CHAPTER structure is one of very popular topics in

CHAPTER 1: INTRODUCTION OF THE STUDY 1.1 INTRODUCTION Referring to the main paper adapting from Jordan which is capital structure and corporate performance, this research is more focused on the capital structure and corporate performance under manufacturing sectors, where the evidence getting from Malaysia.   Furthermore, in Malaysia the manufacturing sector more contribute to the performance and growth in the economy sector. Significant effect of the manufacturing industry to the economy is evidenced in its contribution to the gross domestic product (GDP), external trade and job creation .The decision of financial performance set by the management is very important in determining the firm optimal capital structure. The firm management need to play an important role to come out with their capital structure in order to maximize their firm performance and will give the better decision.

However, the variable that have different level in the firm, the managers try to achieve the best set to attain an optimal capital structure.          The main objective of this study is going to examine the relationship between capital  structure and firm performance in Malaysia whether it belongs to positively  relationship  or  negatively relationship between independent variables and dependent variables. This  A Study of Capital Structure in Manufacturing Sector: Evidence from Malaysia   6  independent variable through firm growth, size tax, tangibility if the asset, and short and long   term debt and the dependent variable is the performance of the firm.      The chapter 2 of this study will discusses about the literature review and chapter 3 discusses the research methodology to investigate the effect of capital structure on corporate performance.   The limitation of this study is the time constraint to get the quality of the findings, ability and effectiveness to answer the research question and hypothesis, and difficulties in findings related journals and published articles.

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        A Study of Capital Structure in Manufacturing Sector: Evidence from Malaysia   7            1.2  BACKGROUND OF THE STUDY This study focuses on the relationships of capital structure on corporate performance in the manufacturing sector which is consumer sector. Basically, the capital structure is one of very popular topics in the finance field. Besides that, the capital structure of a firm’s is very significant since it is related to the ability of a firm in meet the needs of its stakeholders.    In order to contribute to this line of study into develop country like Malaysia, this paper extends the studies on the capital structure on corporate performance which can measure through the independent variables such as leverage, growth, size, tax, and tangibility.

However, the A Study of Capital Structure in Manufacturing Sector: Evidence from Malaysia   8 dependent variable is the performance result which measure by the return on asset (ROA). The analysis is conduct on a sample of 130 consumer firms from consumer sector which are listed on Kuala Lumpur Stock Exchange (KLSE) in Bursa Malaysia.   According to Modigliani and Miller (1963), the capital structure under perfect capital markets assumption has no impact on firm’s value. In real world, there are no perfect capital market which criticized by many researchers and they revised their earlier theory by incorporating tax benefit. Besides that, they also argued that under market imperfection where interest payments are tax deductible (Modigliani & Miller, 1963).

Another theory which is trade-off theory argues that firms trade off the benefits and costs of debt and equity financing and reach to an optimal capital structure even with the market imperfections such as taxes, bankruptcy costs and agency costs. Basically, profitable firms can borrow more up to a certain level, because after that profitability and the value of the firm will decrease due to interaction of bankruptcy costs and agency costs. However, Jensen and Meckling (1976) based on the agency costs theory said the agency problem is cause by a conflict of interest between shareholders and managers or between shareholders and debt holders.    Therefore, opening new markets for listed firms in Malaysia as one of the developing countries in Asia is more frequent recently. This issue show how significant to recognize the capital structure will improve to their performance. In this study will present the relationships which are exist in this research and also, try to explore how the capital structure affects firm performance in Malaysia.

   A Study of Capital Structure in Manufacturing Sector: Evidence from Malaysia   9                   A Study of Capital Structure in Manufacturing Sector: Evidence from Malaysia   10 1.3 PROBLEM STATEMENT Currently, in Malaysia the manufacturing sectors shows positive performance from the previous year. For instance, the speed of light of manufacturing industries grow , the intention from the government is important to make sure regulatory and current trading policies in every aspect to be obeyed and to be peaceful yet globally competitive. The manufacturing sector in Malaysia more focused on its challenges and its importance.

This situation highlight the scope in Malaysia manufacturing environment. Apart from that,almost of challenges focuses to deal with and the most current one is global economic crisis. When the economic crisis happened in Malaysia, more than a half big companies worldwide face a hard time. KLSE in Malaysia is decrease and this will result the hardest hit ever to most companies in Malaysia  and  investors ( Zainal Abidin, 2009).  In the research of Deesomsak, Paudyal, and Pescetto (2004) he found that, this crisis will have an effect on the capital structure resolution which point out that mainly changes of the economic environment will dominance to the changes for the determinants of firm’s decisions. Higher risk premier become difficult to achieve due to the standard of increasing capital in Malaysia.

  However there is not enough research or study being done even though there already many research have been done in the previous decade to get the result on the capital structure and the impact of the value and performance, and researchers still cannot agree on the extent of the impact. In Malaysia, the manager of the firm really concern the outcome of capital structure in measuring the performance of the firm’s as they may presume that attributions of capital A Study of Capital Structure in Manufacturing Sector: Evidence from Malaysia   11 structure will related to their firms’ value. In fact, the good nature of capital structure become the success of the firm.

As a result, capital structure issues that can affect corporate performance need to be addressed.  Therefore, firms in the manufacturing sector need to be measure through the variable to implement all capital structure theories to choose their capital structure for financing the investment, so that they could increase the production and profit. The leverage, growth, size and tangibility of asset been use to measure the performance based on the return on asset (ROA).             A Study of Capital Structure in Manufacturing Sector: Evidence from Malaysia   12       1.4 RESEARCH OBJECTIVE The main objective for the purpose of this study is to investigate the relationship between capital structure and firm performance in Malaysia whether it belongs to positively relationship or negatively relationship between independent variables and dependent variables.   In addition, here also are various specific objective of this paper, such as follows: 1. To determine whether there is significant relationship between short term debt and firm’s performance in Malaysia.

   2. To examine whether there is significant relationship between long term debt and firm’s performance in Malaysia.   3. To examine whether there is significant relationship between return on asset (ROA) and firm’s performance in Malaysia.  A Study of Capital Structure in Manufacturing Sector: Evidence from Malaysia   13 4. To determine whether there is significant relationship between total asset and firm’s performance in Malaysia.  5.

To determine whether there is significant relationship between growth and firm’s performance in Malaysia.       1.5 RESEARCH HYPOTHESES In order for research objectives to be achieved, there are hypothesis which set up according to the theoretical framework. Hypothesis are formulate based on the two main categories which are null hypothesis (Ho) and alternate hypothesis (HA). 1.5.

1  Hypotheses 1 HO1: There is no significant relationship between short term debt and firm’s performance. HA1: There is a significant relationship between short term debt and firm’s performance. A Study of Capital Structure in Manufacturing Sector: Evidence from Malaysia   14  1.

5.2  Hypotheses 2 HO2: There is no significant relationship between long term debt and firm’s performance. HA2: There is a significant relationship between long term debt and firm’s performance. 1.5.

3  Hypotheses 3 HO3: There is no significant relationship between return on asset (ROA) and firm’s performance. HA3: There is a significant relationship between return on asset (ROA) and firm’s performance.     1.5.4  Hypotheses 4 HO4: There is no significant relationship between total asset and firm’s performance.  HA4: There is a significant relationship between total asset and firm’s performance.

  1.5.5  Hypotheses 5 HO5: There is no significant relationship between growth and firm’s performance. A Study of Capital Structure in Manufacturing Sector: Evidence from Malaysia   15 HA5: There is a significant relationship between growth and firm’s performance.