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DECLARATION OF ORIGINAL WORK

BACHELOR OF BUSINESS ADMINISTRATION (HONS) FINANCE

FACULTY OF BUSINESS MANAGEMENT

UNIVERSITI TEKNOLOGI MARA

JOHOR

DECLARATION OF ORIGINAL WORK

I, ZULAIKHA ATHIRAH BT. ZULKIFLI (I/C Number: 900902-14-5000)

Hereby, declare that;

This work has not previously been accepted in substance for any degree, locally

or overseas and not being concurrently submitted for this degree or any other

degrees.

This project paper is the result of my independent work and investigation, except

where otherwise stated.

All verbatim extracts have been distinguished by quotation marks and sources of

my information have been specifically acknowledged.

Signature: __________________ Date: June 2012


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LETTER OF SUBMISSION

25 June 2012

The Programme Coordinator

Faculty of Business Management

University Teknologi MARA Johor

85009 Segamat

Johor Darul Takzim

Dear Madam,

SUBMISSION OF PROJECT PAPER

Attached the project paper titled, THE DETERMINANTS OF CAPITAL

STRUCTURE OF CONSTRUCTION COMPANIES LISTED IN BURSA SAHAM

MALAYSIA to fulfill the requirement as needed by the Faculty of Business

Management, University Technology Mara.

Thank You.

Yours sincerely,

_____________________

ZULAIKHA ATHIRAH BT ZULKIFLI

2009703367

Bachelor of Business Administration (Hons) Finance


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ACKNOWLEDGEMENT

Peace and blessings of Allah be on his last messenger, Prophet Muhammad S.A.W who

has shown us the right way through the darkness of ignorance and kufr. Syukur

Alhamdulillah, my highest gratitude to Allah S.W.T. for the blessings in giving me the

strength to complete this report.

I am sincerely grateful to all who had assisted me with my project paper. My warmest

gratitude to all lecturers at UiTM Segamat, Johor, in particular Pn. Nur Liyana Mohamed

Yousop as my advisor for giving me the most beneficial assistance and offered countless

comments, constant guidance, patience, understanding and inspiration as well as for his

constructive criticism in preparing this report. I could not repay his opinions and ideas

she gave me in conducting this report.

I would also like to express my sincere gratitude and appreciation to En Mohd Fariz

Ahmad Farid (Function Lead Account and Service Management, Sime Darby Global

Services Centre Sdn Bhd) for giving me an opportunity to do industrial training at the

organization and gives me valuable experience in working environment. And, Im also

thankful to all staffs at the Sime Darby Global Services Centre Sdn Bhd who had helped

me and gave me cooperation, encouragement as well advised in completing the study.

A thousand thanks to all of friends and classmates who I will never forget their kindness

and their sharing they gave in completing the report successfully. Then, I would like to

express my appreciation to my beloved family for their support, contributions and

encouragement.

May Allah forgive our short comings, Ameen.


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TABLE OF CONTENTS

TITLE PAGE................................................................................................................... iv

DECLARATION OF WORKS........................................................................................ ii

LETTER OF SUBMISSION. .......................................................................................... iv

ACKNOWLEDGEMENT............................................................................................... iv

LIST OF TABLE AND DIAGRAMS. ............................................................................ v

ABSTRACT. ..................................................................................................................... vi

CHAPTER 1 ....................................................................................................................... 1

INTRODUCTION .............................................................................................................. 1

1.1 Theories of Capital Structure ............................................................................... 1

1.2 Background of study ............................................................................................ 3

1.3 Statement of Problems ......................................................................................... 7

1.4 Research Questions .............................................................................................. 8

1.5

Objectives of the study ......................................................................................... 8

1.6 Significant of the study ........................................................................................ 9

1.7 Scope of the study .............................................................................................. 10

1.8 Limitations of the Study ..................................................................................... 10

1.9 Summary ............................................................................................................ 11

CHAPTER 2 ..................................................................................................................... 13

LITERATURE REVIEW ................................................................................................. 13

2.0 Introduction ........................................................................................................ 13


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2.1 Overview of Theories of Capital Structure ........................................................ 13

2.2 Previous Study.................................................................................................... 14

2.3 Theoretical Framework ...................................................................................... 18

2.4 Summary ............................................................................................................ 20

Chapter 3 ........................................................................................................................... 21

METHODOLAGY AND DATA ...................................................................................... 21

3.0 Introduction ........................................................................................................ 21

3.1 Data Collection ................................................................................................... 21

3.2 Sampling Frame ................................................................................................. 22

3.3 Sources of Data .................................................................................................. 22

3.4 Variables and Measurement ............................................................................... 23

3.5 Research Design ................................................................................................. 24

3.6 Data Analysis and Treatment ............................................................................. 25

3.7

Hypothesis Statement ......................................................................................... 27

3.8 Summary ............................................................................................................ 29

CHAPTER 4 ..................................................................................................................... 30

