This chapter we will discuss the review of literature which is based on previous researchers. We will give a clear indication on what we found in the result from all journals and articles we had used. Other than that, the theoretical framework, actual framework and hypothesis will be written in order to examine the relationship between the dependent variable (firm's performance) and independent variables (debt, dividend, size, profitability, tangibility, large depreciation and customer service.)
2.1 Review of Literature
2.1.1 Firm's Performance & Debt
Based on Zaher (2010), there is a result that investments in their portfolio of leveraged firms over short and long periods tend to generate lower returns than investment in portfolio of debt free firms. However, Ismiyanti and Mahadwartha (2008) found that Debt-Constraint Expropriation (DCE) and Debt- Facilitate Expropriation (DFE) is the base of the relationship of debt to firm performance. Besides, relationship between firm performance and debt also can be determined by using the empirical relationships that estimates in each condition of group-affiliate and no group-affiliate firms. However, the authors also argue that governance mechanisms can reduce default risk van be reduce by governance mechanisms. So that, corporate governance plays a significant role on shareholders, and debt holders protection, because governance can modifying agency cost, monitoring managerial performance and reduce information irregularity between the firm and the lenders. Furthermore, Cavanaugh and Garen (1997) stated that the asset-specific investments will straightly cause the firm to hold less debt because the specific assets do not have much value as collateral. Besides that, they also expect the effect of specificity on debt will becomes more positive or less negative as union power grows. According to Aivazian, Ge and Qiu (2005), a higher percentage of long-term debt in total debt will significantly decrease the firm's investment to have high growth chances. On the contrary, the correlation between debt maturity and investment is not significant for firms with low growth opportunities. Base on Forbes (2002), found that higher debt ratio's firm tend to have lower net income growth, but there is no robust relationship between other performance variables and debt exposure. Continue with Yu , Pennathur and Hsieh (2002) also study about documents public debt issuance influences the interrelationships between banking relationships and firm profitability. Next, Yu, et al. (2002) found that public debt issuance plays a significantly negative role in determining the impact of banking relationships on firm profitability. Last but not the least, Yu, et al. (2002) research's result show that firm profitability negatively affected by public debt. According to Martani, Mulyono, and Khairurizka, (2009), the debt to equity ratio has positive correlation with stock return but not statistically significant. These indicate that a firm's capital structure can represent by the debt to equity ratio. The firm which uses debt financing aggressively will having a high debt to equity ratio. The firms can earn profits when the fund can be used to support long term growth because the increase in debt will increase the value of the company.
2.1.2 Firm's Performance & Dividend
The relationship between dividend and firm performance is complicated. According to Fairchild (2010), dividend will affect the firm's ability to invest in a new project and it provide confusing signal to investors. When dividend increased, there would be a negative signal because the firm is lacking of growth opportunities. However, when dividend has been cut down, there would be a positive signal as the firm has significant growth opportunities. According to According to Tian, Zhang and Cao (2006), the relationship between dividend and firm performance is positive and significant. By using the model supported, they found that the coefficient of rate of dividend changed per share is positive in the years following performance announcement. The coefficients are 0.1298 and 0.0575 respectively. The results show that dividend changes are more strongly related with current and past performance. The market value of the firms has a negative relationship with dividend policy and firm's size but positively related to the dividend pay-out ratio leverage and also growth (Amidu, 2007). MarkE.Holder,Langrehr, and exter (1998) have investigates the relationship between the dividend-policy decisions and investment decisions of a firm which will influence the firm value. Other than that, Amidu (2007) also study the identification of how dividend policy affects performance of firms listed on the Ghana Stock exchange. The results show positive relationships between dividend policy, return on assets and growth in sales, moreover their study also supports the second school of thought that dividend policy is relevant to the firm's performance (Amidu 2007). According to R.Azhagaiah and Priya.N, (2008), the higher dividend will increase the share value in market. There are five variables that will influence the wealth of the shareholders, such as Growth in Sales, Improvement of Profit Margin, Capital Investment Decisions (both working capital and fixed capital), Capital Structure Decisions, and Cost of Capital (Dividend on Equity, Interest on Debt). There is significant impact of dividend policy on shareholders' wealth in Organic Chemical Companies in India, so the dividend is an important factor to determines the shareholder's wealth which the shareholders preferred current dividend to future income.
