THE SPEED OF ADJUSTMENT TOWARDS OPTIMAL CAPITAL STRUCTURE: DO OWNERSHIP CONCENTRATION AND BOARD DIVERSITY MATTER?
DOI:
https://doi.org/10.33736/ijbs.5627.2023Keywords:
Speed of adjustment, optimal capital structure, ownership concentration, board diversityAbstract
Using a partial adjustment model of capital structure, this study examines the role of ownership concentration and board diversity on the speed of adjustment towards optimal leverage. While a degree of ownership concentration can create value, board diversity on the other hand, is vital for companies to endure shifting market conditions. Both components are necessary for leveraging the outcomes of recent Malaysian Corporate Governance Strategic Priorities (2017-2023). As such, recognizing factors that could hinder the adjustment process is important as firms may deviate from their optimal leverage. The analysis of this study includes the top 100 non-financial Malaysian listed companies from 2012 to 2017. Evidence from this study indicates large Malaysian firms have optimal leverage and adjust at a modest rate towards their target in the long-term. The results are robust when using two alternative measures of ownership concentration, which are the single largest shareholder (OC1) and five largest shareholders (OC5). This study reveals both proxies have negative impact on adjustment speed. In other words, large firms with high level of concentrated ownership adjust their leverage slower towards the optimal level. Likewise, a negative significant relationship is found between board diversity and adjustment speed with the presence of OC5. Firm size is also found to have a significant impact on adjustment speed. These results potentially have long-term ramifications for corporate governance, as specific prerogatives for minority shareholders and directors representing them are required to reduce the negative externalities brought by concentrated ownership. Firms should outweigh the cost and benefits of board diversity, as more diverse boards may hinder the adjustment process.
References
Abdullah, S. N. (2013). The causes of gender diversity in Malaysian large firms. Journal of Management & Governance, 18(4), 1137-1159.
https://doi.org/10.1007/s10997-013-9279-0
Adams, R. B., de Haan, J., Terjesen, S., & van Ees, H. (2015). Board diversity: Moving the field forward. Corporate Governance: An International Review, 23(2), 77-82.
https://doi.org/10.1111/corg.12106
Adusei, M., & Obeng, E. (2019). Board gender diversity and the capital structure of microfinance institutions: A global analysis. Quarterly Review of Economics and Finance, 71, 258-269.
https://doi.org/10.1016/j.qref.2018.09.006
Ahmed, A., & Atif, M. (2021). Board gender composition and debt financing. International Journal of Finance & Economics, 26(2), 3075-3092.
https://doi.org/10.1002/ijfe.1951
Amran, N. A., & Ahmad, A. C. (2013). Effects of Ownership Structure on Malaysian Companies Performance. Asian Journal of Accounting and Governance, 4, 51-60.
https://doi.org/10.17576/ajag-2013-4-5774
Anderson, R. C., Reeb, D. M., Upadhyay, A., & Zhao, W. (2011). The Economics of Director Heterogeneity. Financial Management, 40(1), 5-38.
https://doi.org/10.1111/j.1755-053X.2010.01133.x
Ararat, M., Aksu, M. H., & Tansel Cetin, A. (2012). The impact of board diversity on boards' monitoring intensity and firm performance: Evidence from the Istanbul stock exchange. SSRN Electronic Journal, 90(216), 1-33
Ararat, M., Aksu, M., & Cetin, A. T. (2015). How board diversity affects firm performance in emerging markets : Evidence on channels in controlled firms. Corporate Governance: An International Review, 23(2), 83-103.
https://doi.org/10.1111/corg.12103
Arellano, M. & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economics Studies, 58(2), 277-297
https://doi.org/10.2307/2297968
Baker, H. K., Pandey, N., Kumar, S., & Haldar, A. (2020). A bibliometric analysis of board diversity : Current status , development, and future research directions. Journal of Business Research, 108, 232-246.
https://doi.org/10.1016/j.jbusres.2019.11.025
Bany Ariffin, A. N., Mat Nor, F., & McGowan, C. B. (2010). Pyramidal structure, firm capital structure exploitation and ultimate owners' dominance. International Review of Financial Analysis, 19(3), 151-164.
https://doi.org/10.1016/j.irfa.2010.03.002
Baum, C. F., Caglayan, M., & Rashid, A. (2016). Capital structure adjustments: Do macroeconomic and business risks matter? Empirical Economics, 53(4), 1463-1502.
https://doi.org/10.1007/s00181-016-1178-1
Bernile, G., Bhagwat, V., & Yonker, S. (2018). Board diversity, firm risk, and corporate policies. Journal of Financial Economics, 127(3), 588-612.
