Abstract Capital structure studies had mainly Iocused on Iirms in developed countries and little

attention is given on how Iirms in developing and emerging market decide on its capital structure
strategy. ThereIore with a sample oI 155 main listed companies Irom Iour selected ASEAN stock
exchange index-links components Ior the period Irom 2003 to 2007, this study Iound that
proIitability and growth opportunities Ior all selected ASEAN countries exhibit statistical
signiIicant with inverse relationship with leverage. Whereas non-debt tax shield has signiIicant
negative impact on leverage mainly Ior Malaysia index link companies only. Firm size shows a
positive signiIicant relationship Ior Indonesia and Philippine index link companies. As Ior the
country-eIIect Iactors; stock market capitalization and GDP growth rate show signiIicant
relationship with leverage while bank size and inIlation indicate insigniIicant impacts on
leverage. These determinants that inIluence the developing counties are almost similar and are as
predicted by existing theories oI capital structure. Keywords: Capital structure; Leverage; Firm-
speciIic and Country-speciIic Iactors; ASEAN 1.0. Introduction For the past IiIty years aIter the
inIluential irrelevance theory oI Modigliani and Miller (1958) on capital structure, academicians
have debated rigorously on the capital structure theory and had even moved on looking at the
determinants oI Iirms' capital structure choices with Irictions such as agency signalling costs
(Heinkel, 1982; Poitevin, 1989), bankruptcy (Ross, 1977), taxes (Leland and ToIt, 1996),
institutional and historical characteristics oI national Iinancial systems (La Porta et al. , 1997,
2006; Rajan and Zingales, 2003), but the understanding oI the determinants oI national and
international capital structure is still limited and vague (Aggarwal and Jamdee, 2003). In the
early years, Iirms in United States were the primary source oI such study and the coverage
extended to Europe and Japan in mid oI 1980s (Kester, 1986; Rajan and Zingales, 1995; Cornelli
et al. , 1996). In the aItermath oI the Asian Iinancial crisis in 1997, eIIorts were Iocused on
emerging countries to shed some light on the Iactors that caused the turmoil in the region.
Despite oI this attempt, there have been a limited work done on the Asian region mainly because
oI the constraints on corporate Iinancial data in the region (Fan and Wong, 2002; Deesomsak et
al. , 2004; DriIIield et al. , 2007). Undoubtedly, there is also insuIIicient evidence on how
theories Iormulated Ior Iirms operating in the major developed markets can be applied to Iirms
outside these markets coupled with diIIerential
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International Research Journal oI Finance and Economics - Issue 47 (2010) 31 in institutional
and legal Irameworks. Consequently, incomprehensive conclusions and puzzling questions are
leIt either partially or completely unanswered in the area oI international capital structure. In
view oI the above constraints this study will analyse the determinants oI capital structure in Iour
countries oI the ASEAN members, namely Malaysia, Indonesia, Philippine and Thailand. The
countries are selected due to their emerging status among the ASEAN counterparts and Ior the
common attributes shared in its accounting practices, corporate governance and corporate
control. The exclusion oI other countries is due to the diIIerence in market attributes (Singapore
being developed market) and also due to the immaturity oI the stock markets (Brunei, Cambodia,
Lao, Myanmar and Vietnam). First a comparison is made on corporate leverage decisions
between developing countries. This is Iollowed by observing the Iactors that aIIect individual
countries' capital structures and examining iI the prediction oI conventional capital structure
models improves by just knowing the nationality oI the company. The remainder oI the paper
proceeds as Iollows: Section two will review the main theoretical Iramework such as country-
speciIic Iactors (macroeconomics); and Iirm-speciIic determinants aIIecting capital structure.
Section three provides the research methodology along with the description oI the variables, data
structure and the analysis techniques. In section Iour, the results is presented and discussed
Iollowed by section Iive concluding the study. 2.0. Literature Review The Modigliani-Miller
('MM) theorem (1958) Iirst Iormed the basis Ior modern thinking on capital structure where
assuming in a perIect capital market (no transaction or bankruptcy costs; perIect inIormation);
Iirms and individuals can borrow at the same interest rate; no taxes; and investment decisions
aren't aIIected by Iinancing decisions. However, there is a Iundamental diIIerence between debt
Iinancing and equity Iinancing in the real world with corporate taxes and dividends paid to
shareholders; commonly recognized as interest tax shield (Graham, 2000; MacKie-Mason,
1990). The compromise is represented in the Trade-oII Theory oI capital structure which
indicates that the decision oI a company to choose how much debt and equity Iinancing that is
required is based on the balancing oI the costs and beneIits oI each Iorm oI Iunding. There is an
advantage to Iinance through debt (interest tax shield beneIit) but do need the consideration Ior
the costs oI Iinancial distress including bankruptcy costs oI debt and non-bankruptcy costs.
