Investment and Financial System Design for Firms in Malaysia

Abstract

This paper investigates the impact of financial system design on investment. It is aimed to provide additional empirical evidence based on the original paper by Demirguc-Kunt and Maksimovic (2002). The firm-level data are used for Malaysian listed firms between 2000 and 2007. This paper also utilizes the same estimation method i.e. generalised method of moments for panel data, as proposed by Arellano and Bond (1991). The findings show that: first, the Risk Weighted Capital-adequacy Ratios and Core Capital Ratios have negative impact on investment of firms. This can be explained from Government intervention which is designed to encourage bank’s lending to firm investment. Second, the capital market variables show negative effects on investment due to the presence of capital market imperfections. Finally, both gross domestic product and foreign direct investment show positive impacts on investment. This result is consistent with previous empirical evidence in which a firm is likely to have a larger investment when its investment opportunities are good. It is recommended to the policy maker to intervene the related policy with investment and financial design. It is because both variables are interrelated each other and give impact to the growth of economy in a country.

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