Capital structure, capital investment and profitability among Malaysian listed firms

 
 
 
  • Abstract
  • Keywords
  • References
  • PDF
  • Abstract


    Capital investments are referred as a critical managerial decision on firm's fixed asset for generating profitability. However, the empirical finding shows that not every capital investment has a significant positive effect on profitability. Literature indicates mixed results of examining the capital investment relationship with firm's profitability, which vary in respects to the debt structure. On the other hand, strong government reinforcement has pushed Malaysia up as one of the top ten countries with robust private capital investment in the year 2004. Since the capital investments are typically irreversible and hypothesized as profit generator, the first aim of this study is to examine the effect of the capital investment on the firm's profitability across firms and sectors. The second aim is to examine the moderating effect of capital structure on the relationship between capital investment and profitability across firms and sectors. This study utilized pooled ordinary least squares and fixed effect analysis across 708 non-financial Malaysian listed firms. The unbalanced datasets for the period 2001 to 2015 were employed to check the robustness of these results. This study suggested that capital investment has a strong significant positive effect on profitability measurements across Malaysian listed firms in non-financial sectors. On the other hand, the significant negative moderating effect of capital structure on the relationship between capital investment and return on capital across Malaysian listed firms reflected the perspective of empire building theory. In addition, the independent sample test engaged across sectors affirmed that moderating effect of capital structure are different across sectors. Thus, this study concluded the existence of moderating effect of capital structure on the relationship between capital investment and profitability. This study addressed the knowledge gap on the moderating effect of capital structure based on empire building theory.

     

     


  • Keywords


    Capital Structure, Capital Investment and Profitability

  • References


      [1] Clark PK (1979), Investment in the 1970s: Theory, Performance, and Prediction. Brookings Papers on Economic Activity 1, 73-113.

      [2] Chandra P (1989), Financial Management: Theory and Practice (2nd Edition). Tata McGraw-Hill Publishing Company Limited, New Delhi.

      [3] Woolridge JR & Snow C (1990), Stock Market Reaction to Strategic Investment Decisions. Strategic Management Journal 11, 353–63.

      [4] Fisher I (1930), The Theory of Interest, as Determined by Impatience to Spend Income and Opportunity to Invest it. Maccillan, New York.

      [5] Hirshleifer J (1958), On the Theory of Optimal Investment Decision. Journal of Political Economy 66(4), 329-352.

      [6] Hawkins CJ & Pearce DW (1971), Capital investment appraisal 11-25. London: Macmillan.

      [7] Ashford RW, Dyson RG & Hodges SD (1988), The capital-investment appraisal of new technology: problems, misconceptions and research directions. Journal of the Operational Research Society 39(7), 637-642.

      [8] Echevarria DP (1998), Capital Investment and the Profitability of Fortune 500 Industrials: 1971–1990. Studies in Economics and Finance 18(2), 3-35.

      [9] Kim S (2001), The Near-Term Financial Performance of Capital Expenditures: A Managerial Perspective. Managerial Finance 27(8), 48–62.

      [10] Appuhami BR (2008), The impact of firms' capital expenditure on working capital management: An empirical study across industries in Thailand. International Management Review 4(1), 8.

      [11] Raheman A & Nasr M (2007), Working capital management and profitability–case of Pakistani firms. International review of business research papers 3(1), 279-300.

      [12] Valipour H, Moradi J & Karimi K ( 2012), The Impact of Capital Expenditure on Working Capital Management: Empirical Evidences from Tehran Stock Exchange. International Research Journal of Finance and Economics 85, 14-25.

      [13] McConnell JJ & Muscarella CJ (1985), Corporate Capital Expenditure Decisions and the Market Value of the Firm. Journal of Financial Economics 14, 399–422.

      [14] Pegels CC (1991), Alternative Methods of Evaluating Capital Investments in Logistics. International Journal of Physical Distribution and Logistics Management 21(2), 19-25.

      [15] Abel A & Eberly J (1996), Optimal Investment with Costly Reversibility. Review of Economic Studies, 63, 581–593.

      [16] Shah A & Khan S (2007), Determinants of capital structure: Evidence from Pakistani panel data. International review of business research papers 3(4), 265-282.

      [17] Fama EF & French KR (2006), Profitability, Investment and Average Returns. Journal of Financial Economics 82(3), 491-555.

      [18] Chan K, Chan KC, Jegadeesh N & Lakonishok J (2003), Earnings Quality and Stock Returns: The Evidence from Accruals. Journal of Business 79, 1041–1082.

      [19] Anderson CW & Garcia-Feijoo L (2006), Empirical Evidence on Capital Investment , Growth Options , and Security Returns. The Journal of Finance 61 (1), 171-194.

      [20] Kumar P & Li D (2013), Capital investment, Option Generation, and Stock Returns. Working paper, University of California, San Diego, 1- 43.

      [21] Bar-Yossef S, Callend J & Livnat J (1987), Autoregressive Modeling of Earnings Investment Causality. Journal of Finance 42, 11-28.

      [22] Lipson ML, Mortal S & Schill MJ (2011), On the scope and drivers of the asset growth effect. Journal of Financial and Quantitative Analysis 46(6), 1651-1682.

      [23] Chung KH,Wright P & Charoenwong C (1998), Investment opportunities and market reaction to capital expenditure decisions, Journal of Banking and Finance 22, 41–60.

      [24] Li D (2004), The Implications of Capital Investment for Future Profitability and Stock Returns an Over-investment Perspective. PhD Thesis, University of California, Berkeley.

      [25] Cheng C & Yang M (2017), Enhancing performance of cross-border mergers and acquisitions in developed markets: The role of business ties and technological innovation capability. Journal of Business Research 81, 107-117.

