Debt Maturity, Underinvestment Problem and Corporate Value

Khaw, Karren Lee-Hwei; Lee, Benjie Chien Jiang

doi:10.21315/aamjaf2016.12.s1.1

Cited by 9 publications

(13 citation statements)

References 32 publications

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“…Malaysian firms also have a close relation with their banks; thus, they prefer to use bank borrowing than debt securities (Deesomsak et al , 2009). Deesomsak et al (2009) find that Malaysian firms are unlikely to use debt maturity as a tool to mitigate their agency costs, but the finding does not hold when firms are recognized by their heterogeneous characteristics (Khaw and Lee, 2016).…”

Section: Introductionmentioning

confidence: 99%

Debt financing puzzle and internationalization

Khaw

2019

JABS

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Purpose This study aims to examine the relation between long-term debt and internationalization in the presence of the agency costs of debt and business risk. Design/methodology/approach Sample firms consist of 517 non-financial listed firms in Malaysia, with 4,197 firm-year observations from the year 2000 to 2014. This study uses panel data regressions and a series of robustness tests to examine the hypotheses. Findings The results show that multinational corporations (MNCs) are more likely to sustain less long-term debt than domestic corporations (DCs) to mitigate the costs related to agency problem and firm risk. Meanwhile, foreign-based MNCs maintain less long-term debt than local-based firms, and the finding is more significant at a higher degree of internationalization. Robustness tests confirm the negative relations. Research limitations/implications The findings indicate that the ongoing debate on the debt financing puzzle can be explained by internationalization. Moreover, the findings suggest that in addition to the systematic differences between MNCs and DCs, studies on the debt financing and internationalization should also account for the systematic differences among MNCs such as the local-based MNCs, foreign-based MNCs and DCs that later expand their business operations abroad. Practical implications MNCs have to be responsive to the diverse institutional environments as they diversify their business operations geographically. When the adverse effects of internationalization outweigh the benefits, MNCs could use the long-term debt financing decision to mitigate the costs of doing business abroad. This is because debt financing is also a primary concern in the corporate financial decisions for the maximization of shareholders’ wealth. Originality/value This study contributes to the debt financing literature from the international perspective by providing evidence from an emerging market. In addition, this study highlights the importance of recognizing firms by their firm-specific characteristics, such as internationalization, given the systematic differences among firms.

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Section: Introductionmentioning

confidence: 99%

Debt financing puzzle and internationalization

Khaw

2019

JABS

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“…The third view on maturity structures is derived from the liquidity needs of firms where managers are seen to be balancing the need for liquidity which is obtained via long-term borrowing versus improvement in credit ratings as a result of borrowing in the short-term (Brick and Liao, 2017;Shawtari et al, 2016;Al Shubri and Jamil, 2017;Kamarudin et al, 2018). Finally, the signalling theory predicts that managers are further balancing the benefit arising positive signal sent to the market by borrowing in the short terms versus the higher costs associated with frequent need to renew debt contracts (Iqbal- Hussain and Guney, 2011;Khaw and Lee, 2016;Pontoh, 2017;.…”

Section: Motivating the Studymentioning

confidence: 99%

The Impact of Sharia Compliance on the Adjustment to Target Debt Maturity of Malaysian Firms

Hussain¹,

Shamsudin²,

Anwar³

et al. 2018

ERSJ

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This paper investigates the speed of adjustment to target debt maturity for a sample of Malaysian firms based on the sample period of 2007 to 2016. We examine the impact of Sharia compliance on the speed of adjustment to target debt maturity structure by grouping companies based on nature of compliance to Sharia requirements which is categorised by the Securities Commission of Malaysia. In line with our expectations, the analysis shows that firms classified as Sharia compliant tend to adjust at more rapid rates to target debt maturity when below target levels suggesting that compliant firms are able to issue long-term debt at cheaper levels relative to noncompliant counterparts. In addition, the reverse is observed when evaluating firms above target levels where non-compliant firms adjust at more rapid rates. Our findings indicate that compliant firms are able to raise long-term debt at cheaper rates relative to non-compliant firms given the captive market situation observed in the Islamic capital markets in Malaysia. This does however indicate the potential for higher agency costs as well as greater levels of information asymmetry for compliant firms relative to noncompliant firms given that non-compliant firms are more willing to reduce maturity structures to reach target levels when above target levels.

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“…The signalling effect on debt maturity is based on the fact that equilibrium is dependent on transaction or flotation costs (Flannery, 1986). In such cases, high quality firms opt for short-term debt given that the premium attached to longer term borrowing would be unattractive to these firms given that the pricing would be based on the average probability of default (Khaw and Lee, 2016). Conversely, low quality firms would prefer long-term debt given that the 'average' market price would attract a premium which would be lower than theirs (Pontoh, 2017).…”

Section: Literature Reviewmentioning

confidence: 99%

Debt Maturity and Shari'ah Compliance: Evidence from Malaysian Panel Data

Hussain¹,

Shamsudin²,

Salehuddin³

et al. 2018

ERSJ

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This paper investigates the effect of firm-specific characteristics on debt maturity in Malaysia. We examine the impact of Shari'ah compliance on debt maturity structure by grouping companies based on compliance status as governed by the Securities Commission of Malaysia over the sample period of 2007 to 2016. The results indicate that Shari'ah compliant firms tend to have longer debt maturity structure indicating that the nature of compliance determines the maturity structure of companies in Malaysia as managers of these firms tend to focus on mitigating liquidity risks potentially faced. In addition, Shari'ah compliant firms also tend to have lower bankruptcy costs. Contrary to their non-compliant counterparts, managers of Shari'ah compliant firms tend to change debt maturity structure as a signaling tool whilst opting for longer structures in periods of positive share price performance. We also find that Shar'iah compliance has no impact on firms' strategy of matching debt to asset maturity structure.

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Debt Maturity, Underinvestment Problem and Corporate Value

Abstract: ABSTRACT

Cited by 9 publications

References 32 publications

Debt financing puzzle and internationalization

Debt financing puzzle and internationalization

The Impact of Sharia Compliance on the Adjustment to Target Debt Maturity of Malaysian Firms

Debt Maturity and Shari'ah Compliance: Evidence from Malaysian Panel Data

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