The agricultural sector has played an important role in social and economic development of Malaysia. In the early stages, planting food crops like rice, vegetables, fruits and fish and livestock activities has been providing food, creating employment opportunities and income for local residents. The establishment of Rubber Research Institute in 1926 had started the move to make Malaysia a major producer of natural rubber in the world for several centuries until the late 1980s, Mazwina (2010).
One of the main important factors of company's financial managers is making decisions about the appropriate combination of financial resources and determining the composition of capital structure which is the combination of stocks and bonds, Chadegani (2011). Generally, a mix of internal and external sources of financing is used by today's' corporate business organizations. Example of internal source would be the issuance of share through initial public offering (IPO) and debt would be the external source (Wahab A.R et. al. 2012). Management has to be more careful and alert to ensure that capital structure decision is maximizing firm value. Proper capital structure leads the firm to achieve the better performance and ensures it will sustain in the market.
The capital structure decision is at the center of many other decisions in the area of corporate finance. These include dividend policy, project financing, issue of long term securities, financing of mergers, buyouts and so on. One of the many objectives of a corporate financial manager is to ensure the lower cost of capital and thus maximize the wealth of shareholders. Capital structure is one of the effective tools of management to manage the cost of capital. An optimal capital structure is reached at a point where the cost of the capital is minimum (Prahalathan, 2010).
Debt and equity financing is one of the most important decision facing managers who need capital to fund their business operations. Debt and equity are two main sources of capital available to business, and each offers both advantages and disadvantages.Debt /equity ratio is a measure of a company's financial leverage. Debt/equity ratio is equal to long-term debt divided by common shareholder's equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company with a higher debt/equity ratio may be riskier, especially in times of rising interest rate, due to the additional interest that has to be paid out for the debt.
Capital structure determination is achieving an appropriate and desirable combination of equity and debts in a way that could maximize the firm value and reduce the cost of financing. The macroeconomic variables play significant role in the capital structure decisions, Gajurel (2006). The company can choose whether to use a large amount of debt or very little debt based on their preference and needs.
The question on how the companies choose their capital structure and what factors influence the corporate financing behavior is remain questionable. The determinants of capital structure on businesses have not been widely explored in the Malaysia context and in case of that, this study explores the plantation sectors in Malaysia, Mazwina (2010).
Problem Statement/Research Questions
The plantation sector is exposed by the market changes that make it very volatile. The demand and supply of the plantation sector are heavily determined by the demand and supply and lead to the substitution effect and speculation on commodities.
Two important issues that arise in this study consist of the investment a firm should consider and the second issue involves the firm's financing choices in order to obtain an optimal capital structure where shareholders wealth will be maximized. Therefore, there are several factors affecting the company's financial condition such as profitability, tangibility, growth opportunities, liquidity, and lastly size of firm.
Prior to 1997 financial crisis, Malaysian firm were highly leveraged because of the close relationship with local bank where bank-based borrowings were dominating the capital structure of the firm (Tam and Tan, 2007). Capital structures of most of Malaysian firm tend to debt financing as option of equity financing were less considered.
This study will examine the capital structure of plantation sectors in order to determine the practices of capital structure decision. As stated earlier, the capital structure is very important and become the crucial stage for corporate finance decision and in term of that, the study will be looking at the factors that determine the capital structure of plantation companies in Malaysia.
Research Objectives (Not more than three)
There should be a clear understanding of the study objectives to determine the appropriate sampling design and to evaluate the likelihood of achieving the desired information. There is a wide range of possible study objectives that can be served and the main objectives are:
To study and analyse the relationship between profitability, tangibility, growth opportunities, liquidity, size of firm with dependent variable which is leverage.
To identify the factors that determines of capital structure for plantation companies.