ANALYSIS AND FINDINGS ......................................................................................... 30

4.0 INTRODUCTON ............................................................................................... 30

4.1 DESCRIPTIVE STATISTICS ........................................................................... 30

4.2 MULTICOLLINEARITY .................................................................................. 33


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4.3 MULTIPLE REGRESSIONS ............................................................................ 34

4.4 ANOVA ............................................................................................................... 40

4.5 FINDINGS AND DISCUSSION ......................................................................... 41

CHAPTER 5 ..................................................................................................................... 44

CONCLUSION AND RECOMMENDATION ................................................................ 44

5.0 CONCLUSION .................................................................................................. 44

5.1 RECOMMENDATION ..................................................................................... 45

REFERENCES ................................................................................................................. 46


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LIST OF TABLES AND DIAGRAMS

Diagram 2.1: Previous Framework

Diagram 2.2: Research Framework

Diagram 4.1: Example of Skewness

Table 4.1 Descriptive Statistics

Table 4.2 Multicollinearity

Table 4.3 Model Summary

Table 4.4 Anova

ABSTRACT


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CHAPTER 1

INTRODUCTION

1.0

Definition of Capital Structure

In finance terms, capital structure can be expressed as the way the firms finance its

assets by using the combination of equity, debt and securities. Firms need to do

crucial actions in order for the companies to earn and gaining profit. Capital

structure will be support by theories: Pecking Order Theory, Static Trade-Off

Theory and Market Timing.

1.1

Theories of Capital Structure

1.1.1 Pecking Order

The theory for firms capital structure first suggested by Donaldson in 1961

then later it was modified by Stewart C. Mayers and Nicolas Majluf in 1984.

This theory stated that, companies prioritize their source of financing from

internal financing to equity. As this theory affirmed that the financial of

equity as a last resort. The attraction of interest tax shields and the threat of

financial distress arc considered as second order. Debt ratios modify when

there is an imbalance of internal cash flow, net of dividends, and real

investment opportunities. Low debt ratios will be used by the companies

that have higher profitability but with the limited investment opportunities.


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Farhat, 2012). In which, this theory assume that firms maintain the optimum

capital structure, but marginal benefits of debt will be equal with marginal

costs.

1.1.3 Market Timing

Just like pecking order and trade-off theory, market timing also conclude on

how firms decide whether to finance their investment with equity or debt

instruments. Baker and Wurgler (2002) who has given the idea of market

timing theory, claimed that, firms do not care on which tools will they

choose but then they will choose which financing instruments on that time

that have higher value in financial market. A firm that hit the target of

market timing will definitely find the minimum over the window. While, for

the company who are barely hit the target, on average issue at the median of

the window. Firms are not succeeding in timing the target market so as to

minimize the cost of their debt (M.Z. Frank and P. Nezafat, 2010). Firms

will not to be able to have higher return even though they have perfectly

timing during financial crisis. Market timing theory more like to relate with

macroeconomic condition.

1.2

Background of study

There many studies on determinant of capital structure but there are only several

researches on Malaysia.


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1.2.1 Profitability

Profitability comes from the word profit where can be define as earn

or gain from activities done by individual or company. Profitability

also can be described as an advantageous quality of being beneficial.

High profitability firms have lesser propensity to borrow given the

sufficiency amount to finance its expansion (Jong et. Al, 2008).

After a critical recession occurs in Malaysia, many firms tend to

careful on their borrowing for risky project. The profit will reinvest

again for future needed as followed by Pecking Order Theory. The

static trade off theory suggests that the raising in debt should be

based on the debt tax shields due to the subtraction of interest

expenses when calculating profit before tax. This approach can be

explain when study the negative relationship between profitability

and debt ratio. A study by Buferna, Bangassa and Hodgkinson (2008)

measure profitability by calculate return on asset (ROA). This

measure of ROA was used also by D.R. Fraser, Hao Zhang and C.

Derashid (2005).

1.2.2 Growth

Growth is this context can be defined as grown revenue, cash flows

and earnings by increase and bounds on the investment made.

Companies with high future growth chances should use more equity


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financing, because higher lifted company is more probably to pass

up profitable investment opportunities (Myers, 1977).Such mature

companies will by diversified trough its public offering will have

stable earnings. There is limitation for a company to growth

especially on unfortunate events. Situation such as during war,

recession might be unavoidable for the firms to face. The growth of

companies measure by N. Naser and K. Petrov (2011) used

percentage increase in Gross Premium (GP).

1.2.3

Size

The term size in this context is the capacity of the company, whether

it is large or small company. Larger firms have advantage on

borrowing capacity than small or medium firms because of its

diversification of business that reduce bankruptcy risk. This might be

positive link between size of firm and the debt ratio which is tally

with pecking order theory. In simplest word, the diluted ownership

structure that simplifies the borrowing decision of the management.

Thus, in this competitive market, banks more likely to lend to large

company with large loan. Total Assets are used by Al-Ashwal (2010)

as a proxy of firms size.