https://doi.org/10.1016/j.jfineco.2017.12.009
Bertrand, M., & Schoar, A. (2003). Managing with style: The effect of managers on firm policies. The Quarterly Journal of Economics, 4, 1170-1206.
https://doi.org/10.2139/ssrn.376880
Bhat, K. U., Chen, Y., Jebran, K., & Memon, Z. A. (2019). Board diversity and corporate risk: evidence from China. Corporate Governance (Bingley), 20(2), 280-293.
https://doi.org/10.1108/CG-01-2019-0001
Blau, P. (1977). Inequality and heterogeneity - A primitive theory of social structure. New York: Free Press.
Blundell, R. & Bond, S. (1998) Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143.
https://doi.org/10.1016/S0304-4076(98)00009-8
Bond, S. R. (2002). Dynamic panel data models: A guide to micro data methods and practice. Portuguese Economic Journal, 1, 141-142.
https://doi.org/10.1007/s10258-002-0009-9
Buvanendra, S., Sridharan, P., & Thiyagarajan, S. (2018). Determinants of speed of adjustment (SOA) toward optimum capital structure: Evidence from listed firms in Sri Lanka. Journal of Asia-Pacific Business, 19(2), 46-71.
https://doi.org/10.1080/10599231.2018.1453742
Byoun, S., Chang, K., & Kim, Y. (2016) Does corporate board diversity affect corporate payout policy? Asian-Pacific Journal of Financial Studies, 45(1), 48-101.
https://doi.org/10.1111/ajfs.12119
Chang, X., Chou, R. K., & Huang, T.-H. (2014). Corporate governance and the dynamics of capital structure: New evidence. Journal of Banking & Finance, 48, 374-385.
https://doi.org/10.1016/j.jbankfin.2014.04.026
Che-ahmad, A. B., & Mustafa, A. S. (2017). Ownership patterns and control of top 100 Malaysian listed companies. In SHS Web of Conferences (Vol. 34, pp. 1-8).
https://doi.org/10.1051/shsconf/20173401006
Chee, H. K., Hooy, C. W., & Ooi, C. A. (2016). The influence of ultimate ownership concentration on leverage. Jurnal Pengurusan, 47, 55-65.
https://doi.org/10.17576/pengurusan-2016-47-05
Claessens, S., & Fan, J. P. H. (2002). Corporate Governance in Asia: A Survey. International Review of Finance, 3(2), 71-103.
https://doi.org/10.1111/1468-2443.00034
Claessens, S., Djankov, S., & Lang, L. H. P. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58(1-2), 81-112.
https://doi.org/10.1016/S0304-405X(00)00067-2
Darmadi, S. (2013). Board members' education and firm performance: Evidence from a developing economy. International Journal of Commerce and Management, 23 (2), 113-135.
https://doi.org/10.1108/10569211311324911
De Jong, A., Kabir, R. & Nguyen, T. (2008) Capital structure around the world: The roles of firm- and country-specific determinants. Journal of Banking & Finance, 32(9), 1954-1969.
https://doi.org/10.1016/j.jbankfin.2007.12.034
De Miguel, A., & Pindado, J. (2001). Determinants of capital structure: new evidence from Spanish panel data. Journal of Corporate Finance, 7, 77-99.
https://doi.org/10.1016/S0929-1199(00)00020-1
Deesomsak, R., Paudyal, K., & Pescetto, G. (2004). The determinants of capital structure: evidence from the Asia Pacific region. Journal of Multinational Financial Management, 14, 387-405.
https://doi.org/10.1016/j.mulfin.2004.03.001
Drobetz, W., & Wanzenried, G. (2006). What determines the speed of adjustment to the target capital structure ?. Applied Financial Economics, 16(13), 941-958.
https://doi.org/10.1080/09603100500426358
Elsas, R., & Florysiak, D. (2011). Heterogeneity in the speed of adjustment toward target leverage. International Review of Finance, 11(2), 181-211.
https://doi.org/10.1111/j.1468-2443.2011.01130.x
Emoni, E. L., Muturi, W., & Wandera, R. W. (2017). Effect of board diversity on capital structure among listed firms in Nairobi stock. International Journal of Management and Commerce Innovations, 4(2), 141-150.