2.1.3 Firm's Performance & Size
Rajan and Zingales (1995) had revealed that large firms have less debt than small firms in Germany. Therefore, large firms should borrow more because they are more diversified and lesser risk of the firm will get into bankrupt. These results suggest a positive relationship between firm size and firm performance. However, the problem of information asymmetry is less severe for large firms, so the packing order theory suggests a negative relationship between firm size and debt ratio. According to Firm's size is an important determinant of firm's performance, so that Onaolapo and Kajola (2010) found that there is positive relationship between firm size and firm performance. From the testing by using 30 out of 121 non-financial firms listed on the Nigeria Stock Exchange (NSE) that use to measure the size of the market in the test, the authors found that there is positive relationship between firm size and firm performance. Besides, Kajola (2008) also found that there is positive relationship between firm performance and board size. Pagano and Schivardi (2003) showed that there is positive relationship between the average firm size and productivity growth or growth of the firm performance. They also conclude a measure of the average firm size and found that differences in the size distribution within sectors will play an important role by explaining cross-country differences in average firm size. Besides that, Pagano and Schivardi also stated the positive correlation between size and growth. The larger firms grow slower compare to the small firms which are the most dynamic component of the industry. According to Forbes (2002), larger firms normally have worse performance compare to smaller firms, although the significance of this result fluctuates across other specifications. Moreover, Beck, Kunt, & Maksimovic (2005) also have study whether small, medium-sized, and large firms are constrained differently in countries with different levels of financial and institutional development. Lastly, base on Beck, et al. (2005) result shows that the small firms that stand to benefit the most from improvements in firm performance and get less corruption. Gomes, Kruglianskas and Scherer (2009) have stated that the differences are not significant in the performance when compared the large and small firms. Only a significant difference have been shown when compare the small firms with the large firms is the cost reduction due to technological innovations to the process, while suggests that large firms are innovating significantly more in processes, which is consistent with the literature.
2.1.4 Firm's Performance & Profitability
Rajan and Zingales (1995) had continued to reveal that profitability has negative relationship with firm performance. Based on their study, when the debt financing is the dominant mode of external financing but investments and dividends are fixed in the short term, then the changes in firm performance will be negatively correlated with the changes in profitability. Zhang (2011) found that the relationship between firm performance and profitability are negative, or not significantly. The author test the profitability impact of information systems (IS) support for product innovation at the firm level by using survey and archival data. The result of standard deviations and zero-order correlations from the test shows there is not significantly between profitability and performance. IS support for product innovation was negatively related to profitability and firm performance when complementarily from firm specific information and knowledge was low. Due to Mueller (1977, 1986), found that to gain relatively high profits it should not overly problematic that some firms at a point in time because competition should make sure that such high profitability is a transitory, and not a persistent, phenomenon. From Hagedoorn and Schakenraad (1994) point of view stated that horizontal strategic alliances have no significant overall impact on partner firms' profitability gains. However, Oum, Park, Kim, and Yu (2004) have found that alliance is an important factor in define the extent of alliance impact on the firm performance and conclude that have a significant and positive impact on profitability when they involve in high level cooperation. Cho and Pucik (2011) have examined the relationship between innovativeness, quality, growth, profitability, and market value at the firm level. According to Martani, Mulyono, and Khairurizka, (2009) the variables which are consistently significant on adjusted return and abnormal return to the firm are profitability ratios, total assets turnover, and market value ratio. When making decision on investment, the investors' point of view financial ratios are very useful.
Besides that, Firer and Stainbank, (2003) indicate that intellectual capital performance is the only positive predictor of a company's performance in terms of profitability. This because when a company's performance measure by using the return on assets, there was a positive relationship between intellectual capital performance and a company's performance. From research of Yu-ShanChen and Ke-ChiunChang, (2009) there is positive relationship between proï¬tability of the US pharmaceutical companies and their patent citations. This means that high profitability ratio of companies' in the US pharmaceutical industry can increase their innovation performance. Therefore, US pharmaceutical companies should raise their proï¬tability so that they can invest more R&D resources to increase their innovation performance.
2.1.5 Firm's Performance & Tangibility
According to Myers and Majluf (1984) state that selling secured debt will benefit for firms because there are some risks related with issuing securities about which firm's managers have better information than other shareholders. Furthermore, suggestion of this finding is positive relationship between tangibility and firm performance because mostly lenders need hold some collateral before issuing debt therefore firms holding assets can take advantage of this opportunity. By using financial statements of 30 out of 121 non-financial listed companies on the NSE from 2001-2007, Onaolapo and Kajola (2010) found that there is negative correlated between firm performances with 1% asset tangibility. It provides relevant evidence that the sampled firms did not arrangement their asset carefully to control their firm performance. According to Chiu, Lai, Lee, and Liaw (2008) have revealed that the different specialized complementary assets have different moderating effect on the relationship between the technological diversification and performance and thus conclude that by maintaining the relationship will help the firms generate competitive advantage. Kochha (1997) discovered that firms are likely will increased costs and decreased firm performance if they do not get suitable governance structures in their transactions with potential suppliers of fund (Strategic asset). Performance differences observed across firms are likely to be a function of the heterogeneity in strategic assets controlled, as well as the capability to deploy resources (Kochha 1997). According to Lozano, Fuentes, & Lozano, (2006) have found that new established company and small companies with a minimal existence of tangible assets are experience greater financing problems. This because their principal source of value is the presence of assets that are difficult to value. So the price of the shares which is a variable has an influence on the debt power of the company and on its value in the market.
