Determining the Key Factors of Corporate Leverage in Malaysian Service Sector Firms Using Dynamic Modeling

Abstract

The prime objective of this paper is to investigate the relationship between company-specific factors and firm’s leverage of 231 service sector companies of Bursa Malaysia for the period 2008-2018. This study employed dynamic panel regression by employing System Generalized Method of Moments (S-GMM) developed by Blundell and Bond (1998) as the results indicated that the model is genuinely dynamic. Findings reveal that firm size, profitability, liquidity, and growth opportunities are the determinants of corporate leverage in Malaysia service sector firms. However, sustainability (company age), net profit margin and cash ratio are not related to company’s leverage in Malaysian service firms. Particularly, this study is significant for Malaysian service firms to maintain their optimal financial stability, capital structure and company-specific factors. In general, findings of the study embrace significant insights for corporate tycoons, regulatory bodies and practitioners. Meanwhile, theoretically, the study is important for embracing the predictions of pecking order theory and trade-off theory in terms of explaining the determinants of corporate leverage in Malaysian service firms. This study is novel in examining this relationship in Malaysian service sector by using the dynamic estimator (S-GMM) for estimations catering the problem of endogeneity, unobserved heterogeneity and simultaneity.

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