Engelen, P-J., van den Berg, A., & van der Laan, G. (2012). Board diversity as a shield during the financial crisis. In Boubaker, S., Nguyen, B. D., & Nguyen, D. K. (Eds.), Corporate Governance: Recent Developments and New Trends (4th ed., pp. 259-285). Springer Berlin Heidelberg.
https://doi.org/10.1007/978-3-642-31579-4_11
Ezeani, E., Kwabi, F., Salem, R., Usman, M., Alqatamin, R. M. A., & Kostov, P. (2022). Corporate board and dynamics of capital structure: Evidence from UK, France & Germany. International Journal of Finance & Economics, 1-18.
https://doi.org/10.1002/ijfe.2593
Faulkender, M., Flannery, M. J., Hankins, K. W., & Smith, J. M. (2010). Transaction costs and capital structure adjustments.
Faulkender, M., Flannery, M. J., Hankins, K. W., & Smith, J. M. (2012). Cash flows and leverage adjustments. Journal of Financial Economics, 103(3), 632-646.
https://doi.org/10.1016/j.jfineco.2011.10.013
Ferreira, D. (2010). Board diversity. In Baker, H. K., & Anderson, R. (Eds.), Corporate Governance: A synthesis of theory, research and practice. (pp. 225-242). John Wiley & Sons Inc.
https://doi.org/10.1002/9781118258439.ch12
Ferreira, D. (2014). Board diversity: Should we trust research to inform policy?. Corporate Governance (Oxford).
https://doi.org/10.1111/corg.12092
Flannery, M. J., & Hankins, K. W. (2013). Estimating dynamic panel models in corporate finance. Journal of Corporate Finance, 19(1), 1-19.
https://doi.org/10.1016/j.jcorpfin.2012.09.004
Flannery, M. J., & Rangan, K. P. (2006). Partial adjustment toward target capital structures. Journal of Financial Economics, 79(3), 469-506.
https://doi.org/10.1016/j.jfineco.2005.03.004
Frank, M. Z., & Goyal, V. K. (2008). Trade-off and Pecking Order theories of debt. In Eckbo, B.E.(Ed.), Handbook of Empirical Corporate Finance (pp. 135-202). Elsevier. https://ssrn.com/abstract=670543
https://doi.org/10.2139/ssrn.670543
Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: Which factors are reliably important? Financial Management, 38(1), 1-37.
https://doi.org/10.1111/j.1755-053X.2009.01026.x
Frijns, B., Dodd, O., & Cimerova, H. (2016). The impact of cultural diversity in corporate boards on firm performance. Journal of Corporate Finance, 41, 521-541.
https://doi.org/10.1016/j.jcorpfin.2016.07.014
Germain, L., Galy, N., & Lee, W. (2014). Corporate governance reform in Malaysia: Board size, independence and monitoring. Journal of Economics and Business, 75, 126-162.
https://doi.org/10.1016/j.jeconbus.2014.06.003
Hambrick, D. C., Davison, S. C., Snell, S. A., & Snow, C. C. (1998). When groups consist of multiple nationalities: Towards a new understanding of the implications. Organization Studies, 19(2), 181-205.
https://doi.org/10.1177/017084069801900202
Haron, R., Ibrahim, K., Mat Nor, F., & Ibrahim, I. (2013). Factors affecting speed of adjustment to target leverage: Malaysia evidence. Global Business Review, 14(2), 243-262.
https://doi.org/10.1177/0972150913477469
Harrison, D. A., & Klein, K. J. (2007). What's the difference? Diversity contructs as separation, variety or disparity in organizations. Academy of Management Review, 32(4), 1199-1228.
https://doi.org/10.5465/amr.2007.26586096
Heshmati, A. (2001). The dynamics of capital structure: Evidence from micro and small firms. Research in Banking and Finance, 2, 199-241.
Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance : Integrating agency and resource deoendence perspectives. The Academy of Management Review, 28(3), 383-396.
https://doi.org/10.2307/30040728
Horwitz, S. K., & Horwitz, I. B. (2007). The effects of team diversity on team outcomes: A meta-analytic review of team demography. Journal of Management, 33(6), 987-1015.
https://doi.org/10.1177/0149206307308587
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior , agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
https://doi.org/10.1016/0304-405X(76)90026-X
Kang, H., Cheng, M., & Gray, S. J. (2007). Corporate governance and board composition: Diversity and independence of Australian boards. Corporate Governance, 15(2), 194-207.
https://doi.org/10.1111/j.1467-8683.2007.00554.x
Kasbi, S. (2009, September). Ownership concentration and capital structure adjustments. EFMA Annual Meeting Program (2009), Reno, United States.