      [26] Opler T, Pinkiwitz L, Stulz R & Williamson R (1999), The Determinants and Implications of Corporate Cash Holdings. Journal of Financial Economics 52, 3-46.

      [27] Titman S, Wei K & Xie F (2004), Capital Investments and Stock Returns. The Journal of Financial and Quantitative Analysis 39(4) 677-700.

      [28] Eckbo BE & Kisser M (2017), Trade-off theory and leverage dynamics of high frequency debt issuers. Working Paper, Dartmouth and Norwegian School of Economics.

      [29] Donaldson G (1961), Corporate Debt Capacity: A Study of Corporate Debt Policy and the Determination of Corporate Debt Capacity. Division of Research, Harvard School of Business Administration, Boston.

      [30] Al-Thuneibat AA, Al-Rehaily AS & Basodan YA (2015), The impact of internal control requirements on profitability of Saudi shareholding companies. International Journal of Commerce and Management 25(2), 196-217.

      [31] Singh MK & Ramann S (2014), User Right as a Mezzanine Capital Investment : Innovations in Infrastructure Debt Financing. Working Paper, Indira Gandhi Institute of Development Research, Mumbai, 1-33.

      [32] Tirole J (2006), The Theory of Corporate Finance. Princeton University Press.

      [33] Parrino R & Kidwell DS (2009), Fundamentals of Corporate Finance. New York, NY, John Wiley & Sons.

      [34] Harford J (1999), Corporate Cash Reserves and Acquisitions. Journal of Finance 54,1967-1997.

      [35] Harford J, Mansi S & Maxwell W (2008), Corporate Governance and Firm Cash Holdings in the U.S. Journal of Financial Economics 87(3), 535-555.

      [36] Dittmar A & Smith MJ (2007), Corporate Governance and the Value of Cash Holdings. Journal of Financial Economics 83, 599-634.

      [37] Sullivan M & Zhang A (2011), Are Investment and Financing Anomalies Two Sides of the Same Coin? Journal of Empirical Finance 18(4), 616–633.

      [38] Lyandres E, Sun L & Zhang L (2008), The New Issues Puzzle: Testing the Investment - Based Explanation. Review of Financial Studies, 21 (6), 2825–2855.

      [39] Jensen M (2001), Value Maximisation, Stakeholder Theory, and the Corporate Objective Function. European Financial Management, 7(3), 297-317.

      [40] Hennessy CA & Levy A (2002), A Unified Model of Distorted Investment: Theory and Evidence. Working Paper, University of California at Berkeley.

      [41] Jiang C, Chen H & Huang Y (2006), Capital Expenditures and Corporate Earnings Evidence from the Taiwan Stock Exchange. Managerial Finance 32(11), 853–861.

      [42] Chen Y & Hammes K (2003), Capital Structure: Theories and Empirical Results - A Panel Data Analysis. Gothenburg University, 1–32.

      [43] Economic Report (Various Issues, 2001-2014), Ministry of Finance, Kuala Lumpur: National Printers, Malaysia.

      [44] Esfahani HS & Ramirez MT (2003), Institutions, Infrastructure, and Economic Growth. Journal of Development Economics 70(2), 443–477.

      [45] Bryan S (1997), Incremental Information Content of Required Disclosures in Management Discussion and Analysis. The Accounting Review, 72 (April), 285-301.

      [46] Callen J, Livnat J & Ryan S (1996), Capital Expenditures: Value Relevance.

      [47] Shankaran N (2009), Malaysia and the global crisis: impact, response, rebalancing strategies. Asian Development Bank Institute Working Paper series (148).

      [48] Tamirat AS, Barrera AT & Pennings JM (2017), Dynamic Capital Structure: Dynamics, Determinants and Speed of Adjustment.

      [49] Kim S, Pilotte E & Yang JS (2013), Agency Costs and the Short-Run Stock Price Response to Capital Expenditures. Financial Review 47(2), 375–399.

      [50] Dunning JH (1988), The Theory of International Production. The International Trade Journal 3(1), 21-66.

      [51] Jensen MC & Meckling WH (1976), Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics 3(4), 305–360.

      [52] Fama EF & French KR (2006), Profitability, Investment and Average Returns. Journal of Financial Economics 82(3), 491-555.

      [53] Lian LL, Ramakrishnan S, Vaicondam Y & Hishan SS (2017), Capital Investment and Profitability Across Malaysian Consumer Products Sector. Advanced Science Letters, 23(9), 9282-9286.

      [54] Ramakrishnan S, Alsahliy DK, Hishan SS, Keong LB & Vaicondam Y (2017), Corporate Responsibility of the Listed Malaysian Insurance Companies. Advanced Science Letters, 23(9), 9279-9281.

      [55] Sanil HS & Ramakrishnan S (2015), Communicating the corporate social responsibility on the company website: A study conducted on worldwide responsible accredited production certified apparel manufacturers in India. International Journal of Economics and Financial Issues 5, 52-56.

      [56] Vaicondam Y & Ramakrishnan S (2017), Capital Structure and Profitability Across Malaysian Listed Firms. Advanced Science Letters, 23(9), 9275-9278.

      [57] Sanil, H. S., Ramakrishnan, S., Alwethainani, M., Kazi, A. G., & Siddique, M. (2016). Effectiveness of Supply Chain Management with Reference to Apparel Industry: A Case Study in India. International Review of Management and Marketing, 6(4S).


 

View

Download

Article ID: 20609
 
DOI: 10.14419/ijet.v7i4.9.20609




Copyright © 2012-2015 Science Publishing Corporation Inc. All rights reserved.