Factors Affecting Speed of Adjustment to Target Leverage: Malaysia Evidence

Razali Haron, Khairunisah Ibrahim, Fauzias Mat Nor and Izani Ibrahim
Additional contact information
Razali Haron: Razali Haron is Assistant Professor at International Islamic University Malaysia, Kulliyyah of Economics and Management Sciences, Department of Finance, Jalan Gombak, Gombak, Kuala Lumpur, Malaysia. E-mail: hrazali@iium.edu.my; razaliharon@yahoo.com.
Khairunisah Ibrahim: Khairunisah Ibrahim is Lecturer at International Islamic University Malaysia, Kulliyyah of Economics and Management Sciences, Department of Finance, Jalan Gombak, Gombak, Kuala Lumpur, Malaysia. E-mail: ikhairun@iium.edu.my
Fauzias Mat Nor: Fauzias Mat Nor is Professor at Graduate School of Business, Universiti Kebangsaan Malaysia, Selangor, Malaysia. E-mail: fauzias@ukm.my
Izani Ibrahim: Izani Ibrahim is Professor at Graduate School of Business, Universiti Kebangsaan Malaysia, Selangor, Malaysia. E-mail: izani@ukm.my

Global Business Review, 2013, vol. 14, issue 2, 243-262

Abstract: This study focuses on the dynamic aspect of capital structure which is a relatively new area in the finance literature. By employing panel data, 790 of non-financial listed firms in Malaysia are examined for the period 2000–2009. Conducted using the dynamic Partial Adjustment Model and estimated based on the Generalized Method of Moment, this study investigates the existence of target capital structure, speed of adjustment and factors affecting speed of adjustment. There are evidences of target capital structure and firms do adjust to be at their target from time to time with a considerably rapid speed of adjustment, in line with dynamic trade-off theory. Firms in Malaysia are found to be under-adjusted, being below the required adjustment to be at the target within a year. Study on factors affecting speed of adjustment is a new contribution to the literature as no work has been done regarding this issue in Malaysia. This study also analyzes firm-specific factors affecting speed of adjustment. There is strong evidence on the negative relationship between the speed of adjustment and distance from target leverage suggesting fast adjustment if not being far from target. Firm size and profitability significantly influence speed of adjustment for firms in Malaysia.

Keywords: Target capital structure; speed of adjustment; dynamic trade-off theory; GMM (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:sae:globus:v:14:y:2013:i:2:p:243-262

DOI: 10.1177/0972150913477469

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