THE DETERMINANTS OF CAPITAL STRUCTURE OF CONSTRUCTION
COMPANIES LISTED IN BURSA SAHAM MALAYSIA
ZULAIKHA ATHIRAH BT ZULKIFLI 2009703367
Submitted in Partial Fulfillment of the Requirement for the Bachelor of Business Administration (Hons) Finance
FACULTY OF BUSINESS MANAGEMENT UNIVERSITI TEKNOLOGI MARA JOHOR
JUNE 2012 ii
DECLARATION OF ORIGINAL WORK
BACHELOR OF BUSINESS ADMINISTRATION (HONS) FINANCE FACULTY OF BUSINESS MANAGEMENT UNIVERSITI TEKNOLOGI MARA JOHOR
DECLARATION OF ORIGINAL WORK
I, ZULAIKHA ATHIRAH BT. ZULKIFLI (I/C Number: 900902-14-5000)
Hereby, declare that; This work has not previously been accepted in substance for any degree, locally or overseas and not being concurrently submitted for this degree or any other degrees.
This project paper is the result of my independent work and investigation, except where otherwise stated.
All verbatim extracts have been distinguished by quotation marks and sources of my information have been specifically acknowledged.
Signature: __________________ Date: June 2012 iii
LETTER OF SUBMISSION
25 June 2012
The Programme Coordinator Faculty of Business Management University Teknologi MARA Johor 85009 Segamat Johor Darul Takzim
Dear Madam, SUBMISSION OF PROJECT PAPER
Attached the project paper titled, THE DETERMINANTS OF CAPITAL STRUCTURE OF CONSTRUCTION COMPANIES LISTED IN BURSA SAHAM MALAYSIA to fulfill the requirement as needed by the Faculty of Business Management, University Technology Mara.
Thank You.
Yours sincerely,
_____________________ ZULAIKHA ATHIRAH BT ZULKIFLI 2009703367 Bachelor of Business Administration (Hons) Finance
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ACKNOWLEDGEMENT
Peace and blessings of Allah be on his last messenger, Prophet Muhammad S.A.W who has shown us the right way through the darkness of ignorance and kufr. Syukur Alhamdulillah, my highest gratitude to Allah S.W.T. for the blessings in giving me the strength to complete this report.
I am sincerely grateful to all who had assisted me with my project paper. My warmest gratitude to all lecturers at UiTM Segamat, Johor, in particular Pn. Nur Liyana Mohamed Yousop as my advisor for giving me the most beneficial assistance and offered countless comments, constant guidance, patience, understanding and inspiration as well as for his constructive criticism in preparing this report. I could not repay his opinions and ideas she gave me in conducting this report.
I would also like to express my sincere gratitude and appreciation to En Mohd Fariz Ahmad Farid (Function Lead Account and Service Management, Sime Darby Global Services Centre Sdn Bhd) for giving me an opportunity to do industrial training at the organization and gives me valuable experience in working environment. And, Im also thankful to all staffs at the Sime Darby Global Services Centre Sdn Bhd who had helped me and gave me cooperation, encouragement as well advised in completing the study.
A thousand thanks to all of friends and classmates who I will never forget their kindness and their sharing they gave in completing the report successfully. Then, I would like to express my appreciation to my beloved family for their support, contributions and encouragement.
May Allah forgive our short comings, Ameen.
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TABLE OF CONTENTS TITLE PAGE. .................................................................................................................. iv DECLARATION OF WORKS ........................................................................................ ii LETTER OF SUBMISSION. .......................................................................................... iv ACKNOWLEDGEMENT ............................................................................................... iv LIST OF TABLE AND DIAGRAMS. ............................................................................ v ABSTRACT. ..................................................................................................................... vi CHAPTER 1 ....................................................................................................................... 1 INTRODUCTION .............................................................................................................. 1 1.1 Theories of Capital Structure ............................................................................... 1 1.2 Background of study ............................................................................................ 3 1.3 Statement of Problems ......................................................................................... 7 1.4 Research Questions .............................................................................................. 8 1.5 Objectives of the study ......................................................................................... 8 1.6 Significant of the study ........................................................................................ 9 1.7 Scope of the study .............................................................................................. 10 1.8 Limitations of the Study ..................................................................................... 10 1.9 Summary ............................................................................................................ 11 CHAPTER 2 ..................................................................................................................... 13 LITERATURE REVIEW ................................................................................................. 13 2.0 Introduction ........................................................................................................ 13 vi
2.1 Overview of Theories of Capital Structure ........................................................ 13 2.2 Previous Study.................................................................................................... 14 2.3 Theoretical Framework ...................................................................................... 18 2.4 Summary ............................................................................................................ 20 Chapter 3 ........................................................................................................................... 21 METHODOLAGY AND DATA ...................................................................................... 21 3.0 Introduction ........................................................................................................ 21 3.1 Data Collection ................................................................................................... 21 3.2 Sampling Frame ................................................................................................. 22 3.3 Sources of Data .................................................................................................. 22 3.4 Variables and Measurement ............................................................................... 23 3.5 Research Design ................................................................................................. 24 3.6 Data Analysis and Treatment ............................................................................. 25 3.7 Hypothesis Statement ......................................................................................... 27 3.8 Summary ............................................................................................................ 29 CHAPTER 4 ..................................................................................................................... 30 ANALYSIS AND FINDINGS ......................................................................................... 30 4.0 INTRODUCTON ............................................................................................... 30 4.1 DESCRIPTIVE STATISTICS ........................................................................... 30 4.2 MULTICOLLINEARITY .................................................................................. 33 vii