ThereIore the empirical relevance oI the trade-oII theory is still been questioned (Frank and
Goyal, 2003). On the other end, Miller (1977) and Graham (2000) argue that the tax savings
obtained do seem large enough and certain while the deadweight bankruptcy costs seem minor.
However Iirm managers or insiders are assumed to possess private inIormation about the
characteristics oI the Iirm's return stream or an investment opportunity which gives raise to the
asymmetric inIormation that are present and one preIerence oI Iinancing, either being Irom
internal source, heavily debt based or Iinancing with a view oI maximising the shareholders'
wealth. The most current and comprehensive work on international capital structure are being
work by De Jong et al., (2008) who studied the roles oI Iirm in relation to the capital structure
around the world that observed the roles oI Iirm- and country-speciIic determinants and work by
Deesomsak et al. , (2004) and Booth et al. , (2001) who studied the determinants oI Capital
Structure as an evidence Irom the Asia PaciIic region. In De Jong et al. (2008), it was Iound that
Iirm-speciIic determinants (Iirm size, asset tangibility, proIitability, Iirm risk and growth
opportunities) on leverage diIIer across countries, while prior studies implicitly assume equal
impact oI these determinants. Although they concur with the conventional direct impact oI
country-speciIic Iactors on the capital structure oI Iirms, they do show that there is an indirect
impact. This is because country-speciIic Iactors also inIluence the roles oI Iirm- speciIic
determinants on leverage. According to Deesomsak et al. (2004), capital structure decision oI
Iirms is inIluenced by the environment in which they operate, as well as Iirm-speciIic Iactors.
The Iinancial crisis oI 1997 also Iound to have a signiIicant but diverse impact on Iirm's capital
structure decision across the region.
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32 International Research Journal oI Finance and Economics - Issue 47 (2010) Eight Iirm-
speciIic determinants that were studied were tangibility, proIitability, Iirm size, growth
opportunities, non-debt tax shield, liquidity, earnings volatility, and share price perIormance
whereas seven country-speciIic variables, namely the degree oI stock market's activity, the level
oI interest rates, the legal protection oI creditor's rights, ownership concentration, and three
country dummies were used. Similarly in Booth et al. (2001), they analyze capital structure
choices in ten developing countries, being India, Pakistan, Thailand, Malaysia, Turkey,
Zimbabwe, Mexico, Brazil, Jordan, and Korea. The macroeconomic variables used were the
stock market value/GDP, liquid liabilities/GDP, real GDP growth rate, inIlation rate and Miller
tax term and the tax rate, business risk, asset tangibility, size, return on assets and market-to-
book ratio were the Iirm speciIic variables applied. It was Iound that the variables that are
relevant Ior explaining capital structures in the United States and European countries were
similar as in developing countries, despite the proIound diIIerences in institutional Iactors across
these developing countries. The diIIerence in the development oI banks versus Iinancial markets
has long been perceived as a possible determinant oI capital structure (Mayer, 1990; and Rajan
and Zingales, 1995). This indicator oI banking or market development may cause diIIerences in
the accessibility to external Iinancing by Iirms which implies that as equity markets become
more developed, they become a viable option Ior corporate Iinancing and Iirms make less use oI
debt Iinancing. ThereIore countries with a relatively large banking sector are more likely to be
associated with higher private sector debt ratios. Previous studies appear to agree on the negative
relation between the size oI stock market and leverage level (Demirguc-Kunt and Maksimovic,
1998 and 1999; Booth, et al. 2001 and Giannetti, 2003). Similarly the growth rate oI GDP is an
important macroeconomic variable. II investment opportunities in an economy are correlated,
then there should be a relationship between the growth rate oI individual Iirms and the growth
rate oI the economy. Thus, the aggregate growth rate may serve as a control variable in cross-
country comparisons oI Iirm Iinancing choices. Since economy-wide growth opportunities (GDP
