After nearly ten years of the Asian financial crisis, the affected countries have rebound and back on track with decent economy fundamentals. Post-crisis period exhibited better corporate governance policies implemented by the authorities to ensure firms choose best source of financing (Wei and Zhang, 2008). 4
1.3 Problem Statement Modigliani and Miller (1958) who broke a new ground on capital structure studies had indicated capital structure is independent of the value of the firm under certain assumptions. Subsequent studies pursuant to that had been undertaken to gauge various aspects of capital structure. The objectives of these past studies, among others, were to test the relevance capital structure theories, to determine the optimal capital structure level and to establish relationship between capital structure and firm value. However, there are numerous studies conducted to identify the determinants of capital structure of firms. These studies have analyzed a variety of factors that determines capital structure, such as share price, asset size, tax shields, profitability and growth. Capital structure determinants study by Booth et al. (2001) in developing countries like Thailand, Jordan, Turkey, Pakistan Mexico, Brazil and Zimbabwe reported that same factors are also important in developed countries, but their direction of influences differs across countries. Zou and Xiao (2006) had reviewed that Rajan and Zingales (1995) whom compared capital structure decisions across G-7 countries and report that in these countries the same sets of determinants (i.e., firm size, asset tangibility, growth opportunities and profitability) affect corporate financing choices based on extant capital structure theories. Thus, there is need for a re-look on the same determinants and its effect on capital structure of local firms. 5
Studies to ascertain corporate governance practices as determinant of capital structure are comparatively limited in local literature. This is because corporate governance is usually considered as a diluted linkage in Asia’s corporate sector (Tam and Tan 2007). In fact, to address agency cost in firm, capital structure, i.e. debt financing, is widely used as a tool to implement corporate governance practices. The basic of agency cost arises from clear division of ownership and control, which shape the capital structure of the firm (Arslan and Karan, 2006). This is because via debt financing, owners are able to avoid the managers from taking financing decisions that has advantage for themselves (Pindado and Torre, 2006). On the same note, tax shields are one of main benefit that surfaces from debt financing (Zou and Xiao, 2006). One dimension of corporate governance is type of ownership structure of the firms. Hence, testing the implications of different type of ownership structure on capital structure would provide an insight on the relationship between both variables. Ownership structure of Malaysian firms can be grouped into three categories, i.e. family-owned, state-owned and foreign-owned.
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