Capital Structure and Investment Behaviour of Malaysian Firms in the 1990s: A Study of Corporate Governance before the Crisis

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  • 1 January 2001
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      • Published in RePEc
Abstract
This is an empirical study analyzing the corporate finance and governance structure in Malaysia before and after the financial crisis of 1997, utilizing the agency cost approach. The contribution of this paper is to link the corporate governance mechanism with the role of banks and corporate ownership structure taking into account the institutional framework and historical background of the Malaysian financial system. Based on data for 375 non-financial KLSE (Kuala Lumpur Stock Exchange) listed companies during fiscal years 1995-99, our analysis is organized into three parts. Section 2 outlines characteristics of corporate finance in Malaysia in the 1990s using aggregated time-series data. Section 3 examines determinants of capital structure via cross-sectional regressions in terms of dependency on banks, availability of internal funds, ownership concentration, ethnic ownership structure, industry effects, etc. And in section 4, we estimate simple investment functions with panel data in order to examine the effects of debt financing on corporate investments before the crisis. Empirical results show that the commitment of banks to finance corporate debt as well as lending obviously increased debt ratios. Ownership concentration mitigates conflict between managers and owners. Foreign ownership also contributed to a reduction in the agency costs of equity financing. However, increasing ownership by native Malays (Bumiputera), both the direct and indirect holding of corporate shares, played no significant role in disciplining corporate management. Finally, high dependency on debt led to excessive corporate investment before the crisis. These results imply that the concentration of risks on the banking sector and social policy advocating the dispersion of corporate ownership weakened the corporate governance mechanism, thereby exacerbating the distress of Malaysia's corporate sector during the financial crisis.
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