Scope of the study ( maximum1 page)
This study was conducted in Malaysia. The researcher wants to determine how the relationship between independent variables which are tangibility, profitability, opportunities growth, liquidity and size of firm will influences the dependent variable which is the determinant of capital structure for plantation industries in Malaysia. In this study, the researcher focused more on the leverage ratio in Malaysia. Hence, at the end of this result it will show either both independent and dependent variable is actually positive or negative relationship or both have a long term relationship or vice versa. All the data was gathered in yearly basis for the period of 2000 until 2011 which takes eleven years. The data for both variables was collected and gathered from one source which is from the system of DataStream. The data were analyzed in order to support the findings using Panel Data and the result made must be efficient and effective for this research paper.
Significance of the study ( maximum1page)
Financial Manager
This study is significant to company's financial manager to determine the decision of capital structure for their company. Financial manager may use this research as a guideline to determine the factor that can be maximizing company profit.
Investor
This study is significant to an investor interested in learning about the capital structure for plantation industries in Malaysia. From this study the investor will get an idea about the performance of a certain company as given below:
To get an information to the investor about the company performance in Malaysia about their management.
To provide a good decision making to invest at certain company.
Researcher
Researcher is the person that done a systematic investigation process to increased or revised the current knowledge by discovering the new fact. This study is done so that it can help the other researcher in the future who wanted to do and to expand the research on this issue to obtain the additional information about the topic.
Limitation of the study ( maximum1pages)
When doing research there are lots of limitation and constraints. Researcher usually might face this situation upon completion their research study. Thus, the limitation and constraints face by the researcher to complete this study are:
Lack of Experience and Knowledge
The researcher has lack of experience and knowledge in conducting the research. It is because this research paper is the first time for the researcher to do in order to complete the researcher studies. Consequences from that, it limits the researcher's knowledge and skill to be applied while conducting this study. Besides that, the researcher strongly depends on their advisors as guidance to complete the research study according to schedule given. Otherwise, the previous research paper from previous researcher also helps to complete this study.
Accuracy of the Data
The data that researcher collect is from secondary data which is data that collect from others sources. Since my research is on monthly basis, it hard to find all data in monthly basis. All the variables I found in monthly basis, but for income the researcher find in yearly. However, due to unavailability and insufficiency of data and time, the researcher need to drop the more observation since not data is available match to others variables.
Operational definitions (Five Keywords)
1.6.1 Capital Structure
Conventional external sources of funding businesses can generally be classified under two broad headings - equity (which is commonly called as ordinary capital) and debt. Equity refers to a right to participate in the business and equity holders are considered as owners of the business. They are expected to contribute money, which would be repaid to them only at the winding up of the business, in case the business has some surplus. They would be given dividends if the business generates profits. Debt refers to borrowings made by the business from outsiders who are paid a periodic interest on the money rendered (Madan Kartini, 2001).
1.6.2 Tangibility
Assets that have a physical form. Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory. The opposite of a tangible asset is an intangible asset. Nonphysical assets, such as patents, trademarks, copyrights, goodwill and brand recognition, are all examples of intangible assets. (investopedia.com, 2012)
1.6.3 Profitability
Business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. (investopedia.com, 2012)
1.6.4 Growth Opportunities
Any firm whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders, opting instead to plow most or all of its profits back into its expanding business. (investopedia.com, 2012)
1.6.5 Liquidity
Easy convertibility into cash. A liquid asset or security can be easily bought or sold with little or no impact on price. Most methods of counting money supply include some highly liquid investments such as certificates of deposit. Liquid assets and investments are highly desirable as they may be sold to allow an investor to enter other investments as they arise. On exchanges, liquid investments usually have low bid-ask spreads. (financial-dictionary, 2012)
1.6.6 Size of Firm
In this study, size of firm will be measured by total asset of the company. Asset is the value owned by the firm in terms of tangible and intangible asset. Asset also something valuable that can be converted into cash. Total asset can be shown in balance sheet of bank's report. Intangible asset is something that can be seen and touch which is act as physical form likes building and equipment as fix asset, cash as current asset. Otherwise, intangible asset is some of value that beneficial for the bank in market likes pattern and goodwill. Large of asset beneficial for bank in aspect of financial services offered and funds mobilized from the bank in order attract the customer. According Rajan and Zingales (1995) said that large firm will be employ higher amount of debt compared to small firms. This statement has also been supported by other study like Abor J. and Biekpe N. (2009), said that smaller firm tend to use less long term debt and more to use short term debt due to shareholder-lender conflict.