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1.2.4 Liquidity

In simplest word, liquidity can be defined as the ability to turn out

into cash. In longer terms, the degree where asset or security can be

buy or sold whenever it is without interfering the price of the asset.

The ownership structure had estimated that relationship between

debt and liquidity was insignificant (F.Bancel and U.R Mittoo, 2002).

Family ownership may have more control in not allowing managers

to increase leverage and incur interest cost imposed especially when

the firm has high level of liquidity. This can be related to agency

cost theory as it can control agency cost problems. Kila and Mansoor

(2009) suggest a ratio of Short-Term Assets to Total Liabilities,

excluding Share Capital and Retained Earnings. As for N. Naser and

K. Petrov (2011) they recommend on Short-Term Liabilities where

quick ratio equal to short term assets divided by total liabilities.

1.2.5 Asset Tangibility

Asset tangibility is type of assets that have physical characteristics

but in can be high in value such as machinery, land, and buildings.

From the theoretical point of view, the tangible assets can be used as

collateral (P. Bauer, 2004). Static trade-off said that firms with high

levels of asset tangibility are less expected to default and will have

higher chance to getting a positive relationship between asset


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tangibility and debt ratio. Therefore, higher tangibility lowers the

risk of a creditor and increases the value of assets in the case of

bankruptcy. As we can conclude, the more the tangible the assets,

the higher its ability to issue secured debt. Haslindar and Tajul (2010)

measured assets tangibility by divided total assets with fixed asset.

The same calculation used by Bauer (2004).

1.3 Statement of Problems

Subsequent studies pursuant to that had been undertaken to gauge various aspects of

capital structure. The objectives of the previous studies is to test the importance of

capital structure theories, to test the relevance capital structure theories, to create

the relationship between capital structure and firm value, and to establish the

optimal capital structure.

Firm needs to make crucial capital structure decisions so that firms will achieve

maximize value of the firm. One of the ways that firms can do is by reducing its

weighted cost of capital. In order to do that, firms need to allocate its sources of

capital that will reduce its cost. Construction firms are needed for the studies as

they need to know on which determinants that will maximize profit and also reduce

cost. Most problems that construction firms face are insufficient capital, do not have

enough fixed assets and they usually own construction equipments rather than

property; lands or buildings to finance their responsibility (Ebaid, 2009). Basically,

banks do not accept such assets as collateral for loans. Without the loans it is hardly


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for the firms to finance for their projects. Moreover, between developers and

contractors in Malaysia, developers tend to be more profitable than contractors and

it is because they were burdened by the debt (Mansor and Rozimah, 2010).

Financial problems occur by the construction firms is low profit margins from the

projects. What firms have to do when there is unfortunate events occur such as

tsunami, recession, and war. Nowadays especially, there is unstable economics,

what must firms needs to take actions to gain profit or even balance it.

1.4 Research Questions

In this study, there is a question that has been developed regarding the problem

statement occurred as following:

i. Whether short-run or long-run capital structure that will give higher

return on investment towards company and the investors?

1.5

Objectives of the study

This study had also developed an objective in order to answer the research

question. The objective will be as a guide in this study so that the research is on the

correct path. It as follows:


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i. To determine and examine the determinants of capital structure for

construction companies in which it will benefit them.

1.6

Significant of the study

This research identifies the determinants of capital structure of constructions

companies. Hence, based on this study, it will give some advantage to

groups of people. As follows:

1.6.1 Managers of the company

This paper research helps a lot for manager of the company as this paper

will give guidance to them on how to finance their capital. Thus, they can

find such way to improve their activities.

1.6.2 Investors

This research paper also gives beneficial information towards investors.

This is because that important information regarding capital structure of the

company that investors intended to invest to is the crucial part. In which

might help to make smart decision.

1.6.3 Researches

This paper might be important and significant to other researchers who most

likely to gain information regarding this research. Besides, they can refer as

reference and gain another variable which can be add on as their variables.


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1.7 Scope of the study

The main factor of this study is to examine the determinants of capital structure of

constructions company Listed in Bursa. The independent of this study are

profitability, size, growth, liquidity and asset tangible. As for the dependent

variable, it will be debt ratio. The data will be derived from the financial report of

the companies. All information also has been taken from journal and website.

1.8

Limitations of the Study

There are three limitations during conducting this research.

1.8.1 Period of data gathered

The period of data to be gathered is restricted. The researcher wanted to

lengthen the period usage to make more accurate results but the availability

of data is limited.

1.8.2 Accuracy of Data

This is because the study is totally depends on secondary data which is

mostly are from publish materials. If any error occurs on the publish data it

will absolutely effect the result of this study.


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1.8.3 Difficulties in obtaining the information

Some of the data are limited to obtain such researcher have to purchase the

information which is totally affect the ongoing study. This occurs because

they want to protect the information from reached to irresponsible person

which might harm the institutions. In such data, the researcher has to search

for information that relates to capital structure theories in which very

difficult to acquire.