growth rate) are closely correlated with Iirms' growth opportunities, Iirms with large growth
opportunities tend to use less debt in optimality as argue by Myers' hypothesis (1977). Another
important country-speciIic institution that may aIIect corporate Iinancial decision is the inIlation
eIIect because debt contracts are generally nominal contracts and high inIlation is likely to
discourage lenders Irom providing long-term debt (Fan et al., 2006). Corporate perIormance
element has also been identiIied as a potential determinant oI capital structure. The tax trade-oII
models predict that proIitable companies will employ more debt since they are more likely to
have a high tax burden and low bankruptcy risk. On the other hand, the pecking order theory oI
Iinance proposed by Myers (1984) prescribes a negative relationship between debt and
proIitability on the basis that successIul companies do not need to depend so much on external
Iunding. Higher growth opportunities provide incentives to invest sub-optimally, or to accept
risky projects that expropriate wealth Irom debt holders (Deesomsak et al. 2004). This raises the
cost oI borrowing and thus growth Iirms tend to use internal resources or equity capital rather
than debt. In addition, high growth Iirms whose value comes Irom intangible growth
opportunities do not want to commit themselves to debt servicing as their revenue may not be
available when needed. ThereIore, an inverse relationship between growth opportunity and
leverage is predicted. According to DeAngelo and Masulis (1980), non-debt tax shields are
substitutes Ior interest or debt-related tax shields; hence non-debt tax shield should empirically
show a negative sign in relation to the leverage ratios. Accordingly to the trade-oII theory, a
negative relationship between leverage and non-debt tax shields is postulated. Similarly,
DeAngelo and Masulis (1980) argue that the marginal corporate savings Irom an additional unit
oI debt decreases with increasing non-debt tax shields. In contrast, Moore (1986) argues that
Iirms with substantial non-debt tax shields should also have considerable collateral assets which
can be used to secure debt. It has been argued above that secured debt is less risky than
unsecured debt. ThereIore, Irom a theoretical point oI view, one could also argue Ior a positive
relationship between leverage and non-debt shield. The trade-oII theory postulates a positive
relation between Iirm size and debt, since larger Iirms have been shown to have lower
bankruptcy risk and relatively lower bankruptcy cost. Bigger Iirms could have easier access to
capital
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International Research Journal oI Finance and Economics - Issue 47 (2010) 33 markets and
borrow at more Iavourable interest rates, perhaps because they are more diversiIied in their
investments and thereIore have a lower risk oI deIault than smaller Iirms (Smith and Watts,
1992). This suggests a positive relationship between Iirm size and leverage. In line with above
discussion, two major types oI variables are observed in this study being the country-speciIic and
Iirm-speciIic determinants, in analyzing the impacts on Iirms' leverage choice. Four Iactors Irom
each determinant is also observed which were the country-speciIic (size oI the banking industry
and stock market, gross domestic product growth rate and inIlation) and Iirm-speciIic
(proIitability, growth opportunities, non-debt tax shield and Iirm size). 3.0. Methodology 3.1.
Variable Selection First the relative importance oI Iactors aIIecting the capital structure oI each
individual country in the sample is observed through variables that inIluence the Iirm's debt
position in the context oI country and Iirm levels. This is essential in providing the insight to a
Iirm's policy Ior both short-term debt and long-term debt. Rajan and Zingales (1995) indicated
that total debt could overstate the level oI leverage because total debt do includes accounts
payable that may be used Ior transaction purpose rather than Ior Iinancing. Furthermore the
choice oI either using the book value or market value is also crucial thereIore the measure oI
leverage based on the market value oI equity, rather than the book value, was used as it gives
more tentatively consistent results (Wiwattanakantang, 1999; Suto, 2003 and Deesomsak et al.