LIST OF TABLES AND DIAGRAMS Diagram 2.1: Previous Framework Diagram 2.2: Research Framework Diagram 4.1: Example of Skewness Table 4.1 Descriptive Statistics Table 4.2 Multicollinearity Table 4.3 Model Summary Table 4.4 Anova
ABSTRACT ix
This paper is attempted to discover the determinants of capital structure of construction firms listed in Bursa Saham Malaysia. As it financial conditions of the construction companies always are responsive towards economic situation. The vital part is when managers will make the decision whether to finance the company internal or external source. Basically, capital structure theories can be divided into; the pecking order, static trade-off theory, and market-timing theory. Optimal capital structure is needed by construction firms as it will benefit firms and also its stakeholders. The dependent variable is debt ratio that can be interpreted by total debt divided by total assets. While for the independent variables, it consists of profitability, growth, size, liquidity and tangible assets. The result was profitability does have negative insignificant relationship towards debt ratio, growth had positive insignificant relationship with debt ratio, and size had positive insignificant relationship towards debt ratio. While liquidity had negative significant relationship with debt ratio and asset tangibility had positive significant relationship towards debt ratio. In conclusion this study provides verification indicate firms performance whether positive or negative that related to capital structure. 1
CHAPTER 1 INTRODUCTION 1.0 Definition of Capital Structure In finance terms, capital structure can be expressed as the way the firms finance its assets by using the combination of equity, debt and securities. Firms need to do crucial actions in order for the companies to earn and gaining profit. Capital structure will be support by theories: Pecking Order Theory, Static Trade-Off Theory and Market Timing. 1.1 Theories of Capital Structure 1.1.1 Pecking Order The theory for firms capital structure first suggested by Donaldson in 1961 then later it was modified by Stewart C. Mayers and Nicolas Majluf in 1984. This theory stated that, companies prioritize their source of financing from internal financing to equity. As this theory affirmed that the financial of equity as a last resort. The attraction of interest tax shields and the threat of financial distress arc considered as second order. Debt ratios modify when there is an imbalance of internal cash flow, net of dividends, and real investment opportunities. Low debt ratios will be used by the companies that have higher profitability but with the limited investment opportunities. 2
Firms will borrow more when the investment opportunity depleted. In its simplest form, the pecking order model of corporate financing says that when a firm's internal cash flows are inadequate for its real investment and dividend commitments, the firm issues debt (Chakraborty, 2010). Equity is never issued, except possibly when the firm can only issue junk debt and costs of financial distress are high (Myers and Sunder, 1994). The Pecking Order Theory started off with the existing of asymmetric information by the manager regarding their firms prospects, risk and investor behavior. This asymmetric information affects the decision between internal or external financing and chooses between debt and equity. 1.1.2 Static Trade-Off The idea of static trade-off theory refers to usage of company by using how much debt financing and equity financing to balance its costs and benefits. The trade off theory was first claimed by F.Modigliani and H.M. Miller in 1963. This theory takes such consideration such a balance between the dead- weight costs of bankruptcy and the saving benefits of debt. Where agency cost is often too included in the balance. Under the agency cost theory, in order the company to deals with compensates costs relate with underinvestment and asset substitution problems, the firms will use the advantage of reducing potential cash flow problems and other potential conflicts that arise between managers and shareholders (C. Cotei and J. 3
Farhat, 2012). In which, this theory assume that firms maintain the optimum capital structure, but marginal benefits of debt will be equal with marginal costs. 1.1.3 Market Timing Just like pecking order and trade-off theory, market timing also conclude on how firms decide whether to finance their investment with equity or debt instruments. Baker and Wurgler (2002) who has given the idea of market timing theory, claimed that, firms do not care on which tools will they choose but then they will choose which financing instruments on that time that have higher value in financial market. A firm that hit the target of market timing will definitely find the minimum over the window. While, for the company who are barely hit the target, on average issue at the median of the window. Firms are not succeeding in timing the target market so as to minimize the cost of their debt (M.Z. Frank and P. Nezafat, 2010). Firms will not to be able to have higher return even though they have perfectly timing during financial crisis. Market timing theory more like to relate with macroeconomic condition. 1.2 Background of study There many studies on determinant of capital structure but there are only several researches on Malaysia. 4
1.2.1 Profitability Profitability comes from the word profit where can be define as earn or gain from activities done by individual or company. Profitability also can be described as an advantageous quality of being beneficial. High profitability firms have lesser propensity to borrow given the sufficiency amount to finance its expansion (Jong et. Al, 2008). After a critical recession occurs in Malaysia, many firms tend to careful on their borrowing for risky project. The profit will reinvest again for future needed as followed by Pecking Order Theory. The static trade off theory suggests that the raising in debt should be based on the debt tax shields due to the subtraction of interest expenses when calculating profit before tax. This approach can be explain when study the negative relationship between profitability and debt ratio. A study by Buferna, Bangassa and Hodgkinson (2008) measure profitability by calculate return on asset (ROA). This measure of ROA was used also by D.R. Fraser, Hao Zhang and C. Derashid (2005). 1.2.2 Growth Growth is this context can be defined as grown revenue, cash flows and earnings by increase and bounds on the investment made. Companies with high future growth chances should use more equity 5
financing, because higher lifted company is more probably to pass up profitable investment opportunities (Myers, 1977).Such mature companies will by diversified trough its public offering will have stable earnings. There is limitation for a company to growth especially on unfortunate events. Situation such as during war, recession might be unavoidable for the firms to face. The growth of companies measure by N. Naser and K. Petrov (2011) used percentage increase in Gross Premium (GP). 1.2.3 Size The term size in this context is the capacity of the company, whether it is large or small company. Larger firms have advantage on borrowing capacity than small or medium firms because of its diversification of business that reduce bankruptcy risk. This might be positive link between size of firm and the debt ratio which is tally with pecking order theory. In simplest word, the diluted ownership structure that simplifies the borrowing decision of the management. Thus, in this competitive market, banks more likely to lend to large company with large loan. Total Assets are used by Al-Ashwal (2010) as a proxy of firms size.