1.9

Summary

In this chapter, researcher had introduced some capital structure theories which are

very helpful to know a little bit about capital structure really is. In addition,

researcher also had defined the terms that mostly will be used in this study and the

relationship between the variables. The inspiration behind this study is to determine

the determinants of capital structure of construction companies by using secondary

data available in Malaysia, in order to answer the research questions that have been

listed above. Besides that, the scope and limitations also have been explained. Thus,

for the next chapter, the researcher will be explained about the previous studies that

have been conducted.


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CHAPTER 2

LITERATURE REVIEW

2.0 Introduction

Literature review is a process where published and unpublished work from

secondary data sources needs to be identified, evaluated and documented it

(Sekaran and Bougie, 2010). It is a depth and intensity evaluation of previous study.

Besides that, It is also a summary and synopsis of a particular area of research,

allowing anybody reading the paper to establish why the researchers are pursuing

this particular research program. For this particular study, there are many author

and researchers had discover the determinants of capital structure.

2.1

Overview of Theories of Capital Structure

Capital structure basically comes with theory originally from Modigliani and Miller

in 1958. Until now, there are several theories of capital structure likes Pecking

Order Theory, Static Trade-Off, and Market Timing Theory. Capital structure is a

fundamental aspect of corporate finance that explore into study on the approach a

firm chooses its sources of financing to funds its investments in acquisition of

assets. In order a company to make wise decision of capital structure, firms needs

determine its operating investment both internal and external. Argument by

Modigliani and Miller (1998) is that capital structure does not exist in perfect


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market is irrelevance, as in real world, imperfections market is clear. In Trade-Off

Theory states that taxable firms should increase its debt level until its tax

advantages borrowing exceed the cost of financial distress till it is balance. Debt

level is expected to be increase the limit as marginal value of tax shield is equal or

lesser to present value of possible financial distress costs (Delcoure, 2007). Under

trade off-theory, a significant positive relationship should exist between

profitability, asset tangibility and size towards financial leverage. Meanwhile the

pecking order theory recommended by Myers (1977) suggest that firms prefer to

finance new investment, first with retained earnings then followed by debt and

finally with an issue of new equity. Means that, high profits firms should hold less

debt because the high level of profits provides a high level of internal fund. Thus,

for the results it is shows that a significant negative relationship between

profitability and debt ratio. For asset tangibility and growth it is expect to be a

positive relationship.

2.2

Previous Study

A study by Syuhada, Zaleha, Mansor and Hussian (2011) shows that large firms

rely heavily on the debt financing. Besides that, the researchers able to discover that

asset tangibility has influence the most on the debt. This is because, when the

company has more assets tangibility, the demand for debt in financing the assets is

also increased. Moreover, the results study by them shows that profitability indeed,

inversely related, whereas the size, growth and asset tangibility are directly related


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to the dependent variable. Other than that, size measured by the sales figure is

positively related to total debt. It is suggested that larger firms depend more on

leverage financing for expand compared to smaller firms. Thus, this will exposed to

them to financial risk during economic downturn.

An empirical study done by Mansor, Salwani, Syuhada, Zuraida and Norazidah

(2011) on studies of property companies in Malaysia by using five independent

variables: property asset intensity, size, growth, profitability and interest rate. They

recommended that property asset intensity and profitability are significant

determinants of capital structure. While, for size and growth do not happened to be

significant result on capital structure.

On study on capital structure of SMEs in Malaysia studied by Haslindar and Tajul

(2011) explained that size is significantly positive related to long term debt. It can

further explained that the larger the firm the larger will it diversified and faces

lower risk as compared to smaller firms. There is statistically significant

relationship with the long term debt. SMEs will finance their activities based on

pecking order theory (Abor and Biekpe, 2009). Other than that, the study also found

that the asset tangibility has a positive significant result related to long term debt.

Such non-current assets are important and act as protection to lenders from any

problems (Jensen and Meckling, 1976). Unfortunately, there is no significant

relationship regarding liquidity with long term debt.


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Debt issuers with high growth opportunity will create more wealth in one year

period, which is conflicting with the expected relationship (Yusnidah, MD. Mohan

Kamarun and Mohd. Sobri, 2011). In their study, they found that the opposite

relationship is monitored he the interaction between capital structure change and

growth opportunity is considered. For one year of observation, there is strongly

negative impact of growth opportunity become vital if only the increasing of

financial leverage. On the other hand, when the capital structure is zero, it is rather

gives positive affect towards company. This is because firms can utilize the growth

opportunities without any unpleasant effect related with financial distress cost. The

researcher also states that debt issuing with higher free cash flow and increased

leverage experience low performance in three years time. However, there is

argument on the benefit of higher financial leverage at the existence of high free

cash flows should be clear if no substitute measures of reducing the agency cost are

undertaken.