2004). Meanwhile proIitability is deemed to have a negative eIIect on leverage (Titman and
Wessels, 1988) and it is measured by normalising the Iirm's earnings beIore interest and taxes
(EBIT) with total assets (De Jong et al. , 2008). As Ior the growth opportunities there are two
diIIerent arguments about how growth rate aIIects leverage. Since growth can enhance the Iirms'
borrowing ability in the Iuture, this would suggest that growth increases Iirms' assets, and
thereIore higher leverage. Gupta (1969) suggests that a company with rapid growth will tend to
Iinance the expansion with debt. But Myers (1977) argue that Iirms with higher growth rates tend
to use less and or short term debt in their capital structure to reduce the agency costs. Titman and
Wessels (1998) also note that Iirms usually attempt to invest in suboptimal projects in order to
transIer wealth Irom bondholders. Since costs related to this type oI agency problem is higher in
rapidly growing Iirms, then Iirms use less debt in order to avoid this cost. For this reason, growth
rate should have a negative relationship with debt. ThereIore it would be appropriate to deIine
Iirm's growth as the total assets minus book equity plus market equity over book total assets (or
market-to-book value oI total assets). Similarly the non-debt tax shield is measured by the
depreciation expense over book value oI total assets during the sample period. Meanwhile the
Iirm size is expected to have a positive impact on leverage (Rajan and Zingales, 1995) it is then
better deIined as the natural logarithm oI total revenue. Furthermore Demirguc-Kunt and
Maksimovic (1999) and Booth et al. (2001) reported a positive sign Ior the relation between the
banking sector/GDP and debt to asset and thereIore measured by the ratio oI assets oI domestic
banks to GDP Iigures. As Ior stock market Iactor, Giannetti (2003) Iound a negative correlation
between size oI stock market and leverage level and the variable oI 'size oI equity market' used in
this study is the stock market capitalization divided by GDP (STKMKT) (De Jong et al. , 2008;
Joeveer, 2006; Booth et al. , 2001). As Ior the the GDP growth rate it is deIined as the average oI
annual real GDP growth rate (unit in percentage) oI each country, averaged through 20002007
based on the source Irom the Euromonitor International. Finally as Ior the inIlation eIIect on
leverage it is Iound to have mixed results on capital structure. HomaiIa et al. (1994) Iound a
positive relationship between leverage and inIlation as inIlation reduces the 'real cost oI
employing debt via the erosion oI the repayment oI the principal. However, the studies by Booth
et al. (2001) and Fan et al. (2006) show that insigniIicant relationship between leverage and
inIlation but leverage is positively related to economic development.
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34 International Research Journal oI Finance and Economics - Issue 47 (2010) 3.2. Sample and
Model The sampling design is based on the index-linked to the stock exchange oI the Iour
selected ASEAN countries as shown in Table 1. Four countries representing ASEAN are
selected, namely Malaysia, Indonesia, Philippines and Thailand. Data Ior leverage and Iirm-
speciIic variables are collected Irom Bloomberg, Financial Times and Reuters database (all
Iinancial companies were excluded). Data on country-speciIic variables are collected Irom a
variety oI sources, mainly World Development Indicators and Financial Structure Database oI
the World Bank and Euromonitor International which covers Ior a period Irom 2003 to 2007 (on
Iirms with at least Iive years available data were used). This timeIrame is selected to gauge the
aItermath eIIect oI the Asian Iinancial crisis in 1997 on the capital structure decisions. This
Iinally leaves 155 companies meeting all the requirements. Table 1: List oI Stock Exchanges in
Selected ASEAN Countries Country Stock Exchange (SE) Index Number oI component Total
listed companies Total Market Capitalization (in USD million) oI index Irom total market
capitalization Malaysia Bursa Malaysia KLCI 100 983 325,290 70 Indonesia Indonesia SE
LQ-45 45 383 211,693 70 Philippine Philippine SE PSEi 30 242 103,007 54 Thailand
Thailand SE SET100 100 523 197,129 80 Source: Annual report and statistics 2007, World
Federation oI Exchanges; Thomson Reuters An ordinary-least-square regression is Iirst
employed to determine whether relations exist between leverage ratio and the determinants. Next
two regression equations are used to test the Iirm- speciIic determinants (PROFIT, GROWTH,
NDTS and SIZE) and later add the country-speciIic determinants (BANK, STK, GDP and INF)
to the Iirst equation. The model oI regression equation is as Iollows: c u c
u INF GDPRATE STKMKT Bank SIZE NDTS Growth ProIit
Y SIZE NDTS Growth ProIit Y 6 2 2 8 7 5 4 3 1 2 4 3 1 1 Where Y representing the leverage, n
being coeIIicient oI explanatory variables oI and PROFIT ProIitability; GROWTH Growth
opportunities; NDTS non-debt tax shield; SIZE Iirm size; BANK size oI banking industry;
SKTMKT size oI stock market; GDPRATE GDP growth rate; and INF annual inIlation
rate and c being the error term The Iirst regression equation is to determine the Iirm-speciIic
Iactors inIluencing leverage in the individual countries whereas the second regression is to
examine the country eIIect on the leverage. This approach is consistent with previous studies as
in Deesomsak et al. (2004) and Song and Philippatos (2004). 4.0. Results Table 2a - 2c below
presents the descriptive statistics on the leverage ratios Ior each selected ASEAN countries. The
sample means, medians, maximums, minimums, standard deviations, skewness, kurtosis and the
Jarque-Bera statistics along the p -value are reported in respect to Iirm speciIic and country
speciIic.
