FINANCIAL SUSTAINABILITY OF A FIRM: DEBT-BASED OR EQUITY-BASED FINANCING TO PURSUE?

Umul Ain’syah Sha’ari (), Siti Raihana Bt Hamzah () and Karmila Hanim Kamil ()
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Umul Ain’syah Sha’ari: Universiti Sains Islam Malaysia, Malaysia
Siti Raihana Bt Hamzah: Universiti Sains Islam Malaysia, Malaysia
Karmila Hanim Kamil: Universiti Sains Islam Malaysia, Malaysia

Journal of Islamic Monetary Economics and Finance, 2023, vol. 9, issue 2, 199-224

Abstract: This study examines the potential of utilizing equity-based financing by companies in achieving financial sustainability as compared to debt-based financing. To this end, a conceptual framework of equity-based financing over debt-based financing is developed to provide an understanding of the concept of equity-based financing. Subsequently, this study analyses the credit risk exposure between equity and debt for selected sectors in Malaysia. More specifically, a Monte Carlo method is employed to examine the feasibility of the equity-based financing model in fostering the financial sustainability of companies through simulation of equity-based and debt-based financing models from the global financial crisis (GFC) period to the Covid-19 phase. This study finds that equity-based financing can reduce credit risk exposure when returns are tied to the company’s performance. The findings also show that equity-based financing can achieve financial sustainability regardless of any economic events. To conclude, equity-based financing can thus be a viable capital financing option for companies because it can contribute to long-term financial sustainability.

Keywords: Equity-based financing; Financial sustainability; Monte carlo simulation; Economic crisis (search for similar items in EconPapers)
JEL-codes: C6 G01 G32 G39 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:idn:jimfjn:v:9:y:2023:i:2a:p:199-224

DOI: 10.21098/jimf.v9i2.1653

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