Determinants of capital structure in small and medium sized enterprises in Malaysia

Abstract

This study aims to investigate the determinants of capital structure in small and medium-sized enterprises (SMEs) in Malaysia and their effect on firms’ performance. The study addresses the following primary question: What are the factors that influence the capital structure of SMEs in Malaysia? The sample of this research is SMEs in the east coast region of Malaysia. Adopting a positivist paradigm, the research design includes a preliminary study comprising 25 interviews with the owner-managers of SMEs, which is analysed using thematic analysis. The results are used to finalise the conceptual framework for the main study, which takes the form of a self-completion questionnaire survey. Usable responses were received from 384 firms, giving a response rate of 75.3%. The survey data is analysed using a series of binomial logistic regression models. Results reveal that there was no indication for the impact of owner’s education and experience on capital structure decisions. Other owner-related factors, firm characteristics, management performance and environment were found to relate to all types of capital structure. Both complete and partial mediating effects are also discovered in this study. The results provide evidence to support the pecking order hypothesis (Myers, 1984; Myers and Majluf, 1984), agency theory (Jensen and Meckling, 1976) and culture model of Schwartz (1994). It appeared that owner-managers in Malaysia do not strive to adjust their capital structure towards some optimal debt ratio, which is contrary to the static trade-off theory (DeAngelo and Masulis, 1980) of capital structure. This study makes several important contributions to the existing studies of capital structure. This research led to the development of a model of capital structure determinants by integrating factors related to owner-managers, firms, culture, and environment. This study incorporates methodological triangulation that may mitigate the problem of the difficulties in accessing financial data of SMEs in Malaysia. This study also provides meaningful insight into the financing preferences of the owner-managers with relevant implementations to academics, business practitioners, financial providers and policymakers. The research findings should assist owner-managers in making optimal capital structure decisions as well as help the policymaker in making an appropriate policy on the financing.