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International Research Journal oI Finance and Economics - Issue 47 (2010) 35 Table 2a:
Descriptive Statistics oI Leverage Ratio MALAYSIA INDONESIA PHILIPPINE THAILAND
Mean 0.24 0.20 0.28 0.30 Median 0.19 0.15 0.21 0.27 Maximum 0.87 0.86 0.81 0.89 Minimum
0.00 0.00 0.00 0.00 Std. Dev. 0.20 0.20 0.22 0.20 Skewness 0.84 1.51 0.91 0.50 Kurtosis 2.85
5.36 2.85 2.54 Jacque-Bera 38.81 70.72 10.39 13.26 Chi-square at 95 signiIicance 5.99 5.99
5.99 5.99 Note: Leverage ratio is market debt-to-total assets ratio which is computed by total
debts over market value oI total assets (total assets minus book value equity plus market value
equity) Table 2b: Descriptive Statistics oI Firm-speciIic Independent Variables MALAYSIA
PROFIT GROWTH NDTS SIZE Mean 0.11 1.98 0.04 5.89 Median 0.09 1.40 0.03 5.85
Maximum 0.84 20.79 0.44 9.05 Minimum -0.64 0.40 0.00 2.49 Std. Dev. 0.12 2.04 0.05 1.31
INDONESIA PROFIT GROWTH NDTS SIZE Mean 0.23 3.57 0.06 6.57 Median 0.18 2.37 0.05
6.47 Maximum 1.03 22.29 0.23 8.82 Minimum -0.03 0.62 0.02 4.21 Std. Dev. 0.19 3.76 0.04
1.00 PHILIPPINE PROFIT GROWTH NDTS SIZE Mean 0.31 1.80 0.06 5.94 Median 0.16 1.60
0.06 6.03 Maximum 2.71 5.48 0.18 8.71 Minimum -0.04 0.52 0.00 3.27 Std. Dev. 0.49 1.12 0.04
1.51 THAILAND PROFIT GROWTH NDTS SIZE Mean 0.12 2.06 0.06 5.68 Median 0.10 1.52
0.05 5.50 Maximum 0.49 9.72 0.29 10.49 Minimum -0.31 0.40 0.00 1.82 Std. Dev. 0.11 1.40
0.05 1.41 Note: PROFIT is operating income over total assets. GROWTH is the growth
opportunities, calculated by market-to- book total assets. NDTS is the non-debt tax shield,
calculated by depreciation over total assets. SIZE is natural logarithm oI total revenue. Table 2c:
Descriptive Statistic oI Country-speciIic Determinants BANK STKMKT GDPRATE INF Mean
0.86 0.86 0.06 0.04 Median 0.94 0.68 0.06 0.03 Maximum 1.26 1.52 0.07 0.13 Minimum 0.17
0.14 0.04 0.01 Std. Dev. 0.37 0.50 0.01 0.03 Skewness -0.87 0.08 0.18 1.73 Kurtosis 2.20 1.34
1.87 6.18 Source: World Development Indicators and Financial Structure Database oI the World
Bank, Euro monitor International
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36 International Research Journal oI Finance and Economics - Issue 47 (2010) From Table 2a
above, the leverage ratios Ior the Iour selected ASEAN members are relatively moderate with
average ratio ranging Irom 0.20 to 0.30. Thailand has the highest leverage ratio with 0.30,
Iollowed by Philippine (0.28), Malaysia (0.24) and Indonesia (0.20) with standard deviation in
the range oI 0.20. As Ior the skewness, all leverage ratios are skew to the right, indicating that
the most oI the leverage ratios are on the lower range. On the kurtosis measure, all countries
except Indonesia have kurtosis value oI normal distribution pattern (value below three).