Literature Review (Contains all variables - maximum 5 pages)
2.2 INDEPENDENT VARIABLE
2.2.1 Tangibility
Tangible assets are assets that can be touch, smell, see, taste and hear using our five senses. Assets having a physical existence, such as cash, equipment, and real estate, accounts receivable are also usually considered tangible assets for accounting purposes. The opposite of a tangible asset is an intangible asset for example patents, trademarks, copyrights, goodwill and brand recognition. For tangible assets using more than one year, a company uses a process called depreciation to allocate part of the asset's expense to each year of its useful life, instead of allocating the entire expense to the year in which the asset is purchased. For example land, if they purchase that land and using that land for more than one year, the depreciation will be deduct for the land. Tangible assets for property industries are for example land, they can use that land for multipurpose. They can use that land for rent or sell it at the higher price at the future.
Booth et al. (2001) strongly believe that the more tangible the firm`s assets, the greater its ability to issue secured debt. Plantation industries prefer to make debt because they have more secured collateral to paid loan if default payment. The bank most prefers to give loan to industries that have more tangible assets because it is secured debt. Having the incentive of getting debt at lower interest rate, a firm with higher percentage of fixed asset is expected to borrow more as compared to a firm whose cost of borrowing is higher because of having less fixed assets.
Firm that have more tangible asset should use more debt since it can be used it as a collateral. Besides that, intangible assets for example trademarks, contracts and patented technology not only cannot be used as collateral, it also tends to devaluate when financial distress occurs, Wahab A.R et. al.(2012). Meanings that plantation industries have more tangible assets compare to intangible assets, the firm will prefer to do debt because it is easily to get fund compare to using equity. The firm has secured collateral to do debt. But using more debt has disadvantages which is bankruptcy cost and agency cost.
According Munshi (1990) said that the positive sign of tangibility is due to the fact that assets in place are financed with debt while the negative sign of growth is because growth opportunities are financed with equities. This is agreed by Ozkan (2001) who contends that firm with relatively large proportion of intangible assets cannot support debt.
More tangible asset will be a secured debt. It also will reduce debt agency cost. This is because more tangible assets will be secured debt as collateralized. If default payment exists, the company will use their tangible asset to pay their payment. The debtor will did not have to worried since they can take their assets of the default payment exists.
In order to estimate tangibility, we use ratio of fixed assets over total assets. This is done by study of Han-Suck Song (2005).
2.2.2 Profitability
Nowadays, Malaysia`s economy condition become more greater and sustainable because of the many mega project develop by government. For example Iskandar Region at Johore Bharu, many FDI like to invest at there because it may have potential to generate more profit because of the strategic place that is middle from Malaysia and Singapore. So that, the investor most prefers to invest at Iskandar Region. As a result, the price of land becomes more expensive. So that people will prefer to buy land at that area and try to make profit from buy and sell land.
According Jensen (1986) strongly believes that there is a positive relationship between profitability and financial leverage of the market for corporate control is effective because debt reduces the free cash flow generated by profitability. As a result the company will use more debt compare to equity. The research is agreed by Ooi (1990) said that a profitable company will employ more debt since they are more likely to have a higher tax burden and low bankruptcy risk.Um (2001) said that a firm that have high profit level gives rise to higher debt to accompanying tax shields. High profitability of a company will lead to use debt and thus provides the benefit of tax shields on interest payment. More debt the company will get more tax shields, meaning that they will pay less tax.
