Three essays on capital structure determinants

Abstract

The dissertation consists of three essays on capital structure. The first essay is entitled “Why should PLS-SEM be used rather than Regression? Evidence from the Capital Structure perspective”. This study examines capital structure determinants using a simultaneous causal model with interaction effects between manifest and latent variables. Partial Least Squares is an approach to Structural Equation Models that allows researchers to analyse the relationships simultaneously. It is interesting to compare and contrast this approach in analysing mediation relationships with the regression analysis popularized by Baron and Kenny (1986). In addition to statistical data, logical arguments are presented supported by two case studies from PLS-SEM and regression models. I find that the choice between regression and PLS-SEM matters even with the simplest scenarios per item for constructs. This study’s originality is the provision of new comparative analyses of PLS-SEM versus regression analysis in the context of capital structure determinants. The “indirect” and “mediate” macro syntax normal theory of the Sobel test, and the bootstrapping techniques proposed by Preacher and Hayes (2004, 2008) are compared with PLS-SEM. I find that the PLS-SEM analysis provides less contradictory results than regression analysis in terms of detecting mediation effects. The second essay is entitled “Determinants of Capital Structure and Firm Financial Performance - A PLS-SEM Approach: Evidence from Malaysia and Indonesia”. This essay investigates the impact of capital structure determinants on firm financial performance together with the mediation effect of firm leverage in Malaysia and Indonesia over the period 1990 to 2010. My results show that some of the capital structure determinants directly affect firm financial performance. I also find that only the Malaysian sample has a positive significant correlation between firm leverage and firm financial performance. Malaysian firms use external financing instead of internal financing to heighten the performance. My results also show that firm leverage plays a mediating role in Malaysia but not for the Indonesian sample. Asset structure, growth opportunities, liquidity, non-debt tax shield and interest rate are the attributes that were indirectly influenced by firm leverage on firm financial performance. Further analysis for multi-group analysis (MGA) in PLS was also tested for equality of the parameter estimates. I find that some attribute coefficients in the determinants of capital structure and firm financial performance are significantly different between Malaysia and Indonesia. The third and final essay is entitled “Interrelation between Countries, Economic Sectors, Capital Structure and Performance: The Malaysian and Indonesian evidence”. Here I study the comprehensive, simultaneous interrelationships between countries, economic sectors (i.e., primary, secondary and tertiary sector), capital structure and performance, especially involving mediation and the equality of coefficient effects in different sectors. I find a direct relationship between the determinants of capital structure and firm financial performance within different economic sectors. I find a significant relationship between firm leverage and firm financial performance in the secondary and tertiary sectors but not for the primary sector. I find that the secondary sector tends to use internal financing while the tertiary sector tends to use external financing to enhance firm financial performance. My results also reveal that the effect of firm leverage on firm financial performance tends to be mediated by firm- and country-specific attributes, as well as by the sector in which they operate. A closer examination of the data showed that in the economic sectors, I find robust results that there are not just positive direct and indirect effects, but also negative direct and indirect effects. Using PLS multi-group analysis (MGA), my findings show that I reject the null hypothesis that the all path coefficient estimates for the sector comparisons are equal.