Observing the Iormal test oI normality (using Jacque-Bera), all leverage ratios show non-
normality in the error term and hence transIormation oI square root is perIormed Ior the leverage
variable. In terms oI Iirm speciIic independent variables Table 2b shows the statistics oI all
independent variables such as proIitability, growth opportunities, non-debt tax shield and Iirm
size Ior the selected ASEAN countries. The ranking Ior proIitability, which is computed by the
value oI operating income over total assets, Irom most proIitable to least proIitable is Philippine
(0.31), Indonesia (0.23), Thailand (0.12) and Malaysia (0.11). As Ior the growth opportunities,
measured by market to book oI total assets, Indonesia has the highest having a mean oI 3.57
mean Iollow by Thailand 2.06, Malaysia 1.98 and Philippine 1.80. As Ior the non-debt tax shield,
being measured by depreciation expense over total assets, all countries have a ratio oI ranging
Irom 4 to 6 percent. As Ior the size, measured in natural logarithm oI revenue, all countries have
a means oI approximately 5.68 to 6.57, which translated into revenue oI approximately oI
USD300 to USD700 million. As Ior the country eIIect analysis (Table 2c) Ior the selected
ASEAN countries, measured by the private credit by deposit money banks to GDP, has a mean
oI 0.86, stock market size (STKMKT), measured by stock market capitalization to GDP, mean oI
0.86, GDP growth rate (GDPRATE) ranging Irom minimum 4 percent to 7.3 percent and annual
inIlation rate (INF) in annual growth percentage, ranging Irom 1 percent to 13 percent with mean
oI 4 percent. Next observing the outcome oI the regression analysis, Iirst the Iirm-speciIic
determinants oI capital structure on individual countries Iollowed by the Iirm-speciIic
determinants pooled Ior all countries including the country-speciIic are presented in the Table 3a
3c below. Table 3a: Firm SpeciIic Analysis oI Determinants oI Leverage Variables Malaysia
Indonesia Philippine Thailand Constant 0.60 ** (11.30) 0.35 ** (3.29) 0.72 ** (28.40) 0.78 **
(22.25) ProIitability -0.16 (-0.83) -0.67 ** (-4.20) -0.05 ** (-2.81) -0.48 ** (-4.18) Growth
opportunities -0.04 ** (-3.25) -0.01 (-1.33) -0.12 ** (-7.16) -0.08 ** (-7.94) Non-debt tax shield
-0.52 ** (-2.58) -0.13 (-0.50) -0.03 (-0.11) -0.19 (-0.79) Size -0.01 (-0.85) 0.03 * (2.09) 0.04 **
(6.40) -0.01 (-1.03) R-squared 0.24 0.45 0.76 0.57 Adj. R-squared 0.23 0.43 0.75 0.56 Note: (i)
Dependent variable is square root oI leverage ratio (ii) * denotes signiIicant at 5 level and **
denotes signiIicant at 1 level (iii) Parentheses is the t-statistic Table 3b: Country EIIects
Analysis oI Determinants oI Leverage Variable CoeIIicient t-Statistic CONSTANT 0.77 * 10.10
PROFIT -0.10 ** -2.51 GROWTH -0.05 * -7.63 NDTS -0.70 * -4.95 SIZE 0.01 1.14 BANK
0.06 1.38
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International Research Journal oI Finance and Economics - Issue 47 (2010) 37 STKMKT -0.10 *
-4.54 GDPRATE -2.29 * -2.69 INF -0.29 -0.66 R-squared 0.35 Adjusted R-squared 0.34 Note:
(i) Dependent variable is square root oI leverage ratio (ii) * denotes signiIicant at 5 level and
** denotes signiIicant at 1 level Table 3c: Summary oI Firm-speciIic Determinants
COUNTRIES LEVERAGE PROFIT GROWTH NDTS SIZE Malaysia 0.24 0.11 1.98 0.04 5.89
Indonesia 0.20 0.23 3.57 0.06 6.57 Philippine 0.28 0.31 1.80 0.06 5.94 Thailand 0.30 0.12 2.06
0.06 5.68 Note: PROFITProIitability, GROWTHGrowth opportunities, NDTS Non-debt tax
shield, SIZE Firm size Table 3d: Summary oI Country-speciIic Determinants DESCRIPTION
BANK STKMKT GDPRATE INF Mean 0.86 0.86 0.06 0.04 CoeIIicient 0.06 -0.10 -2.29 -0.29
Probability 0.17 0.00 0.01 0.51 Note: BANKBanking size, STKMKTStock market size,
GDPRATEGDP growth rate, INFInIlation rate First the Iirm speciIic determinants tabulated
in Table 3a above, the relationship between proIitability and leverage is Iound to be negative as
excepted Ior all countries; statistically signiIicant Ior Indonesia, Philippines and Thailand but
insigniIicant Ior Malaysia. The negative and signiIicant result is consistent with the predictions