But, Bevan and Danbolt (2002) strongly believe that high profitable company should use less debt since high level of profit provides high level of internal fund. Company prefers to use internal sources of fund such as retained earnings. Then company will choose external sources such as debt and lastly will issue new equity to new investor if external sources of financing are really required. This is agreed by Myers and Majluf 1984 said that higher profitability of the firm will choose to have high internal financing compare to debt. So that the relationship between leverage and profitability is negative.
Here, we use the ratio of earnings before interest and taxes (EBIT) to total assets as measure profitability. This measure is used by Mira (2005).
2.2.3 Growth Opportunities
An investment or project that has the potential to grow significantly, leading to a profit for the investor. Is it growth opportunities will be a factor to the determinant of capital structure for plantation industries? Company that is well established will use more debt or equity for their fund. The growth of a company will can be measured by financial ratio of the company. The manager of a company is important to manage a company to be well growth for successes their goal. Deesomsak et al (2004) found that growth opportunities have a negative effect on leverage. Berretta (2008) said that the firm that with low growth opportunities lead to use less debt compare to internal funding.
Um (2001) state that growing company will actively seeking for investment opportunities and to finance the investment, the company needed more funds to insufficient retained earnings to cover the cost of the investment. Meaning that, the company that well establishes using more external fund to financing their fund needed. So that the theory suggests a positive relationship between leverage and growth. Firm with high growth and large size would tend in debt financing (Chen, 2004).
The larger the firm, the higher the risk and the higher the growth opportunity, and the more likely the outside shareholders will hold the ownership which finally leads to a higher debt level.
2.2.4 Size of Firm
Size is also considered as an important characteristic of a firm in plantation industries. The larger a firm is, more needs have to be diversified and thus is the reasons for the firm to apply more debt in funding their company. Size of firm is a good explanatory variable for leverage ratio. This statement agreed by Antoniou et al, (2002).
According Deesomsak et al (2004) firm size has a positive effect on leverage. This also agreed by Chikolwa (2009). Large firm tend to hold more debt in Bevan and Danbolt (2002) study, because they regarded as being 'too big to fail' and therefore receive better access to capital market. Um (2001) agreed that large firm will use more debt than smaller firm because large firm the monitoring cost is lower compare small firm. By contrast, according Suhaila and Wan Mahmood (2008) said that the larger firms less dependent on debt compare to smaller firm. Meaning that the largest of the firm will prefer to use internal financing compare to debt.
In order to measure size of firm, we use sales over total assets that had been done by I.M Pandey in their study.
2.2.5 Liquidity
Liquidity indicates the ability firm to pay creditors in short term obligation (Manos et al., 2007).
According Manis, Murinde and Green (2007) agreed that liquidity ratio reflects firms' ability to pay debt. Meaning that, it is negative relationship between liquidity and leverage. The firm tends to use the extra cash to finance their investment instead of incurring interest cost, Deesomsak, Paudyak and Pescetto (2004). Additional debt would make the firm's financial standing weak (Eriotis et al., 2007).
According Deesomsak et. al (2004) in order to measure liquidity they use current assets over current liabilities. This also agreed by Manos et. al (2007) in their study.
Research Methods: (Elaborate on Research Methodology, Research design, Sampling techniques and Analytical procedures, also include research framework - with explanation)
This section provides information about the source of data, sample size, measurement of the variables, hypotheses formulation and model selection and discussion of different measures of the variables.
3.0 INTRODUCTION
Research can be defined as scientifically and methodically in order to provide information for solving the problems. Research can be divided into two categories which is basic and applied research. In applied research, the researcher attempts to solve a known problem and find answers to a specific question. However, understanding the process and methods used for both applied and basic research are important in order to interpret the research results. Encyclopedia business (2011).The objective of this research is actually to analyze either the explanatory variables which are tangibility, profitability, growth opportunities, liquidity, and size of firm has a positive or negative relationship with dependent variables which is laverage ratio. Therefore, the researcher will used an applied research in order to find the answers. The discussion of this chapter will begin with types of data, data collection method, data analysis and data processing.
