The Impact of Capital Structure and Agency Cost on Firm's Profitability of Industrial Product Sector

164 Pages·2017·1.35 MB·English

THE IMPACT OF CAPITAL STRUCTURE AND
AGENCY COST ON FIRM’S PROFITABILITY OF
INDUSTRIAL SECTOR IN MALAYSIA

KUEK SHI MIN
LAU KAH FAI
LEE CHENG YOONG
LIM SHEA NEE
TAN CHOON HONG

BACHELOR OF BUSINESS ADMINISTRATION
(HONS) BANKING AND FINANCE

UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF BUSINESS AND FINANCE
DEPARTMENT OF FINANCE

AUGUST 2017
GROUP A41

THE IMPACT OF CAPITAL STRUCTURE AND
AGENCY COST ON FIRM’S PROFITABILITY OF
INDUSTRIAL SECTOR IN MALAYSIA

BY

KUEK SHI MIN
LAU KAH FAI
LEE CHENG YOONG
LIM SHEA NEE
TAN CHOON HONG

A research project submitted in partial fulfillment of the
requirement for the degree of

BACHELOR OF ADMINISTRATION (HONS)
BANKING AND FINANCE

UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF BUSINESS AND FINANCE
DEPARTMENT OF FINANCE

AUGUST 2017
THE IMPACT OF CAPITAL STRUCTURE AND AGENCY COST ON FIRM’S
PROFITABILITY OF INDUSTRIAL SECTOR IN MALAYSIA

Copyright @ 2017
ALL RIGHTS RESERVED. No part of this paper may be reported, stored in a
retrieval system, or transmitted in any form or by any means, graphic, electronic,
mechanical, photocopying, recording, scanning, or otherwise, without the prior
consent of the authors.
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THE IMPACT OF CAPITAL STRUCTURE AND AGENCY COST ON FIRM’S
PROFITABILITY OF INDUSTRIAL SECTOR IN MALAYSIA

DECLARATION

We hereby declare that:
(1) This undergraduate research project is the end result of our own work and that
due acknowledgement has been given in the references to ALL sources of
information be they printed, electronic, or personal.

(2) No portion of this research project has been submitted in support of any
application for any other degree or qualification of this or any other university, or
other institutes of learning.

(3) Equal contribution has been made by each group member in completing the
research project.

(4) The word count of this research report is 28183.

Name of Student: Student ID: Signature:
1. KUEK SHI MIN 14ABB06897
2. LAU KAH FAI 13ABB05275
3. LEE CHENG YOONG 14ABB06755
4. LIM SHEA NEE 14ABB07242
5. TAN CHOON HONG 14ABB06605

Date: __23th August 2017__

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THE IMPACT OF CAPITAL STRUCTURE AND AGENCY COST ON FIRM’S
PROFITABILITY OF INDUSTRIAL SECTOR IN MALAYSIA

ACKNOWLEDGEMENT

This research project has been successfully completed with the assistance of various
authorities. Foremost, we would like to express our sincere gratitude to Universiti
Tunku Abdul Rahman (UTAR) for giving us the opportunity to conduct this
research project as a partial fulfilment for the requirement of degree completion of
Bachelor of Business Administration (HONS) Banking and Finance. This work
would not have been possible without the valuable data provided by the research
database in library.

We would also like to thank our research supervisor, Dr. Zuriawati Binti Zakaria
for her patient guidance, enthusiastic encouragement and useful opinions
throughout our research. In the research pe

riod, she provided not only the sufficient knowledge and answers to our queries,
but also practical suggestions to improve our work. Her willingness to spare her
time for our thesis completion is immensely appreciated. The research group is
deeply grateful to our second examiner, Mr. Aminuddin Bin Ahmad for sharing his
professional comments on the earlier version of the manuscript and
recommendations for our better work.

Last but not least, the research group would like to thank each of the group members
of this research group for sharing their pearls of wisdom and putting their
continuous hard work. Their willingness to cooperate, brilliant ideas and supports
are vital for the accomplishment of this research project within the constrained
timeframe. In a nutshell, we are sincerely grateful to every party who has, directly
or indirectly, assisted in carrying out this research.