Kayo, E. K. (2018). Capital structure adjustment in Brazilian family firms. Revista de Administração Contemporânea, 22(1), 92-114.
https://doi.org/10.1590/1982-7849rac2018170004
King, T., Srivastav, A., & Williams, J. (2016). What's in an education ? Implications of CEO education for bank performance. Journal of Corporate Finance, 37, 287-308.
https://doi.org/10.1016/j.jcorpfin.2016.01.003
Kraus, A., & Litzenberger, R. (1973) A state-preference model of optimal financial leverage. Journal of Finance. 28(4), 911-922
https://doi.org/10.1111/j.1540-6261.1973.tb01415.x
Ku Ismail, K. N. I., Mustapa, I. R., & Abdullah, S. N. (2019). Gender boardroom quotas: A survey of Malaysian Corporate Directors. International Journal of Business and Society, 20(3), 968-983
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate governance. Journal of Finance, 58(2), 3-27.
https://doi.org/10.1016/S0304-405X(00)00065-9
Lean, H. H., Ting, I. W. K., & Kweh, Q. L. (2015). Ownership concentration, family ownership and leverage: Evidence from Malaysia. Malaysian Journal of Economic Studies, 52(2), 117-133.
Liao, L. K., Mukherjee, T., & Wang, W. (2015). Corporate governance and capital structure dynamics: An empirical study. Journal of Financial Research, 38(2), 169-191.
https://doi.org/10.1111/jfir.12057
M'ng, J. C. P., Rahman, M., & Sannacy, S. (2017). The determinants of capital structure: Evidence from public listed companies in Malaysia, Singapore and Thailand. Cogent Economics & Finance, 5(1), 1-34.
https://doi.org/10.1080/23322039.2017.1418609
Mai, Y., Meng, L., & Ye, Z. (2017). Regional variation in the capital structure adjustment speed of listed firms : Evidence from China. Economic Modelling, 64, 288-294.
https://doi.org/10.1016/j.econmod.2017.03.028
Masulis, R. W., Wang, C., & Xie, F. (2012). Globalizing the boardroom-The effects of foreign directors on corporate governance and firm performance. Journal of Accounting and Economics, 53(3), 527-554.
https://doi.org/10.1016/j.jacceco.2011.12.003
Mat Nor, F., Ibrahim, K., Haron, R., Ibrahim, I., & Alias, M. A. (2012). Practices of capital structure decisions : Malaysia survey evidence. International Review of Business Research Papers, 8(1), 33-63.
Matemilola, B. T., Amin Noordin, B. A., Wan Ngah, W. A. S., & Md Nassir, A. (2015). Unobservable effects and speed of adjustment to target capital structure. International Journal of Business and Society, 16(3), 470-479.
https://doi.org/10.33736/ijbs.580.2015
Mishra, R. K., & Jhunjhunwala, S. (2013). Diversity and the effective corporate board. Academic Press.
Morellec, E., Nikolov, B., & Schurhoff, N. (2012). Corporate governance and capital structure. The Journal of Finance, 67(3), 803-848.
https://doi.org/10.1111/j.1540-6261.2012.01735.x
Nguyen, T., Bai, M., Hou, G., & Vu, M.C., (2020). State ownership and adjustment speed toward target leverage: Evidence from a transitional economy. Research in International Business and Finance.53(3), 1-17
https://doi.org/10.1016/j.ribaf.2020.101226
Nisiyama, E. K., & Nakamura, W. T. (2018). Diversity of the board and capital structure. RAE-Revista de Administracao de Empresas, 58(6), 551-563.
https://doi.org/10.1590/s0034-759020180604
Öztekin, Ö., & Flannery, M. J. (2012). Institutional determinants of capital structure adjustment speeds. Journal of Financial Economics, 103(1), 88-112.
https://doi.org/10.1016/j.jfineco.2011.08.014
Paligorova, T. (2011). Corporate risk-taking and ownership structure. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1364393
https://doi.org/10.2139/ssrn.1364393
Paramanantham, N. S., Ting, I. W. K., & Kweh, Q. L. (2018). Ownership concentration and debt structure : Evidence from Top 100 PLCs in Malaysia. Institutions and Economies, 10(3), 1-13.
Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource dependence perspective. Standford University Press. https://ssrn.com/abstract=1496213
Rajan, R.G. and Zingales, L. (1995), What Do We Know about Capital Structure? Some Evidence from International Data. The Journal of Finance, 50 (5), 1421-1460
https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
Rozeff, M. S. (1982). Growth, beta and agency costs as determinants of dividend payout ratios. The Journal of Financial Research, 5(3), 249-259.
https://doi.org/10.1111/j.1475-6803.1982.tb00299.x
Saleh, M. S. A. H., Shahar, H. K., & Ibrahim, Y. (2018). The determinant of capital structure of Malaysian firms : Test of Pecking Order and trade-off theories under different corporate ownership identities. IOSR Journal of Economics and Finance, 9(4), 61-70.