oI the pecking order theory, showing that Iirms preIer to use internal sources oI Iunding when
proIits are high. In most previous studies (Rajan and Zingales, 1995; Booth et al. , 2001; De Jong
et al. , 2008), they report a signiIicant negative eIIect oI proIitability on leverage. Next looking at
the growth opportunities, it has a negative relationship with leverage and is statistically
signiIicant Ior all countries with the exception oI Indonesia. It is also consistent with Deesomsak
et al. (2002) except De Jong et al. (2008) who Iound a positive relationship with the Iour
countries. The negative relationship supports the predictions oI the agency theory that high
growth Iirms use less debt since they do not wish to expose themselves to possible restrictions
imposed by lenders. As Ior the non-debt tax shield, inverse relationship with leverage was Iound
Ior all Iirms in selected ASEAN countries. Only Malaysia Iirms show a statistically signiIicant
result on this variable and are consistent with previous study oI Deesomsak et al. (2004). This
negative association supports the tax-based model that suggests that the major beneIit oI using
debt Iinancing is corporate tax deduction. ThereIore, Iirms that have higher non-debt tax shields
are likely to use less debt. The relationship between size and leverage is ambiguous as Indonesia
and Philippine give positive correlation whereas Malaysia and Thailand yield negative
correlation. From the Table 3b, Indonesia and Philippine are Iound to have statistical
signiIicance results. In previous studies (Wiwattanakantang, 1999; Booth et al ., 2001; Pandey,
2002 and Prasad et al. , 2003), they did show similar signiIicant relationship with a positive
correlation. The trade-oII and agency theories suggest that larger Iirms tend to have better
borrowing capacity relative to smaller Iirms. Larger Iirms tend to be more diversiIied and Iail
less oIten, so size (computed as the logarithm oI revenue) may be an
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38 International Research Journal oI Finance and Economics - Issue 47 (2010) inverse proxy Ior
the probability oI bankruptcy. II so, size should have a positive impact on the supply oI debt. In
Table 3b, two country-speciIic determinants (STKMKT and GDPRATE) show statistically
signiIicant (at alpha one percent) relationship with leverage. Even though the R-squared is 35
percent, the F-statistic oI 50 indicating the Iour country-speciIic variables as group variables
signiIicantly inIluences the leverage. Bank size has insigniIicant relationship with leverage as
banks are more prudent in lending aIter the Iinancial crisis and this result is consistent with the
Iinding by Fan et al. (2006). As Ior the stock market development, it can provide alternative
source oI Iunding to Iirms other than borrowing Irom banks or bond market. Hence stock market
size does impact negatively with leverage. This Iinding is consistent with previous studies by
Deesomsak et al. (2004) and Song and Philippatos (2004). GDP growth rate variable yields a
negative impact on leverage and the coeIIicients are signiIicant at 1 level. In contrast to Booth
(2001), he Iound a positive correlation between real GDP growth rate and total debt ratio but
negatively with long-term market debt ratio in developing countries. However in Song and
Philippatos (2004) who study the OECD countries, the above relationship is negatively
correlated. This Iinding indicates that in countries with relatively higher rate oI economic
growth, Iirms are using lower levels oI debt to Iinance new investments. InIlation has yielded
insigniIicant relationship with leverage and hence no conclusion could be deduced Irom this
Iinding. As compared to the study by HomaiIa et al. (1994), they Iind a positive relationship
between leverage and inIlation as the real cost oI debt is reduced by the inIlation eIIect. In
contrast, the Iinding by Booth et al. , (2001) in analyzing capital structure in ten developing
countries has Iound insigniIicant relationship between leverage and inIlation and this Iinding is
consistent with the study by Fan et al. (2006) on thirty nine developed and developing countries.