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1.2.4 Liquidity In simplest word, liquidity can be defined as the ability to turn out into cash. In longer terms, the degree where asset or security can be buy or sold whenever it is without interfering the price of the asset. The ownership structure had estimated that relationship between debt and liquidity was insignificant (F.Bancel and U.R Mittoo, 2002). Family ownership may have more control in not allowing managers to increase leverage and incur interest cost imposed especially when the firm has high level of liquidity. This can be related to agency cost theory as it can control agency cost problems. Kila and Mansoor (2009) suggest a ratio of Short-Term Assets to Total Liabilities, excluding Share Capital and Retained Earnings. As for N. Naser and K. Petrov (2011) they recommend on Short-Term Liabilities where quick ratio equal to short term assets divided by total liabilities.
1.2.5 Asset Tangibility Asset tangibility is type of assets that have physical characteristics but in can be high in value such as machinery, land, and buildings. From the theoretical point of view, the tangible assets can be used as collateral (P. Bauer, 2004). Static trade-off said that firms with high levels of asset tangibility are less expected to default and will have higher chance to getting a positive relationship between asset 7
tangibility and debt ratio. Therefore, higher tangibility lowers the risk of a creditor and increases the value of assets in the case of bankruptcy. As we can conclude, the more the tangible the assets, the higher its ability to issue secured debt. Haslindar and Tajul (2010) measured assets tangibility by divided total assets with fixed asset. The same calculation used by Bauer (2004). 1.3 Statement of Problems Subsequent studies pursuant to that had been undertaken to gauge various aspects of capital structure. The objectives of the previous studies is to test the importance of capital structure theories, to test the relevance capital structure theories, to create the relationship between capital structure and firm value, and to establish the optimal capital structure. Firm needs to make crucial capital structure decisions so that firms will achieve maximize value of the firm. One of the ways that firms can do is by reducing its weighted cost of capital. In order to do that, firms need to allocate its sources of capital that will reduce its cost. Construction firms are needed for the studies as they need to know on which determinants that will maximize profit and also reduce cost. Most problems that construction firms face are insufficient capital, do not have enough fixed assets and they usually own construction equipments rather than property; lands or buildings to finance their responsibility (Ebaid, 2009). Basically, banks do not accept such assets as collateral for loans. Without the loans it is hardly 8
for the firms to finance for their projects. Moreover, between developers and contractors in Malaysia, developers tend to be more profitable than contractors and it is because they were burdened by the debt (Mansor and Rozimah, 2010). Financial problems occur by the construction firms is low profit margins from the projects. What firms have to do when there is unfortunate events occur such as tsunami, recession, and war. Nowadays especially, there is unstable economics, what must firms needs to take actions to gain profit or even balance it.
1.4 Research Questions In this study, there is a question that has been developed regarding the problem statement occurred as following: i. Whether short-run or long-run capital structure that will give higher return on investment towards company and the investors?
1.5 Objectives of the study This study had also developed an objective in order to answer the research question. The objective will be as a guide in this study so that the research is on the correct path. It as follows: 9
i. To determine and examine the determinants of capital structure for construction companies in which it will benefit them. 1.6 Significant of the study This research identifies the determinants of capital structure of constructions companies. Hence, based on this study, it will give some advantage to groups of people. As follows: 1.6.1 Managers of the company This paper research helps a lot for manager of the company as this paper will give guidance to them on how to finance their capital. Thus, they can find such way to improve their activities. 1.6.2 Investors This research paper also gives beneficial information towards investors. This is because that important information regarding capital structure of the company that investors intended to invest to is the crucial part. In which might help to make smart decision. 1.6.3 Researches This paper might be important and significant to other researchers who most likely to gain information regarding this research. Besides, they can refer as reference and gain another variable which can be add on as their variables.
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1.7 Scope of the study The main factor of this study is to examine the determinants of capital structure of constructions company Listed in Bursa. The independent of this study are profitability, size, growth, liquidity and asset tangible. As for the dependent variable, it will be debt ratio. The data will be derived from the financial report of the companies. All information also has been taken from journal and website. 1.8 Limitations of the Study There are three limitations during conducting this research.
1.8.1 Period of data gathered The period of data to be gathered is restricted. The researcher wanted to lengthen the period usage to make more accurate results but the availability of data is limited.