3.1 TYPES OF DATA
Types of data that used for this research can be primary or secondary data. . Primary data is originated by the researcher for the specific purpose of addressing the research problems. While secondary data is the information which already exists and that have been collected for purposes other than the problem at hand (Uma Sekaran, 2003).
In this research, the researchers have decided to use secondary data that collected from secondary sources. Secondary sources are research reports that use primary data to solve research problems and the information usually it is gathered by researchers in the recorded books, articles, and other publications. In other words, the data is gathered from the existing sources (Uma Sekaran, 2003).
For this research, researcher chooses to investigate the determinant of capital structure for plantation industries from financial perspective. Both quantitative and qualitative will be used for this research. The quantitative data is used for the purpose to analyze the data. While qualitative data will be used to interpret the result gathered. The researcher decided to support the findings and get the relevance data through the DataStream and previous thesis from previous researcher in UiTM libraries, articles, books, magazines, newspapers and internet.
3.3.2 - DATA RETRIEVAL
Laverage Ratio
The laverage ratio is the dependent variable of this study. It shows the total of liabilities over assets. The data is retrieved from secondary sources, industrial balance sheet of the company at datastream database. The sample consists of 16 plantation companies from year 2000 until 2011.
Tangibility (Iv1)
The data on tangibility is retrieved from industrial balance sheet of the company from datastream. It is valued in times. This is measured by fixed assets over total assets. The total is in times.
Profitability (Iv2)
The data for profitability is retrieved from income statement and balance sheet from datastream. It is measured by earnings before interest and tax (EBIT) over total assets.
Growth Opportunities (Iv3)
The data on growth opportunities is measured by sale and it is retrieved from datastream. It is valued in times. It shows the higher change in sale, the higher the growth of company. Thus, the sample consists of 16 plantation industries companies from year 2000 until 2011.
Liquidity (Iv4)
The data for liquidity is retrieved from datastream for the period of 2000 to 2012. The higher liquidity, the company able to pay short term obligation. It is measured by current assets over current liabilities.
Size of Firm (Iv5)
Size of firm is measured by sales over total assets which is retrieve from datastream database.
3.3 RESEARCH DESIGN
The expression for the capital structure is obtained from the model is then studied empirically using a panel of selected Malaysian Plantation Industruies. The data for this purpose is technically collected from Datastream. The data collected is in yearly basis which is based on the 2000 - 2011 period, consists of one (1) dependent variable and four (5) independent variables. The data then converted into natural logarithm values, with intention that the estimated coefficients can be interpreted as elasticity. The log-log equation is as follows:
ln(Laveragei,t) = α + β1 ln(Tangibilityi,t) + β2 ln(Profitabilityi,t) + β3 ln(Growthi,t) + β4 ln(Liquidityi,t) + β3 ln(Size Firmi,t) + εi,t
(Equation 1)
Where:
Laverage
=
Laverage
Tangibility
=
Tangibility
Profitability
=
Profitability
Growth
Size Firm
=
=
Growth Opportunities
Size of Firm
α
=
Constant Value
β
=
Coefficient Value
Ô‘
=
Random Error Term
Table 1 : Determinant of Capital Structure
Leverage
Total Liabilities
Total Assets
Haris and Riviv (1991)
Tangibility
Fixed Assets
Total Assets
Han-Suck Song (2005)
Profitability
EBIT
Total Assets
Mira (2005)
Growth Opportunities
Sales
Buvanendra S. (2010)
Liquidity
Current Assets
Current Liabilities
Deesomsak et. al (2004)
Manas et. al (2007)
Size of Firm
Sales
Total Assets
I. M Pandey
3.4 SAMPLING DESIGN
In this study, researcher choose to adopt a non-probability sampling as the selection process that requires some form of researcher judgement to meet the specific requirements.The data gathered for the study were secondary data. The details of the collection procedure are explained as follows; First, the process of identifying the companies that participated in plantation activities between years 2000 and 2011 was carefully carried out. To determine this, the announcement dates were used as the basis.