5.0. Conclusion The discussion on the summary oI Iindings is subdivided into two subsections
comprising Iirm-speciIic and country-speciIic determinants. The leverage ratio Ior the selected
ASEAN countries was moderate, at the range Irom twenty to thirty percent oI total assets. In
summarizing the Iirm-speciIic determinants, Philippine Iirms have the highest return on asset,
Iollow by Indonesia, Thailand and Malaysia. As Ior the growth opportunities, Indonesia rank
highest comparing market to book value oI total assets and other three countries have
approximately 2 times market-to-book total assets. The non- debt tax shield (proxy is
depreciation charge) Ior all countries range Irom Iour to six percent oI total assets. As Ior the
size, all Iirms have averaged revenue oI USD300 to 700 million. The Iour countries yield
diIIerent results in term oI their coeIIicient and signiIicant level between the independent
variables (PROFIT, GROWTH, NDTS, SIZE) and dependent variable (LEVRATIO). As Ior the
proIitability (PROFIT), the inverse relationship with leverage is as expected but only statistically
signiIicant Ior Indonesia, Philippine and Thailand. This Iinding shows that higher proIitable
Iirms use less debt to Iinance their investment which means pecking order theory at work. Firms
will use hierarchy oI Iunds such as internal Iund, Iollow by debt and equity. For the growth
opportunities (GROWTH), a negative relationship with leverage is Iound Ior all countries and all
show statistically signiIicant results except Indonesia. This means that higher growth Iirms tend
to use less debt signalling agency costs theory (asset substitution eIIect) is an important theory in
developing countries. The trade-oII theory is also justiIiable in developing countries looking at
the non-debt tax shield (NDTS)'s negativity correlation with leverage. As non-debt tax shield has
the cost-beneIit eIIect on Iirms, higher non-debt tax shield will reduce the impact on debt. Lastly,
Iirm size (SIZE) has ambiguous relationship with leverage where two countries show positive
relationship (Indonesia and Philippine) and the other two show negative relationship (Malaysia
and Thailand) but only the Iormer show statistical signiIicant.
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International Research Journal oI Finance and Economics - Issue 47 (2010) 39 In analyzing the
country-speciIic determinants, the means oI banking size and stock market capitalization over
GDP are both 0.86 and the selected ASEAN countries are growing at 6 percent annually Ior Iive
years period. The average inIlation rate is at 4 percent. This study Iinds that the selected country
eIIect oI STKMKT and GDPRATE have statistical signiIicant relationship with leverage. Larger
banking size (BANK) has insigniIicant eIIect on leverage and stock market development as
alternative source oI Iunding to debt gives negative impact on leverage. The real GDP growth
rate (GDPRATE) has negative impact on leverage judging Irom the high correlation between
Iirms' growth and GDP growth rate. Due to the marginal diIIerential oI inIlation rate in selected
ASEAN countries, the inIlation eIIect in reducing the cost oI debt Ior the Iirm to borrow is at
negligible level, hence rendering inIlation (INF) as insigniIicant Iactor on leverage. Capital
structure remains an important and signiIicant issue Ior academicians and corporate managers.
This area has been researched by many prominent scholars, namely Modigliani and Miller,
Stewart Myers, Stephen Ross, Michael Jensen and William Meckling. However capital structure
has been studied extensively in the developed countries but only Iew researches Iocus on
developing countries. In this research, the main objective is to study capital structure in the
context oI selected ASEAN member states; Malaysia, Indonesia, Philippine and Thailand and to
determine the Iactors that inIluence capital structure. As a concluding remark, this research Iinds
that the Iactors that inIluence the developed and developing counties are almost similar and as
predicted by existing theories oI capital structure. However in acknowledging the inIluence oI
other pertinent Iactors like corporate governance, legal Iramework and institutional environment
oI the countries; capital structure decision is not only the product oI Iirm's own characteristics
but also the macroeconomics environment in which the Iirm operates. As direction Ior Iuture
research, researcher can assess the real impact oI Asian Iinancial crisis by examining pre- and
post-crisis period which will give indication oI any changes in capital structure decisions. In
addition, other important variables could be added besides the Iirm's characteristics like
corporate governance, legal Iramework and managers' risk behaviour (in disciple oI behaviour
Iinance). It will also be interesting to explore the diversity oI capital structure decisions in large,
medium and small listed companies