Securities Commision Malaysia (2021). Malaysian code on corporate governance 2021. https://www.sc.com.my/api/documentms/download.ashx?id=239e5ea1-a258-4db8-a9e2-41c215bdb776
Short, H., Keasey, K., & Duxbury, D. (2002). Capital structure, management ownership and large external shareholders: A UK Analysis. International Journal of The Economics of Business, 9(3), 375-399.
https://doi.org/10.1080/1357151021000010382
Smith, N. (2014). Gender quotas on boards of directors. IZA-Institute of Labor Economics. https://wol.iza.org/articles/gender-quotas-on-boards-of-directors/long
https://doi.org/10.15185/izawol.7
Treuren, G., & Anderson, K. (2010). The employment expectations of different age cohorts: Is Generation Y really that different? Australian Journal of Career Development, 19(2), 49-61.
https://doi.org/10.1177/103841621001900207
Yap, I. L., Chan, S. G., & Zainudin, R. (2017). Gender diversity and firms' financial performance in Malaysia. Asian Academy of Management Journal of Accounting and Finance, 13(1), 41-62.
https://doi.org/10.21315/aamjaf2017.13.1.2
Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. (2008). Corporate governance in emerging economies: A review of the principal-principal perspective: Review paper. Journal of Management Studies, 45(1), 196-220.
https://doi.org/10.1111/j.1467-6486.2007.00752.x
Zou, H., & Xiao, J. Z. (2006). The financing behaviour of listed Chinese firms. British Accounting Review, 38(3), 239-258.
Downloads
Published
How to Cite
Issue
Section
License
Copyright Transfer Statement for Journal
1) In signing this statement, the author(s) grant UNIMAS Publisher an exclusive license to publish their original research papers. The author(s) also grant UNIMAS Publisher permission to reproduce, recreate, translate, extract or summarize, and to distribute and display in any forms, formats, and media. The author(s) can reuse their papers in their future printed work without first requiring permission from UNIMAS Publisher, provided that the author(s) acknowledge and reference publication in the Journal.
2) For open access articles, the author(s) agree that their articles published under UNIMAS Publisher are distributed under the terms of the CC-BY-NC-SA (Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License) which permits unrestricted use, distribution, and reproduction in any medium, for non-commercial purposes, provided the original work of the author(s) is properly cited.
3) For subscription articles, the author(s) agree that UNIMAS Publisher holds copyright, or an exclusive license to publish. Readers or users may view, download, print, and copy the content, for academic purposes, subject to the following conditions of use: (a) any reuse of materials is subject to permission from UNIMAS Publisher; (b) archived materials may only be used for academic research; (c) archived materials may not be used for commercial purposes, which include but not limited to monetary compensation by means of sale, resale, license, transfer of copyright, loan, etc.; and (d) archived materials may not be re-published in any part, either in print or online.
4) The author(s) is/are responsible to ensure his or her or their submitted work is original and does not infringe any existing copyright, trademark, patent, statutory right, or propriety right of others. Corresponding author(s) has (have) obtained permission from all co-authors prior to submission to the journal. Upon submission of the manuscript, the author(s) agree that no similar work has been or will be submitted or published elsewhere in any language. If submitted manuscript includes materials from others, the authors have obtained the permission from the copyright owners.
5) In signing this statement, the author(s) declare(s) that the researches in which they have conducted are in compliance with the current laws of the respective country and UNIMAS Journal Publication Ethics Policy. Any experimentation or research involving human or the use of animal samples must obtain approval from Human or Animal Ethics Committee in their respective institutions. The author(s) agree and understand that UNIMAS Publisher is not responsible for any compensational claims or failure caused by the author(s) in fulfilling the above-mentioned requirements. The author(s) must accept the responsibility for releasing their materials upon request by Chief Editor or UNIMAS Publisher.
6) The author(s) should have participated sufficiently in the work and ensured the appropriateness of the content of the article. The author(s) should also agree that he or she has no commercial attachments (e.g. patent or license arrangement, equity interest, consultancies, etc.) that might pose any conflict of interest with the submitted manuscript. The author(s) also agree to make any relevant materials and data available upon request by the editor or UNIMAS Publisher.