1.8.2 Accuracy of Data This is because the study is totally depends on secondary data which is mostly are from publish materials. If any error occurs on the publish data it will absolutely effect the result of this study.
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1.8.3 Difficulties in obtaining the information Some of the data are limited to obtain such researcher have to purchase the information which is totally affect the ongoing study. This occurs because they want to protect the information from reached to irresponsible person which might harm the institutions. In such data, the researcher has to search for information that relates to capital structure theories in which very difficult to acquire. 1.9 Summary In this chapter, researcher had introduced some capital structure theories which are very helpful to know a little bit about capital structure really is. In addition, researcher also had defined the terms that mostly will be used in this study and the relationship between the variables. The inspiration behind this study is to determine the determinants of capital structure of construction companies by using secondary data available in Malaysia, in order to answer the research questions that have been listed above. Besides that, the scope and limitations also have been explained. Thus, for the next chapter, the researcher will be explained about the previous studies that have been conducted.
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CHAPTER 2 LITERATURE REVIEW 2.0 Introduction Literature review is a process where published and unpublished work from secondary data sources needs to be identified, evaluated and documented it (Sekaran and Bougie, 2010). It is a depth and intensity evaluation of previous study. Besides that, It is also a summary and synopsis of a particular area of research, allowing anybody reading the paper to establish why the researchers are pursuing this particular research program. For this particular study, there are many author and researchers had discover the determinants of capital structure. 2.1 Overview of Theories of Capital Structure Capital structure basically comes with theory originally from Modigliani and Miller in 1958. Until now, there are several theories of capital structure likes Pecking Order Theory, Static Trade-Off, and Market Timing Theory. Capital structure is a fundamental aspect of corporate finance that explore into study on the approach a firm chooses its sources of financing to funds its investments in acquisition of assets. In order a company to make wise decision of capital structure, firms needs determine its operating investment both internal and external. Argument by Modigliani and Miller (1998) is that capital structure does not exist in perfect 14
market is irrelevance, as in real world, imperfections market is clear. In Trade-Off Theory states that taxable firms should increase its debt level until its tax advantages borrowing exceed the cost of financial distress till it is balance. Debt level is expected to be increase the limit as marginal value of tax shield is equal or lesser to present value of possible financial distress costs (Delcoure, 2007). Under trade off-theory, a significant positive relationship should exist between profitability, asset tangibility and size towards financial leverage. Meanwhile the pecking order theory recommended by Myers (1977) suggest that firms prefer to finance new investment, first with retained earnings then followed by debt and finally with an issue of new equity. Means that, high profits firms should hold less debt because the high level of profits provides a high level of internal fund. Thus, for the results it is shows that a significant negative relationship between profitability and debt ratio. For asset tangibility and growth it is expect to be a positive relationship. 2.2 Previous Study A study by Syuhada, Zaleha, Mansor and Hussian (2011) shows that large firms rely heavily on the debt financing. Besides that, the researchers able to discover that asset tangibility has influence the most on the debt. This is because, when the company has more assets tangibility, the demand for debt in financing the assets is also increased. Moreover, the results study by them shows that profitability indeed, inversely related, whereas the size, growth and asset tangibility are directly related 15
to the dependent variable. Other than that, size measured by the sales figure is positively related to total debt. It is suggested that larger firms depend more on leverage financing for expand compared to smaller firms. Thus, this will exposed to them to financial risk during economic downturn. An empirical study done by Mansor, Salwani, Syuhada, Zuraida and Norazidah (2011) on studies of property companies in Malaysia by using five independent variables: property asset intensity, size, growth, profitability and interest rate. They recommended that property asset intensity and profitability are significant determinants of capital structure. While, for size and growth do not happened to be significant result on capital structure. On study on capital structure of SMEs in Malaysia studied by Haslindar and Tajul (2011) explained that size is significantly positive related to long term debt. It can further explained that the larger the firm the larger will it diversified and faces lower risk as compared to smaller firms. There is statistically significant relationship with the long term debt. SMEs will finance their activities based on pecking order theory (Abor and Biekpe, 2009). Other than that, the study also found that the asset tangibility has a positive significant result related to long term debt. Such non-current assets are important and act as protection to lenders from any problems (Jensen and Meckling, 1976). Unfortunately, there is no significant relationship regarding liquidity with long term debt. 16
Debt issuers with high growth opportunity will create more wealth in one year period, which is conflicting with the expected relationship (Yusnidah, MD. Mohan Kamarun and Mohd. Sobri, 2011). In their study, they found that the opposite relationship is monitored he the interaction between capital structure change and growth opportunity is considered. For one year of observation, there is strongly negative impact of growth opportunity become vital if only the increasing of financial leverage. On the other hand, when the capital structure is zero, it is rather gives positive affect towards company. This is because firms can utilize the growth opportunities without any unpleasant effect related with financial distress cost. The researcher also states that debt issuing with higher free cash flow and increased leverage experience low performance in three years time. However, there is argument on the benefit of higher financial leverage at the existence of high free cash flows should be clear if no substitute measures of reducing the agency cost are undertaken. There is study on foreign countries, where the researcher takes Russia, Brazil and China as their sample. The results show that Russian companies received higher profitability when they lower their financial leverage. Russian companies also have positive relationship between growth rate and debt ratio. The researcher are manage to reveal the relationship between asset tangibility and debt ratio, where they conclude that the higher the percentage of fixed assets in total assets the lower is the debt level. As for size, there is positive effect as natural logarithm of sales was confirmed while no interpretable results were gained for natural logarithm of total 17
assets alternatively (Ivashkovskaya and Solntsva, 2010). For Russian companies who are controlled by the government will have higher debt as well as companies with foreign shareholders. in the meantime, it does not happened to public company, they tend to borrow less. Somehow, comparative analysis of capital structure determinants shows that profitability influences the debt to - equity choices in the same way for China, Russia as well as Brazil. By test using pecking order or trade- off theory, Russian companies cannot reject either the theories but for Brazil and China, it will rejected by pecking order theory. The trade off theory is most likely to be followed by large-scale companies of China.