There is study on foreign countries, where the researcher takes Russia, Brazil and

China as their sample. The results show that Russian companies received higher

profitability when they lower their financial leverage. Russian companies also have

positive relationship between growth rate and debt ratio. The researcher are manage

to reveal the relationship between asset tangibility and debt ratio, where they

conclude that the higher the percentage of fixed assets in total assets the lower is the

debt level. As for size, there is positive effect as natural logarithm of sales was

confirmed while no interpretable results were gained for natural logarithm of total


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assets alternatively (Ivashkovskaya and Solntsva, 2010). For Russian companies

who are controlled by the government will have higher debt as well as companies

with foreign shareholders. in the meantime, it does not happened to public company,

they tend to borrow less. Somehow, comparative analysis of capital structure

determinants shows that profitability influences the debt to - equity choices in the

same way for China, Russia as well as Brazil. By test using pecking order or trade-

off theory, Russian companies cannot reject either the theories but for Brazil and

China, it will rejected by pecking order theory. The trade off theory is most likely

to be followed by large-scale companies of China.


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2.3 Theoretical Framework

2.3.1 Previous Literature

Dependent Variable Independent Variables

Source: Nurul, Zaleha, Mansor and Hussian

Diagram 2.1: Determinants of Capital Structure

The diagram above shows the study done by Nurul, Zaleha, Wan Mansor

and Hussian (2011) which identifying the determinants of capital structure

of Constructions Company in Malaysia. From this study, they are able to

identify the variables which may help them as reference. The dependent

variable is debt ratio meanwhile for the independent variables are growth,

probability, and size and asset tangibility. The study also took a look at the

Profitability

Growth

Size

Asset Tangibility

Debt Ratio


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theories of capital structure which are Static Trade-Off, Pecking Order and

Agency Cost Theory.

2.3.2

Research Framework

Dependent Variable Independent Variables

Diagram 2.2: Determinants of Capital Structure

Therefore, in order for the researcher to carry out this study, the researcher

has to combine the previous research analysis and study it again. So, the

new and addition variable have been identify which is Liquidity. The

independent variables would be asset tangibility, growth, profitability, size

and liquidity. While for dependent variable is debt ratio. The researcher

Profitability

Growth

Size

Asset Tangibility

Liquidity

Debt Ratio


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using Ordinary Last Square Method form 2006 till 2010 and be conduct by

Statistical Package for Social Science (SPSS).

2.4

Summary

In conclusion, this chapter outlines the previous studies done which is benefit for

the current researcher to analyze and revise it. It does gives guideline to the

researcher so that, it will be easier for the researcher to go to the next chapter.


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Chapter 3

METHODOLAGY AND DATA

3.0 Introduction

This chapter will be discuss about the procedures and methodology used for the

purpose of this research. It includes introduction, sources of the data, the variables

occupied and the hypothesis to test whether the determinants identified would affect

the capital structure of the companies. The objective of this research is to see

whether there are significant relationship or not between the determinants and

capital structure of companies. To achieve the objective, this study is based on the

Ordinary Least-Squares (OLS) regression method to see the relationship between

these variables. Other important information and particular sources needed were

gathered from published journals and articles.

3.1

Data Collection

Data that are used in this research were obtained from the companies website. The

collected data includes data for calculate the profitability of company, the size of

company, the amount of tangible asset that the company have, the growth of the

company and how liquid is the company is. The data gathered to see whether there

are any relationship exists between the dependent variable and the independent

variable. In addition, the annually information also collected through previous


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journals, annual report and internet sources (website) and any other particular

article.

3.2

Sampling Frame

A sample defined as a subgroup of the population. By studying the sample, the

researcher should be able to draw conclusion that would be generalize-able to the

population of interest and likely to produce more reliable results. In this research,

the sampling frame that has been used is the construction companies that have been

listed in the Bursa Saham Malaysia.

3.3 Sources of Data

All the data have been gathered for this research basically from secondary data.

Secondary data refers to statistical material which is not originated by the

investigator himself but obtained from someone elses records, or when primary

data is utilized for any other purpose at some subsequent enquiry it is termed as

secondary data. This type of data is generally taken from newspapers, magazines,

bulletins, reports, journals and many more. (Uma Sekaran, 2003). Since the data

and information used in this research was gathered from annual reports, websites

and journals, it considered as secondary data.


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3.4 Variables and Measurement

The variables used in this study can be categorized into two types which is

dependent variables and independent variables:

3.4.1 Dependent variable

A dependent variable is what you measure in the experiment and what is

affected during the research. The dependent variable responds to the

independent variable. It is called dependent because it depends on the

independent variable. Therefore, in this study the dependent variable is debt

ratio. The study identifies which factors would have significant effect

towards it.

3.4.2 Independent Variables

Independent variables are one that influences the dependent variable. It is

usually what you think will affect the dependent variable. For this study, the

researcher had picked several independent variables, which are profitability,

growth, size, liquidity and tangible assets.


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3.5 Research Design

In order for a research to go accordingly, research design might be appropriate.

