Capital structure and profitability across Malaysian listed firms

Abstract

This study seeks to investigate the effect of capital structure on the firm’s profitability by analyzing the effect between operating performance of Malaysian firms, measured by return on asset (ROA) with short-term debt to total debt (STDTD) and long-term debt to total debt (LTDTD). This study covers the eight major sectors in Malaysia equity market, which listed in Bursa Malaysia. 708 firms were identified as the sample firms and 14 years data from year 2001 to year 2014 used as observations for this study. A series of regression analysis executed for each model. The common effect regression model shows positive significant effect of STDTD on ROA and negative significant of LTDTD on ROA. However, the fixed effect analysis shows positive significant effect of LTDTD on ROA as the time is used as non-random variable. The findings are consistent with agency cost that capital structure affects the firm’s performance based on large sample size.