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THE IMPACT OF CAPITAL STRUCTURE AND AGENCY COST ON FIRM’S
PROFITABILITY OF INDUSTRIAL SECTOR IN MALAYSIA

TABLE OF CONTENTS

Page
Copyright Page……...……………………......……………………………...........ii
Declaration…………………………………..……………………………............iii
Acknowledgement…………………….….….………………………….....……..iv
Table of Contents…………………………….……………………..…........….....v
List of Tables………………………….…….…………………………................ix
List of Figures……………...……………….………………...……...……...........xi
List of Abbreviations………..……………….…………………………......…...xiii
List of Appendices…………………………….……………….…..……......…...xv
Preface………………………………………….…………………..……......…..xvi
Abstract……………………………………………………………………........xvii
CHAPTER 1 RESEARCH OVERVIEW……………………………........…........1
1.0 Introduction…………………………………..……..………...............1
1.1 Research Background…………………………………...…..................1
1.1.1 Overview of Capital Structure………...…………………….1
1.1.2 Overview of Agency Cost………………...……………......17
1.1.3 Overview of Industrial Sector………………………...……22
1.2 Problem Statement……………………………………...........…........32
1.2.1 Capital Structure…………………………………………....32
1.2.2 Agency Cost…………………………………………...…...33
1.3 Research Objectives…………………………………...……..............34
1.3.1 Main Objectives…………………………………................34
1.3.2 Specific Objectives…………………………………............34
1.4 Research Questions……………………………………….….............35
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THE IMPACT OF CAPITAL STRUCTURE AND AGENCY COST ON FIRM’S
PROFITABILITY OF INDUSTRIAL SECTOR IN MALAYSIA

1.5 Hypotheses of the Study……………………………………..............35
1.6 Significance of the Study …………………………………...….........36
1.7 Chapter Layout……………………………….…………………........38
1.8 Conclusion……………………………………....…..………..............38
CHAPTER 2 LITERATURE REVIEW…………………………..………..........39
2.0 Introduction……………………………………………………..........39
2.1 Review of Relevant Theoretical Models………………………..........39
2.1.1 Trade of Theory………………………..……………...........39
2.1.2 Pecking Order Theory..……………..……………...............41
2.1.3 Agency Theory………………………….………..…...........43
2.2 Literature Review ……………….………………………...................45
2.2.1 Independent Variables……………………………...............45
2.2.2 Control Variables………………………….………….........52
2.3 Theoretical Framework……………..…..............................................57
2.4 Hypotheses Development…………………...……………..................58
2.4.1 Debt and Profitability………………………………............58
2.4.2 Equity and Profitability………..……………………...........59
2.4.3 Agency Cost and Profitability……..………………......…..59
2.4.4 Control Variables and Profitability………….……..............60
2.5 Conclusion……………………………………………………............60
CHAPTER 3 METHODOLOGY…………………………………...…...............61
3.0 Introduction……………………………………….…........................61
3.1 Research Design………………………………………..…...…..........61
3.2 Data Collection Methods…………………………………….….........62
3.3 Sampling Design……………………………..………........……........66
3.3.1 Target Population…………………………………..............66
3.3.2 Sampling Technique and Size……………………...............69
3.4 Research Instrument………….………………………………...........70
3.4.1 Dependent Variables……………………………...………..70
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THE IMPACT OF CAPITAL STRUCTURE AND AGENCY COST ON FIRM’S
PROFITABILITY OF INDUSTRIAL SECTOR IN MALAYSIA