3.5 DATA ANALYSIS TECHNIQUE
Data administrative and analysis will describe the strategy that the researchers intend to use in analyzing data that had been collected. It is to make much simpler to the researcher. There are many activities that should be undertaken at this stage. There are editing, sorting, coding, data entry, data verification and data transformation. The process of data analysis used after all the data was obtained from the some resources that are based on the realistic and actual data, such as Datastream. After that, the data has been test by using STATA software provided by the faculty.
3.6 THEORETICAL FRAMEWORK
INDEPENDENT VARIABLES DEPENDENT VARIABLE
Figure 3.1: Theoretical Framework
Based on the figure above, it shows the theoretical framework diagram for determinant of capital structure for plantation industries. The elements for this study are asset tangibility, profitability, opportunities growth, liquidity and size od firm. It is necessary to distinguish clearly between the terms of dependent variable and independent variables in order to fulfill this research. Dependent variable is a characteristic that change when researcher implement the independent variables. While, independent variables is a concept that hypotheses or believed to cause, influence or lead to variation in the dependent variables
3.7 HYPOTHESIS
Based the result of the STATA, there are four hypotheses that can be conclude, where (Ho) is a null hypothesis to be tested and (H1) is an alternate hypothesis. The hypotheses for this study are following:
Model Hypothesis.
Ho: There is no significant relationship between leverage and all the independent variable.
H1: There is a least one independent variable has significant relationship with dependent variable.
Hypothesis 1
Ho: There is no significant relationship between the leverage and tangibility.
H1: There is a significant relationship between the leverage and tangibility.
Hypothesis 2
Ho: There is no significant relationship between the leverage and profitability.
H1: There is a significant relationship between the leverage and profitability.
Hypothesis 3
Ho: There is no significant relationship between the leverage and growth opportunities.
H1: There is a significant relationship between the leverage and growth opportunities.
Hypothesis 4
Ho: There is no significant relationship between the leverage and liquidity.
H1: There is a significant relationship between the leverage and liquidity.
Hypothesis 5
Ho : There is no significant relationship between the leverage and size of firm.
H1: There is a significant relationship between the leverage and size of firm.
3.8 DATA ANALYSIS AND ADMINISTRATION
3.8.1 Pooled Ordinary Least Square Model
Pooled Ordinary Least Square Model (POLS) is employed in this research to examine the simultaneous effects of several independent variables on a dependent variable that is interval scale. It is the basic approach employed in estimating the panel data. According to Kiyung (2010), the model is based on assumption that both the intercept and coefficient for each individual are constant across cross-sectional individuals in the POLS equation.
3.8.2 Random Effect Model
Random Effect Model (REM) known as variance components model is also employed in this study. In REM, it is assumed that the dataset being analyzed consists of a hierarchy of different populations whose differences relate to that hierarchy. It is used when one assumes that there are no fixed effects. REM occurs when the individual-level effect is uncorrelated with the regressors (Wikipedia, 2009).
3.8.3 Fixed Effect Model
Fixed Effect Model (FEM) is different with REM in which either all or some of the explanatory variables are treated as if they arise from the random FEM represents the observed quantities in terms of explanatory variables that are all treated as non-random. FEM occurs when the individual-level effect is correlated with regressors (Wikipedia, 2009).
3.8.4 Breusch and Pagan Multiplier Test
The test statistics of Breusch and Pagan Multiplier is conducted in order to choose between the POLS and REM. Based on the p-value of chi2, the data will be analyzed by using POLS if the null hypothesis cannot be rejected, but REM will be used if the null hypothesis is rejected.
3.8.5 Hausman Fixed Test
Another stage is to compare between REM and FEM by using Hausman Fixed Test. REM is selected with the extension of the GLS-Two Way Estimation if the null hypothesis fails to be rejected. If the null hypothesis is well rejected, FEM will be selected to analyze the data with the extension of FEM-Two-Way Estimation, with extension of variable year.