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2.3 Theoretical Framework 2.3.1 Previous Literature Dependent Variable Independent Variables
Source: Nurul, Zaleha, Mansor and Hussian Diagram 2.1: Determinants of Capital Structure The diagram above shows the study done by Nurul, Zaleha, Wan Mansor and Hussian (2011) which identifying the determinants of capital structure of Constructions Company in Malaysia. From this study, they are able to identify the variables which may help them as reference. The dependent variable is debt ratio meanwhile for the independent variables are growth, probability, and size and asset tangibility. The study also took a look at the Profitability Growth Size Asset Tangibility Debt Ratio 19
theories of capital structure which are Static Trade-Off, Pecking Order and Agency Cost Theory. 2.3.2 Research Framework
Dependent Variable Independent Variables
Diagram 2.2: Determinants of Capital Structure Therefore, in order for the researcher to carry out this study, the researcher has to combine the previous research analysis and study it again. So, the new and addition variable have been identify which is Liquidity. The independent variables would be asset tangibility, growth, profitability, size and liquidity. While for dependent variable is debt ratio. The researcher Profitability Growth Size Asset Tangibility Liquidity Debt Ratio 20
using Ordinary Last Square Method form 2006 till 2010 and be conduct by Statistical Package for Social Science (SPSS). 2.4 Summary In conclusion, this chapter outlines the previous studies done which is benefit for the current researcher to analyze and revise it. It does gives guideline to the researcher so that, it will be easier for the researcher to go to the next chapter.
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Chapter 3 METHODOLAGY AND DATA 3.0 Introduction This chapter will be discuss about the procedures and methodology used for the purpose of this research. It includes introduction, sources of the data, the variables occupied and the hypothesis to test whether the determinants identified would affect the capital structure of the companies. The objective of this research is to see whether there are significant relationship or not between the determinants and capital structure of companies. To achieve the objective, this study is based on the Ordinary Least-Squares (OLS) regression method to see the relationship between these variables. Other important information and particular sources needed were gathered from published journals and articles. 3.1 Data Collection Data that are used in this research were obtained from the companies website. The collected data includes data for calculate the profitability of company, the size of company, the amount of tangible asset that the company have, the growth of the company and how liquid is the company is. The data gathered to see whether there are any relationship exists between the dependent variable and the independent variable. In addition, the annually information also collected through previous 22
journals, annual report and internet sources (website) and any other particular article. 3.2 Sampling Frame A sample defined as a subgroup of the population. By studying the sample, the researcher should be able to draw conclusion that would be generalize-able to the population of interest and likely to produce more reliable results. In this research, the sampling frame that has been used is the construction companies that have been listed in the Bursa Saham Malaysia. 3.3 Sources of Data All the data have been gathered for this research basically from secondary data. Secondary data refers to statistical material which is not originated by the investigator himself but obtained from someone elses records, or when primary data is utilized for any other purpose at some subsequent enquiry it is termed as secondary data. This type of data is generally taken from newspapers, magazines, bulletins, reports, journals and many more. (Uma Sekaran, 2003). Since the data and information used in this research was gathered from annual reports, websites and journals, it considered as secondary data. 23
3.4 Variables and Measurement The variables used in this study can be categorized into two types which is dependent variables and independent variables: 3.4.1 Dependent variable A dependent variable is what you measure in the experiment and what is affected during the research. The dependent variable responds to the independent variable. It is called dependent because it depends on the independent variable. Therefore, in this study the dependent variable is debt ratio. The study identifies which factors would have significant effect towards it. 3.4.2 Independent Variables Independent variables are one that influences the dependent variable. It is usually what you think will affect the dependent variable. For this study, the researcher had picked several independent variables, which are profitability, growth, size, liquidity and tangible assets.