Basically, research design identifying the variables in a problem statement and

developed the theoretical framework. This research is designed to examine the

relationship between dependent variable and independents variables. Hypothesis

testing also developed in order to see and explain all significant relationship

between the variables.

3.5.1

Purpose of Study

Mainly, the reason to conduct this research is to identify and determine the

capital structure of companies in Malaysia particularly construction

companies that been listed in Bursa Saham Malaysia.

3.5.2 Types of Investigation

This study use Ordinary Least-Square method to investigate in order to

determine the factors of capital structure of the construction companies.

3.5.3 Unit of Analysis

Unit of analysis that will be use in this research are as follows, profitability,

size, growth, liquidity and tangible assets.

3.5.6 Data Horizon


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distributed homoscedastic, and not autocorrelated. The OLS regression

model is to see whether there any relationship between the explanatory

variable, x and response variable, y.

Therefore, the model of this study will be:

Y=+ 1X1+ 2X2+ 3X3+ 4X4 + 5X5 +

Where:

Y = dependent variable which is debt ratio.

= constant number of equation

= coefficient beta value

X1 = Profitability

X2 = Growth

X3 = Size

X4 = Liquidity

X5 = Asset Tangibility

= error

3.6.3 Test of Multicollinearity

The assumption under the Classical Linear Regression Model is stipulated

that there is no multicollinearity among independent variables (Gujarati and

Porter, 2009). The condition under multicollinearity is when the

independent variables are linearly related to each other. Thus, it might make


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the regression coefficients to be false and inefficient. The result at the end

will provide us with the false representations of the model. Such way the

researcher can detect the problem is by comparing the t-stats and R value.

The R explain the higher explanatory power of the estimated equation and

more accurate for forecasting purpose. The bigger value of R2, the smaller

the standard error would be. Therefore, higher R2 identifies strong

relationship between the dependent variable and independent variables.

3.6.4 Test of Correlation

The researcher can test the correlation statistic which describes the degree of

relationship between dependent variable and independent variables. Besides

that, significant test is also conducted on the correlations to establish the

probability that the correlation is the one and is not by incident. To be it is

statistically significant, their respective p-value is less than 0.05, or vice

versa. R can be any number between and including positive one and

negative one.

3.7 Hypothesis Statement

Hypothesis can be defined as an unproven proposal that uncertainly explain certain

facts or phenomenon. Generally assign the symbol H0 to the null hypothesis and the

symbol H1 to the alternative hypothesis. The purpose of hypothesis testing is


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slightly more complicated then estimating parameters because the decision maker

must make choice between the two hypotheses.

Hypothesis 1:

H0: There is no significant positive relationship between Debt Ratio and

Profitability.

H1: There is significant positive relationship between Debt Ratio and

Profitability.

Hypothesis 2:


Growth.

H1: There is a significant positive relationship between Debt Ratio and Growth.

Hypothesis 3:

H0: There is no significant positive relationship between Debt Ratio and Size.

H1: There is significant positive relationship between Debt Ratio and Size.

Hypothesis 4:


Liquidity.


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H1: There is a significant positive relationship between Debt Ratio and Liquidity.

Hypothesis 5:


Tangible Assets.

H1: There is a significant positive relationship between Debt Ratio and Tangible

Assets.

3.8

Summary

In this chapter, the methodology to be used in collection and analysis of data is

presented. With the methodology clearly specified, data was obtained and analyzed

accordingly. Thus, this enables the researcher to estimate the relationships between

independent variables and dependent variable to be take on appropriately. This

chapter most probably is the most important chapter because without any conscious

of the researcher, it might not properly studies


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CHAPTER 4

ANALYSIS AND FINDINGS

4.0 INTRODUCTON

In this chapter, it will discuss about the method used and about the results obtained.

It has been mentioned earlier to use Ordinary Least Square Method Analysis in

order to explain the relationship between the dependent variable and several

independent variables. In this case, dependent variable is debt ratios of the

companies while for the independent variables are profitability (return on assets),

size (total assets), liquidity (quick ratio), asset tangibility and growth (net profit

margin). The objective is to analyze whether there is any significant relationship

between all the determinants identify between dependent variable and independent

variables. After collect and regress all the data by using Microsoft Excel, SPSS and

EViews, the summary of the empirical findings as well as the interpretation of the

data has designed.

4.1 DESCRIPTIVE STATISTICS

In this study, Descriptive Statistics is designed in order to check the normality of

data. Descriptive statistics below shows value of mean, minimum, maximum,

standard deviation, variance, skewness and also kurtosis for every single variable

including both dependent and independent variable.


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Table 4.1: Descriptive Statistics

S

k

e

Skewness is a measure of symmetry, or more precisely, the lack of symmetry. A

distribution, or data set, is symmetric if it looks the same to the left and right of the

center point. In other words, it could came in the form of negative skewness or

positive skewness or even undefined, depending on whether data points are

skewed to the left (negative skew) or to the right (positive skew) or at zero of the

data average. The purpose of screening the data is to checking the normality of the

data. Below is the example of skewness :

N Mean Std. Deviation Variance Skewness

Stat

istic

Statistic Std. Error Statistic Statistic Statistic Std.