3.4.2 Independent Variables……………………………………...71
3.4.3 Control Variables……………………………………...…...74
3.5 Data Analysis………………………………………………...............75
3.5.1 Panel Data Techniques……………………………..............76
3.5.2 Diagnostic Test………………….………………….............81
3.6 Conclusion……………………………………………………............84
CHAPTER 4 DATA ANALYSIS………………………………………..............85
4.0 Introduction………………………..………...…..…………..............85
4.1 Descriptive Analysis…………………………………………............86
4.1.1 Return on Asset (ROA)……………………………...……..86
4.1.2 Return on Equity (ROE)………………………………...….87
4.1.3 Long Term Debt Ratio (LTR)……………………...………88
4.1.4 Short Term Debt Ratio (STR)………………………...……88
4.1.5 Equity Ratio (ER)…………………………………………..89
4.1.6 Agency Cost (AGC)………………………………………..90
4.1.7 Firm Size (FS)………………………………...……………90
4.1.8 Sales Growth (SG)………………………………...…….…91
4.2 Panel Data Analysis and Diagnostic Checking………………............92
4.2.1 Poolability Test…………………………………...………..92
4.2.2 Breusch-Pagan Lagrange Multiple Test…………..……….93
4.2.3 Hausman Test………………………………………………93
4.2.4 Normality Test……………………………………..………94
4.2.5 Multicollinearity……………………………………………95
4.2.6 Autocorrelation……………………………...……………..98
4.3 Inferential Analysis…………………………………...………...........98
4.3.1 R-Squared…………….……….……………………............98
4.3.2 F-Test……………………………………..………............100
4.3.3 T-Statistics………..…………………….…………............101
4.4 Conclusion……………………………………………………..........108
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THE IMPACT OF CAPITAL STRUCTURE AND AGENCY COST ON FIRM’S
PROFITABILITY OF INDUSTRIAL SECTOR IN MALAYSIA

CHAPTER 5 DISCUSSION, CONCLUSION AND IMPLICATIONS….........109
5.0 Introduction……………………………………………….…...........109
5.1 Summary of Statistical Analyses……………………………….......109
5.2 Discussions of Major Findings………………….……………...…...112
5.2.1 Long Term Debt and Profitability……………………..….112
5.2.2 Short Term Debt and Profitability…..…………………….113
5.2.3 Equity and Profitability…………………………………...115
5.2.4 Agency Costs and Profitability…………………..……….117
5.2.5 Control Variables and Profitability……………..………...119
5.3 Implication of Study…………………………………………...........122
5.3.1 Companies………………………………………………...122
5.3.2 Policy Makers……………………………………………..123
5.3.3 Investors/Shareholders……………………………………124
5.3.4 Academician and Future Researcher……………..……….125
5.4 Limitations of Study……………...…………………………............125
5.5 Recommendations for Future Research……………….………........126
5.6 Conclusion………………………………..…………………............127
References……………………………...………………………………….........128
Appendices………………………………………………………..…….....……141

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THE IMPACT OF CAPITAL STRUCTURE AND AGENCY COST ON FIRM’S
PROFITABILITY OF INDUSTRIAL SECTOR IN MALAYSIA

LIST OF TABLES
Pages
Table 1.1: Growth of average long term debt for each Malaysian 22
sector from year 2010 to 2014 with base year = 2009.

Table 1.2: Growth of short term debt for each Malaysian sector 24
from year 2010 to 2014 with base year = 2009.

Table 1.3: Growth of average of total equity for each Malaysian 25
sector from year 2010 to 2014 with base year = 2009.

Table 1.4: List of top five out of the 30 listed companies in 27
Malaysia’s KLCI

Table 1.5: Five listed companies in industrial sector in Malaysia 29
in year 2014.

Table 3.1: Variables, Proxies, Descriptions, Unit Measurements 63
& Sources.
Table 3.2: Gross Domestic Product (GDP) of Industrial Sector 68
from 2013 to 2016.
Table 3.3: Total Observations 70
Table 4.1: Descriptive Analysis (2010 – 2015) 86
Table 4.2: Likelihood Ratio Test Result 92
Table 4.3: Breusch-Pagan Lagrange Multiple (BPLM) Test Result 93
Table 4.4: ROA Hausman Test Result 94
Table 4.5: ROA Normality Test Result 94
Table 4.6: Correlation Matrix for the Variables 95
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