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3.5 Research Design In order for a research to go accordingly, research design might be appropriate. Basically, research design identifying the variables in a problem statement and developed the theoretical framework. This research is designed to examine the relationship between dependent variable and independents variables. Hypothesis testing also developed in order to see and explain all significant relationship between the variables. 3.5.1 Purpose of Study Mainly, the reason to conduct this research is to identify and determine the capital structure of companies in Malaysia particularly construction companies that been listed in Bursa Saham Malaysia. 3.5.2 Types of Investigation This study use Ordinary Least-Square method to investigate in order to determine the factors of capital structure of the construction companies. 3.5.3 Unit of Analysis Unit of analysis that will be use in this research are as follows, profitability, size, growth, liquidity and tangible assets. 3.5.6 Data Horizon 25
The time horizon use for this study is annually data which is from year 2006 until year 2010. 3.6 Data Analysis and Treatment The statistical tools use in this study is Descriptive Statistics, Ordinary Least- Square, Test of Correlation, Test of Normality and Test of Multicollinearity in order to test the validity and dependability of the data for this study. This model of analysis will be use to examine the effects of several independent variables on dependent variables that are interval scaled. 3.6.1 Descriptive Statistics In descriptive statistics, summary statistics are use to review a set of observations, consecutively to conclude the amounts as simply as possible. Arithmetic mean will be use to measure the central tendency. Standard deviation, variance and coefficient of variation also will be measure. This is because; it will show how far the dispersion between the ranges of the data is. It is state that, the more the dispersion, the more the volatile the stock indices are. 3.6.2 Ordinary Least-Square The use of OLS is to test the sensitivity of normality, homoscedasticity, and independence. So, in order to determine the validity of an OLS regression, the researcher will test is whether the residuals are normally 26
distributed homoscedastic, and not autocorrelated. The OLS regression model is to see whether there any relationship between the explanatory variable, x and response variable, y. Therefore, the model of this study will be: Y=+ 1X1+ 2X2+ 3X3+ 4X4 + 5X5 + Where: Y = dependent variable which is debt ratio. = constant number of equation = coefficient beta value X1 = Profitability X2 = Growth X3 = Size X4 = Liquidity X5 = Asset Tangibility = error
3.6.3 Test of Multicollinearity The assumption under the Classical Linear Regression Model is stipulated that there is no multicollinearity among independent variables (Gujarati and Porter, 2009). The condition under multicollinearity is when the independent variables are linearly related to each other. Thus, it might make 27
the regression coefficients to be false and inefficient. The result at the end will provide us with the false representations of the model. Such way the researcher can detect the problem is by comparing the t-stats and R value. The R explain the higher explanatory power of the estimated equation and more accurate for forecasting purpose. The bigger value of R 2 , the smaller the standard error would be. Therefore, higher R 2 identifies strong relationship between the dependent variable and independent variables. 3.6.4 Test of Correlation The researcher can test the correlation statistic which describes the degree of relationship between dependent variable and independent variables. Besides that, significant test is also conducted on the correlations to establish the probability that the correlation is the one and is not by incident. To be it is statistically significant, their respective p-value is less than 0.05, or vice versa. R can be any number between and including positive one and negative one. 3.7 Hypothesis Statement Hypothesis can be defined as an unproven proposal that uncertainly explain certain facts or phenomenon. Generally assign the symbol H0 to the null hypothesis and the symbol H1 to the alternative hypothesis. The purpose of hypothesis testing is 28
slightly more complicated then estimating parameters because the decision maker must make choice between the two hypotheses. Hypothesis 1: H0: There is no significant positive relationship between Debt Ratio and Profitability. H1: There is significant positive relationship between Debt Ratio and Profitability. Hypothesis 2: H0: There is no significant positive relationship between Debt Ratio and Growth. H1: There is a significant positive relationship between Debt Ratio and Growth. Hypothesis 3: H0: There is no significant positive relationship between Debt Ratio and Size. H1: There is significant positive relationship between Debt Ratio and Size. Hypothesis 4: H0: There is no significant positive relationship between Debt Ratio and Liquidity. 29
H1: There is a significant positive relationship between Debt Ratio and Liquidity. Hypothesis 5: H0: There is no significant positive relationship between Debt Ratio and Tangible Assets. H1: There is a significant positive relationship between Debt Ratio and Tangible Assets. 3.8 Summary In this chapter, the methodology to be used in collection and analysis of data is presented. With the methodology clearly specified, data was obtained and analyzed accordingly. Thus, this enables the researcher to estimate the relationships between independent variables and dependent variable to be take on appropriately. This chapter most probably is the most important chapter because without any conscious of the researcher, it might not properly studies
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CHAPTER 4 ANALYSIS AND FINDINGS 4.0 INTRODUCTON In this chapter, it will discuss about the method used and about the results obtained. It has been mentioned earlier to use Ordinary Least Square Method Analysis in order to explain the relationship between the dependent variable and several independent variables. In this case, dependent variable is debt ratios of the companies while for the independent variables are profitability (return on assets), size (total assets), liquidity (quick ratio), asset tangibility and growth (net profit margin). The objective is to analyze whether there is any significant relationship between all the determinants identify between dependent variable and independent variables. After collect and regress all the data by using Microsoft Excel, SPSS and EViews, the summary of the empirical findings as well as the interpretation of the data has designed. 4.1 DESCRIPTIVE STATISTICS In this study, Descriptive Statistics is designed in order to check the normality of data. Descriptive statistics below shows value of mean, minimum, maximum, standard deviation, variance, skewness and also kurtosis for every single variable including both dependent and independent variable. 31
Table 4.1: Descriptive Statistics
S k e Skewness is a measure of symmetry, or more precisely, the lack of symmetry. A distribution, or data set, is symmetric if it looks the same to the left and right of the center point. In other words, it could came in the form of negative skewness or positive skewness or even undefined, depending on whether data points are skewed to the left (negative skew) or to the right (positive skew) or at zero of the data average. The purpose of screening the data is to checking the normality of the data. Below is the example of skewness :
Negative skewed symmetric bell Positive skewed (skewed to the left) zero (Skewed to the right) Diagram 4.1: Example of Skewness Based on the Table 4.1, we can see that all the skewness value are at the range (-1) and 1, so its means all the data are normally distributed. All the variables were skewed to the right.