Error

Debt_Ratio 30 0.4825 0.03231 0.17697 0.031 0.705 0.427

Profitbility 30 0.0449 0.00563 0.03086 0.001 0.896 0.427

Growth 30 0.0820 0.01724 0.09444 0.009 3.071 0.427

lgSIZE_ 30 8.8965 0.08199 0.44910 0.202 0.892 0.427

LIQUIDITY 30 1.4690 0.10074 0.55179 0.304 0.296 0.427

ASSET_TA

NGIBILITY30 3.1421 0.25584 1.40128 1.964 1.418 0.427

Valid N

(listwise)30


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Negative skewed symmetric bell Positive skewed

(skewed to the left) zero (Skewed to the right)

Diagram 4.1: Example of Skewness

Based on the Table 4.1, we can see that all the skewness value are at the range (-1)

and 1, so its means all the data are normally distributed. All the variables were

skewed to the right.


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4.2 MULTICOLLINEARITY

Table 4.2: Multicollinearity

Model

Collinearity Statistics

Tolerance VIF

1 (Constant)

PROFIT 0.470 2.130

GROWTH 0.459 2.181

SIZE 0.663 1.508

LIQUIDITY 0.418 2.393

ASSET 0.555 1.803

a. Dependent Variable: DR

Multicollinearity is defined as statistical phenomenon which two or more

independent variable is highly correlated. By refer to the table, centered VIF are

used to identify whether there is existing of multicollinearity problem or not. All the

independent variables are shows VIF value less than 10. According to V.G.R

Chandran (2009), if VIF value below than 10, its means there is no perfect

correlation between independent variable.


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4.3 MULTIPLE REGRESSIONS

Table 4.3: Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 0.916a 0.839 0.805 0.07816

As can be seen in the Table 4.3, R shows figure 0.916 (91.6%) which means there

have a strong relationship between dependent variable (debt ratio) and 5

independent variables which are profitability, growth, liquidity, size and asset

tangibility. While, for R-squared the value show figure 0.839 which is close to 1.0

and its means, 83.9 % of dependent variable can be explained by 5 chosen

independent variable. In contrast, another 16.9% of dependent variable can be

explained by other factors.

Adjusted R squared being used to identify relationship between independent

variable and dependent variable. Based on the table, we can see that adjusted R-

squared value is 0.805 which means that there is existence of high relationship

between the dependent variable and independent variables.


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Table 4.3: Multiple Regeression

Model Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

(Constant) 0.240 0.403 0.596 0.557

Profitbility -0.643 0.669 -0.112 -0.962 0.346

Growth 0.011 0.226 0.006 0.050 0.960

lgSIZE_ 0.057 0.043 0.145 1.341 0.192

LIQUIDITY -0.278 0.037 -0.867 -7.486 0.000

ASSET_TANGIBILI

TY0.054 0.012 0.430 4.598 0.000

a.Dependent variable:Debt Ratio

From the above table, it could be concluded that the result can be explained by the

following equation:

Debt Ratio = 0.240 0.643Profitability + 0.011Growth + 0.057Size

0.0278Liquidity + 0.054Asset Tangibility +

In the table above, it shows that asset tangibility, size and growth have positive

coefficient with the debt ratio, while, the others variables which are profitability and

liquidity have negative coefficient with the debt ratio.

It also shows that, profitability, growth and size have significant level more than

five percent confidence level (p>0.05), while the other variables such as liquidity


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and asset tangibility which both have significant level of 0.000 are less than five

percent (p0.05). Thus, this study fails to


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reject null hypothesis which explained that there is no significant

positive relationship between profitability and total debts.

4.3.2 Growth (Net Profit Margin)

H0: There is no significant positive relationship between Debt

Ratio and Growth.

H1: There is a significant positive relationship between Debt

Ratio and Growth.

The coefficient value of growth is 0.011. It indicates that every one

percent increase in the growth is expected to increase in the total

debts by 0.011 percent assuming that other variables remain constant.

Due to the positive value, it shows that there is positive relationship

between growth and total debts. The probability value (p-value) is at

0.960, in which means more than 0.05 percent confidence level

(p


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4.3.3 Size

H0: There is no significant positive relationship between Debt

Ratio and Size.


Ratio and Size.

The coefficient value of size is 0.057. It indicates that every one

percent increase in the size is expected to increase in the total debts

by 0.057 percent assuming that other variables remain constant. Due

to the positive value, it shows that there is positive relationship

between size and total debts. The probability value (p-value) is at

0.192, in which means more than 0.05 percent confidence level

(p


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Ratio and Liquidity.

