Leverage And Firm Performance: Evidence From Listed Shari'ah-Compliant Companies On Bursa Malaysia
The choice of debt-equity structure is very crucial in corporate financing policies. The capital markets are an important part of the today’s financial system. Shari’ah-compliant companies represent major part of the capital market in Malaysia, representing an average of 35% and 56% of the Malaysian...
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| Summary: | The choice of debt-equity structure is very crucial in corporate financing policies. The capital markets are an important part of the today’s financial system. Shari’ah-compliant companies represent major part of the capital market in Malaysia, representing an average of 35% and 56% of the Malaysian capital market and Islamic capital market respectively. However, the field lacks studies which specifically address the effect of interest-bearing debt ratios and Islamic debt ratios using separated debt data. It is a vital topic due to the recent revised shari’ah screening methodology with the adoption of financial ratio benchmarks, which led to an average total loss of 130 shari’ah-compliant firms in 2013 and later years, raising concerns about the effect of financial ratio benchmarks namely interest-bearing debt upper limit of 33% of firm’s total assets on shari’ah-compliant firms’ performance. Thus, this study mainly focuses on the impact of total Islamic leverage and particularly, the effect of interest-bearing debt and Islamic debt ratios on shari’ah-compliant firms’ performance in Malaysia. The study also examines the optimal level of total Islamic leverage at which a shari’ah-compliant firm may maximise its performance given the maximum allowed conventional debt ratio being 33% of a firm’s total assets. This study sampled 305 continuously reported shari’ah-compliant firms in every semi-annual report of the Shari’ah Advisory Council from 2010 to 2017 of study period. This research requires the sampled companies to meet the two-tier requirements of SCM to preserve their position as shari’ah- compliant companies. The study employed panel data analysis and threshold regression in order to attain its goals. The research found that the total Islamic leverage affected negatively on the performance of shari’ah-compliant companies under both performance measures, namely return on equity and return on assets, but it was not significant. The interest-bearing debt ratios negatively affect the performance of shari’ah-compliant firms’ performance under both performance measures, but it is not significant. The negative effect acted as a sign that encouraged shari’ah-compliant companies to adopt retained earnings instead of debt as a source of funds because of high financing cost. However, the total Islamic debt has produced mixed results. Under return on assets as performance indicator, the results of Islamic debt ratios were similar to the findings of interest-bearing debt ratios, which were negative and insignificant. However, Islamic debt ratios were positively correlated with return on assets as performance indicator. This arose possibly because the percentage of Islamic debt ratio was smaller or below the threshold ratio at which a firm could maximise its value as the reported descriptive analysis implies. Another reason could be poor growth opportunities as related literature suggests. Threshold regression findings suggested that there was no threshold value, which was statistically significant between the total Islamic leverage and the performance of Shari’ah-compliant companies. This is in line with the result of nonlinear relationship between the squared total Islamic leverage and the performance of shari’ah-compliant companies, which resulted in a negative and insignificant. The insignificant results of regressions encourage the financial regulatory authorities in Malaysia, namely Bank Negara Malaysia and the SCM to review the efficiency level of the Malaysian Islamic capital market, which, in part, will enhance the participation of Islamic leverage ratios in the debt-equity structure of shari’ah-compliant companies in Malaysia. |
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