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4.2 MULTICOLLINEARITY Table 4.2: Multicollinearity Model Collinearity Statistics Tolerance VIF 1 (Constant) PROFIT 0.470 2.130 GROWTH 0.459 2.181 SIZE 0.663 1.508 LIQUIDITY 0.418 2.393 ASSET 0.555 1.803 a. Dependent Variable: DR Multicollinearity is defined as statistical phenomenon which two or more independent variable is highly correlated. By refer to the table, centered VIF are used to identify whether there is existing of multicollinearity problem or not. All the independent variables are shows VIF value less than 10. According to V.G.R Chandran (2009), if VIF value below than 10, its means there is no perfect correlation between independent variable.
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4.3 MULTIPLE REGRESSIONS Table 4.3: Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 0.916 a 0.839 0.805 0.07816
As can be seen in the Table 4.3, R shows figure 0.916 (91.6%) which means there have a strong relationship between dependent variable (debt ratio) and 5 independent variables which are profitability, growth, liquidity, size and asset tangibility. While, for R-squared the value show figure 0.839 which is close to 1.0 and its means, 83.9 % of dependent variable can be explained by 5 chosen independent variable. In contrast, another 16.9% of dependent variable can be explained by other factors. Adjusted R squared being used to identify relationship between independent variable and dependent variable. Based on the table, we can see that adjusted R- squared value is 0.805 which means that there is existence of high relationship between the dependent variable and independent variables.
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Table 4.3: Multiple Regeression Model Unstandardized Coefficients Standardized Coefficients T Sig. 1 (Constant) 0.240 0.403
From the above table, it could be concluded that the result can be explained by the following equation: Debt Ratio = 0.240 0.643Profitability + 0.011Growth + 0.057Size 0.0278Liquidity + 0.054Asset Tangibility + In the table above, it shows that asset tangibility, size and growth have positive coefficient with the debt ratio, while, the others variables which are profitability and liquidity have negative coefficient with the debt ratio. It also shows that, profitability, growth and size have significant level more than five percent confidence level (p>0.05), while the other variables such as liquidity 36
and asset tangibility which both have significant level of 0.000 are less than five percent (p<0.05). Below is the explanation about the relationship for each dependent and independent variables:
4.3.1 Profitability (Return on Assets) H0: There is no significant positive relationship between Debt Ratio and Profitability. H1: There is a significant positive relationship Debt Ratio and Profitability. The coefficient value of profitability is -0.643. It indicates that every one percent increase in the profitability is expected to decrease in the total debts by 0.643 percent assuming that other variables remain constant. Due to the negative value, it shows that there is negative relationship between profitability and total debts. This was supported by Syuhada, Zaleha, Mansor & Husian (2011) in which they also found negative relationship between profitability and total debts. The probability value (p-value) is at 0.3346, in which means more than 0.05 percent confidence level (p>0.05). Thus, this study fails to 37
reject null hypothesis which explained that there is no significant positive relationship between profitability and total debts. 4.3.2 Growth (Net Profit Margin) H0: There is no significant positive relationship between Debt Ratio and Growth. H1: There is a significant positive relationship between Debt Ratio and Growth. The coefficient value of growth is 0.011. It indicates that every one percent increase in the growth is expected to increase in the total debts by 0.011 percent assuming that other variables remain constant. Due to the positive value, it shows that there is positive relationship between growth and total debts. The probability value (p-value) is at 0.960, in which means more than 0.05 percent confidence level (p<0.05). Thus, this study is fails to reject null hypothesis which explained that there is no significant positive a relationship between growth and total debts. Firms with a higher amount of their market value related by growth opportunity will have lower debt capacity (Myers, 1977).
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4.3.3 Size H0: There is no significant positive relationship between Debt Ratio and Size. H1: There is a significant positive relationship between Debt Ratio and Size. The coefficient value of size is 0.057. It indicates that every one percent increase in the size is expected to increase in the total debts by 0.057 percent assuming that other variables remain constant. Due to the positive value, it shows that there is positive relationship between size and total debts. The probability value (p-value) is at 0.192, in which means more than 0.05 percent confidence level (p<0.05). Thus, this study is fails to reject null hypothesis which explained that there is no significant positive relationship between size and total debts. The same result were obtained by Haslindar and Tajul (2011) which explained that the larger the firm the more expended and these firms are also facing lower risk as compared to smaller firms. 4.3.4 Liquidity H0: There is no significant positive relationship between Debt Ratio and Liquidity. 39
H1: There is a significant positive relationship between Debt Ratio and Liquidity. The coefficient value of liquidity is -0.278. It indicates that every one percent increase in the liquidity is expected to decrease in the total debts by 0.278 percent assuming that other variables remain constant. Due to the negative value, it shows that there is negative relationship between liquidity and total debts. The probability value (p-value) is at 0.000, in which means less than 0.05 percent confidence level (p<0.05). Thus, this study reject null hypothesis which explained that there is negative significant relationship between liquidity and total debts. The study of Capital structure around the world: The roles of firm- and country-specific determinants by Jong, Rezaul and Nguyen (2007) found that there are limited results for liquidity even though modern theories suggest the negative relationship between liquidity and debt ratio. Mostly, companies or countries with advances economies will obtain significant negative coefficients. 4.3.5 Asset Tangibility H0: There is no positive significant relationship between Debt Ratio and Asset Tangibility. 40
H1: There is a significant positive relationship between Debt Ratio and Asset Tangibility. The coefficient value of asset tangibility is 0.054. It indicates that every one percent increase in the asset tangibility is expected to increase in the total debts by 0.054 percent assuming that other variables remain constant. Due to the positive value, it shows that there is positive relationship between asset tangibility and total debts. The probability value (p-value) is at 0.000, in which means less than 0.05 percent confidence level (p<0.05). Thus, this study reject null hypothesis which explained that there is significant positive relationship between asset tangibility and total debts.