The coefficient value of liquidity is -0.278. It indicates that every

one percent increase in the liquidity is expected to decrease in the

total debts by 0.278 percent assuming that other variables remain

constant. Due to the negative value, it shows that there is negative

relationship between liquidity and total debts. The probability value

(p-value) is at 0.000, in which means less than 0.05 percent

confidence level (p


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Ratio and Asset Tangibility.

The coefficient value of asset tangibility is 0.054. It indicates that

every one percent increase in the asset tangibility is expected to

increase in the total debts by 0.054 percent assuming that other

variables remain constant. Due to the positive value, it shows that

there is positive relationship between asset tangibility and total debts.

The probability value (p-value) is at 0.000, in which means less than

0.05 percent confidence level (p


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ANOVA (Analysis of Variance) is an analysis statistical tool that useful to identify

overall result of the regression. From the table above, we can see that the results

show of calculated value for F-statistic is 24.936 and the significant F at p-value of

0.000. Generally, since p-value is less than 95% confidence interval (5% significant

level) its means that there is a significant correlation between debt ratio with

profitability, growth, size, liquidity and asset tangibility. Overall this result can be

accepted.

4.5 FINDINGS AND DISCUSSION

The researcher wanted the result of all variables to be significant but the result does

not show as expected. There are some of independent variables having positive

relationship but some have negative relationship with the dependent variable.

The null hypothesis for asset tangibility is rejected and shows a positive significant

relationship with the debt ratio. As a result, firms with a larger division in fixed

assets can raise more debt, most probable because they can assurance these fixed

assets as collateral to lenders. The same result was obtained by Nasser and

Krassimir (2011).

As for the profitability, there is no positive relationship shows with the debt ratio.

Profitability are more likely to be related with the tax trade-off models that predict


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that profitable companies will employ more debt since they are more likely to have

a high tax burden and low bankruptcy risk. This result is consistent with the

pecking order theory proposed by Myers, (1984) where companies where not too

depends on external funding.

Size might be not being unimportant determinants of capital structure of

construction companies. The result shows insignificant positive relationships with

debt ratio. In which, larger firms tends to use debt more than smaller firms because

there are more diversified in terms of bankruptcy risk that was proposed by trade-

off theory (n.d).

While for growth variables, there is insignificant positive relationship with debt

ratio. The reason is that companies may grows either in terms of assets and sales,

the growth is straightly apparent by the private lenders such as banks and financial

institutions (n.d). Higher revenue companies imply less risk because they are easier

on debt financing. Besides that, higher growth involved higher needs on external

financing rather than internal financing. Where there is confirmation on Pecking

Orders Theory. Mayers (1977) stated that opportunity of growth of the companies

heavily depends on the firms optional on future investments. The elasticity of

future investments makes the firms to seize from bond holders to equity holders

which control the firms (Wessels and Titman, 1988).


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There is less evidence on liquidity. Claessens and Lang (2000) observed that each

country with one or more firm-specific factors is not significantly related to

leverage. Firms with greatest liquidity ratio might hold a relatively higher debt ratio

due to higher ability to meet short-term obligations when they fall due to

outstanding. This would imply a positive relationship of firms between debt ratio

and liquidity. On the other hand, firms with higher liquid assets may use these

assets to finance their investment. Thus, it will be a negative relationship between

liquidity of firms and debt ratio. Other than that, firms with higher liquid assets will

use these assets to finance their investment.


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CHAPTER 5

CONCLUSION AND RECOMMENDATION

5.0

CONCLUSION

The main objective of this research paper is to identify the capital structure of

construction companies listed in Bursa Saham Malaysia. This is because; the

construction companies are very sensitive with economics cycle. Moreover, this

paper is mean to see whether there is relationship and significant level between

dependent variable and independent variables.

This paper using Ordinary Least Square (OLS) to test the variables for the period

of 5 years from 2006 until 2010. The dependent variable for this paper is total

debts, while for the independent variables are profitability, growth, size, liquidity

and asset tangibility.

The result of the study shows that construction firms depend profoundly on the

debt financing. In addition, the researcher also found that asset tangibility is the

main influencer of the debt. In such, the non-current assets are acts as defender

for lenders form any risk. Based on the result shown, constructions company will

be more reliable in term of debt financing rather than equity financing when the

company became bigger on liquidity and asset tangibility.


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5.1 RECOMMENDATION

This paper gives a general idea to the construction firms about the determinants of

capital structure. Therefore, through this papers hope that it will benefit the firms

whose try to attract more investors. Since, the decision of the companies to

choose whether internal or external sources of financing are very limited.

Hence, future researchers are recommended to studying these factors in depth and

if possible to add another data. Moreover, the possible researchers may also

lengthen the period of the research so that it may see more in clear view. It also

may perhaps be able to be more explain the dependent variable. Other than that,

researcher may use proper method of analysis the result of panel data such as

fixed effects and random effects because these methods would give accurate

result. Besides that, future researchers are suggest to do diagnostic test for panel

data such as unit root test and other panel data analysis.


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