.2018.07.001

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