4.4 ANOVA Table 4.4: F-Test Model Sum of Squares Df Mean Square F Sig. 1 Regression 0.762 5 0.152 24.936 0.000 b
Residual 0.147 24 0.006
Total 0.908 29
a. Dependent Variable: Debt_Ratio b. Predictors: (Constant), ASSET_TANGIBILITY, Profitbility, lgSIZE_, LIQUIDITY, Growth 41
ANOVA (Analysis of Variance) is an analysis statistical tool that useful to identify overall result of the regression. From the table above, we can see that the results show of calculated value for F-statistic is 24.936 and the significant F at p-value of 0.000. Generally, since p-value is less than 95% confidence interval (5% significant level) its means that there is a significant correlation between debt ratio with profitability, growth, size, liquidity and asset tangibility. Overall this result can be accepted. 4.5 FINDINGS AND DISCUSSION The researcher wanted the result of all variables to be significant but the result does not show as expected. There are some of independent variables having positive relationship but some have negative relationship with the dependent variable.
The null hypothesis for asset tangibility is rejected and shows a positive significant relationship with the debt ratio. As a result, firms with a larger division in fixed assets can raise more debt, most probable because they can assurance these fixed assets as collateral to lenders. The same result was obtained by Nasser and Krassimir (2011).
As for the profitability, there is no positive relationship shows with the debt ratio. Profitability are more likely to be related with the tax trade-off models that predict 42
that profitable companies will employ more debt since they are more likely to have a high tax burden and low bankruptcy risk. This result is consistent with the pecking order theory proposed by Myers, (1984) where companies where not too depends on external funding.
Size might be not being unimportant determinants of capital structure of construction companies. The result shows insignificant positive relationships with debt ratio. In which, larger firms tends to use debt more than smaller firms because there are more diversified in terms of bankruptcy risk that was proposed by trade- off theory (n.d).
While for growth variables, there is insignificant positive relationship with debt ratio. The reason is that companies may grows either in terms of assets and sales, the growth is straightly apparent by the private lenders such as banks and financial institutions (n.d). Higher revenue companies imply less risk because they are easier on debt financing. Besides that, higher growth involved higher needs on external financing rather than internal financing. Where there is confirmation on Pecking Orders Theory. Mayers (1977) stated that opportunity of growth of the companies heavily depends on the firms optional on future investments. The elasticity of future investments makes the firms to seize from bond holders to equity holders which control the firms (Wessels and Titman, 1988).
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There is less evidence on liquidity. Claessens and Lang (2000) observed that each country with one or more firm-specific factors is not significantly related to leverage. Firms with greatest liquidity ratio might hold a relatively higher debt ratio due to higher ability to meet short-term obligations when they fall due to outstanding. This would imply a positive relationship of firms between debt ratio and liquidity. On the other hand, firms with higher liquid assets may use these assets to finance their investment. Thus, it will be a negative relationship between liquidity of firms and debt ratio. Other than that, firms with higher liquid assets will use these assets to finance their investment.
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CHAPTER 5 CONCLUSION AND RECOMMENDATION 5.0 CONCLUSION The main objective of this research paper is to identify the capital structure of construction companies listed in Bursa Saham Malaysia. This is because; the construction companies are very sensitive with economics cycle. Moreover, this paper is mean to see whether there is relationship and significant level between dependent variable and independent variables. This paper using Ordinary Least Square (OLS) to test the variables for the period of 5 years from 2006 until 2010. The dependent variable for this paper is total debts, while for the independent variables are profitability, growth, size, liquidity and asset tangibility. The result of the study shows that construction firms depend profoundly on the debt financing. In addition, the researcher also found that asset tangibility is the main influencer of the debt. In such, the non-current assets are acts as defender for lenders form any risk. Based on the result shown, constructions company will be more reliable in term of debt financing rather than equity financing when the company became bigger on liquidity and asset tangibility. 45
5.1 RECOMMENDATION This paper gives a general idea to the construction firms about the determinants of capital structure. Therefore, through this papers hope that it will benefit the firms whose try to attract more investors. Since, the decision of the companies to choose whether internal or external sources of financing are very limited. Hence, future researchers are recommended to studying these factors in depth and if possible to add another data. Moreover, the possible researchers may also lengthen the period of the research so that it may see more in clear view. It also may perhaps be able to be more explain the dependent variable. Other than that, researcher may use proper method of analysis the result of panel data such as fixed effects and random effects because these methods would give accurate result. Besides that, future researchers are suggest to do diagnostic test for panel data such as unit root test and other panel data analysis.
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