2.1.6 Firm's Performance & Large Depreciation
Base on Forbes (2002), have found that firms with more foreign sales exposure have significantly better firm performance after the depreciations. Framework in the Forbes (2002) is first it examines the impact of depreciations on more companies from a range of industries. Second, it also tested about the wider range of effects of depreciations on firm performance. According to Forbes (2002) firms in depreciating countries tend to have significantly lower growth in net income(decrease firm value) and firms in depreciating countries also tend to display worse performance during the year of the depreciation when performance is measured in U.S. dollars. Firms with lower capital ratios are expected to have relatively better performance after depreciations than firms with higher capital ratios (Forbes 2002). From the result by using a sample of 13,500 companies from the world to do the test how 12 major depreciations between 1997 and 2000 affected firm performance, it recommend that in the year after depreciation have significantly higher growth in market capitalization (Forbes, 2002). Author found depreciation increase the present value of firms' expected future profits, so this cause the higher growth in market capitalization in the year after depreciation.
2.1.7 Firm's Performance & Customer Satisfaction
In order to test the relationship between customer satisfaction and firm performance, Anderson, Fornell and Rust (1997) build a database matching customer-based measures of firm performance with traditional measures of business performance, such as productivity and Return on Investment from annual reports and business information services. The result shows that the relationship between customer coefficient and ROI is positive and significant at 0.09. The interaction between customer satisfaction and productivity is found to be positive and significant for goods at 1.45. In Gupt and Zeitham (2006) research, they integrate existing knowledge and research about the impact of customer metrics (customer satisfaction) on firm performance. Beside that, Gupt and Zeitham (2006) also investigate both unobservable or perceptual customer metrics (customer satisfaction) and observable or behaviour metrics (customer retention and lifetime value) on firm performance. Firms must demonstrate the link with customer behaviour to understand customer better, create customer satisfaction, to have better firm's financial performance (Gupt and Zeitham 2006). According to Leo, Gani, and Jermias.(2009) stated that the customer satisfaction is affects the firm profitability in the terms of return on assets and market values of shares. While Ittner and Larcker (1998) showed that the firm value will have positively and significantly affects firm value even though the market does not response to the publication of the customer's satisfaction index.
2.1.8 Firm's Performance &Information Technology
There is significant and positive correlation between information technology (IT) and firm performance (Harris and Katz, 1991; Newman and Kozar, 1994; Mukhopadhyay, Kekre and Kalathuret, 1995). However, Davern and Kaffman (2000) have not been able to find such relationship. Keramati (2007) shows that IT strongly and positively affects on firm performance with apply Canonical Correlation Analysis (CCA) to study the relationship between IT usage and firm performance. Dasgupta, Sarkis and Talluri (1999) conclude that there is a negative relationship between the IT investments on the firm performance in the manufacturing and service firms. Besides that, as a rational manager, he will not invest any money on the IT, unless he planned and think properly that the IT investment will provide them with positive return for their firm. Bharadwaj, Bharadwaj and Konsynski (1999) had revealed that a firm future performance will affected by the IT investments and concluded that had a positive relationship, which can be captured by forward-looking the firms performance measure such as q.
2.2 Review of Relevant Theoretical Model
There are few variables will influence firm performance. For example, dividend, debt, tangibility, size of the company and profitability. The model is just as below;
Public listed consumer product's company
Y = α + β1X1 + β2X2 + β3X3 + β4X4 + β5X5
Y = Firm's Performance
X1= Dividend
X2 = Debt
X3 = Tangibility
X4 = Size
X5 = Profitability
2.2.1 Trade off theory
2.3 Actual Conceptual Framework
Independent Variables
Proposed Theoretical / Conceptual Framework
Independent Variables
2.4 Hypothesis of study
a) Debt influence the firm's performance in consumer product sector
H0: Debt will not influence the firm's performance in consumer product sector
H1: Debt will influence the firm's performance in consumer product sector
Result: Reject H0. There is a significant relationship between firm's performance in consumer product sector and debt.
b) Dividend influence the firm's performance in consumer product sector
H0: Dividend will influence the firm's performance in consumer product sector
H1: Dividend will not influence the firm's performance in consumer product sector
Result: Reject H0. There is a significant relationship between firm's performance in consumer product sector and dividend.
c) Size influence the firm's performance in consumer product sector
H0: Size will influence the firm's performance in consumer product sector
H1: Size will not influence the firm's performance in consumer product sector
Result: Reject H0. There is a significant relationship between firm's performance in consumer product sector and size
d) Profitability influence the firm's performance in consumer product sector
H0: Profitability will influence the firm's performance in consumer product sector
H1: Profitability will not influence the firm's performance in consumer product sector
Result: Reject H0. There is a significant relationship between firm's performance in consumer product sector and profitability.
e) Tangibility influence the firm's performance in consumer product sector
H0: Tangibility will influence the firm's performance in consumer product sector
H1: Tangibility will not influence the firm's performance in consumer product sector
Result: Reject H0. There is a significant relationship between firm's performance in consumer product sector and tangibility.
2.5 Conclusion
The objective of study in this chapter is to determined factors that will affect the firm's performance in consumer product industry of public listed company in Malaysia. Since many previous researchers have done the research that is match and useful to our research for some of the certain variables, therefore it provides many useful information and guide to our study. By the way, we will discuss these information in the further chapter.
