i

THE DETERMINANTS OF CAPITAL STRUCTURE OF CONSTRUCTION

COMPANIES LISTED IN BURSA SAHAM MALAYSIA



ZULAIKHA ATHIRAH BT ZULKIFLI
2009703367



Submitted in Partial Fulfillment of the Requirement for the Bachelor of Business
Administration (Hons) Finance



FACULTY OF BUSINESS MANAGEMENT
UNIVERSITI TEKNOLOGI MARA
JOHOR



JUNE 2012
ii

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
iii

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



iv

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.


v

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
vi

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









viii

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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This paper is attempted to discover the determinants of capital structure of construction
firms listed in Bursa Saham Malaysia. As it financial conditions of the construction
companies always are responsive towards economic situation. The vital part is when
managers will make the decision whether to finance the company internal or external
source. Basically, capital structure theories can be divided into; the pecking order, static
trade-off theory, and market-timing theory. Optimal capital structure is needed by
construction firms as it will benefit firms and also its stakeholders. The dependent
variable is debt ratio that can be interpreted by total debt divided by total assets. While
for the independent variables, it consists of profitability, growth, size, liquidity and
tangible assets. The result was profitability does have negative insignificant relationship
towards debt ratio, growth had positive insignificant relationship with debt ratio, and size
had positive insignificant relationship towards debt ratio. While liquidity had negative
significant relationship with debt ratio and asset tangibility had positive significant
relationship towards debt ratio. In conclusion this study provides verification indicate
firms performance whether positive or negative that related to capital structure.
1

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.
2

Firms will borrow more when the investment opportunity depleted. In its
simplest form, the pecking order model of corporate financing says that
when a firm's internal cash flows are inadequate for its real investment and
dividend commitments, the firm issues debt (Chakraborty, 2010). Equity is
never issued, except possibly when the firm can only issue junk debt and
costs of financial distress are high (Myers and Sunder, 1994). The Pecking
Order Theory started off with the existing of asymmetric information by the
manager regarding their firms prospects, risk and investor behavior. This
asymmetric information affects the decision between internal or external
financing and chooses between debt and equity.
1.1.2 Static Trade-Off
The idea of static trade-off theory refers to usage of company by using how
much debt financing and equity financing to balance its costs and benefits.
The trade off theory was first claimed by F.Modigliani and H.M. Miller in
1963. This theory takes such consideration such a balance between the dead-
weight costs of bankruptcy and the saving benefits of debt. Where agency
cost is often too included in the balance. Under the agency cost theory, in
order the company to deals with compensates costs relate with
underinvestment and asset substitution problems, the firms will use the
advantage of reducing potential cash flow problems and other potential
conflicts that arise between managers and shareholders (C. Cotei and J.
3

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.
4


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
5

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.



6

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
7

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
8

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:
9

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.

10

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.


11

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.



12


13

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
14

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
15

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.
16

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
17

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.








18

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
19

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
20

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.







21

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
22

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.
23

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.

24

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
25

The time horizon use for this study is annually data which is from year 2006
until year 2010.
3.6 Data Analysis and Treatment
The statistical tools use in this study is Descriptive Statistics, Ordinary Least-
Square, Test of Correlation, Test of Normality and Test of Multicollinearity in order
to test the validity and dependability of the data for this study. This model of
analysis will be use to examine the effects of several independent variables on
dependent variables that are interval scaled.
3.6.1 Descriptive Statistics
In descriptive statistics, summary statistics are use to review a set of
observations, consecutively to conclude the amounts as simply as possible.
Arithmetic mean will be use to measure the central tendency. Standard
deviation, variance and coefficient of variation also will be measure. This is
because; it will show how far the dispersion between the ranges of the data
is. It is state that, the more the dispersion, the more the volatile the stock
indices are.
3.6.2 Ordinary Least-Square
The use of OLS is to test the sensitivity of normality, homoscedasticity,
and independence. So, in order to determine the validity of an OLS
regression, the researcher will test is whether the residuals are normally
26

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
27

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 R
2
, the smaller
the standard error would be. Therefore, higher R
2
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
28

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:
H0: There is no significant positive relationship between Debt Ratio and
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:
H0: There is no significant positive relationship between Debt Ratio and
Liquidity.
29

H1: There is a significant positive relationship between Debt Ratio and Liquidity.
Hypothesis 5:
H0: There is no significant positive relationship between Debt Ratio and
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



30

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.
31

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
NGIBILITY
30 3.1421 0.25584 1.40128 1.964 1.418 0.427
Valid N
(listwise)
30

32


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.






33

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.


34

4.3 MULTIPLE REGRESSIONS
Table 4.3: Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 0.916
a
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.




35

Table 4.3: Multiple Regeression
Model Unstandardized
Coefficients
Standardized
Coefficients
T Sig.
1
(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
TY
0.054 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
36

and asset tangibility which both have significant level of 0.000 are less than five
percent (p<0.05).
Below is the explanation about the relationship for each dependent and independent
variables:

4.3.1 Profitability (Return on Assets)
H0: There is no significant positive relationship between Debt
Ratio and Profitability.
H1: There is a significant positive relationship Debt Ratio and
Profitability.
The coefficient value of profitability is -0.643. It indicates that every
one percent increase in the profitability is expected to decrease in the
total debts by 0.643 percent assuming that other variables remain
constant. Due to the negative value, it shows that there is negative
relationship between profitability and total debts. This was supported
by Syuhada, Zaleha, Mansor & Husian (2011) in which they also
found negative relationship between profitability and total debts. The
probability value (p-value) is at 0.3346, in which means more than
0.05 percent confidence level (p>0.05). Thus, this study fails to
37

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<0.05). Thus, this study is fails to reject null hypothesis which
explained that there is no significant positive a relationship between
growth and total debts. Firms with a higher amount of their market
value related by growth opportunity will have lower debt capacity
(Myers, 1977).


38

4.3.3 Size
H0: There is no significant positive relationship between Debt
Ratio and Size.
H1: There is a significant positive relationship between Debt
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<0.05). Thus, this study is fails to reject null hypothesis which
explained that there is no significant positive relationship between
size and total debts. The same result were obtained by Haslindar and
Tajul (2011) which explained that the larger the firm the more
expended and these firms are also facing lower risk as compared to
smaller firms.
4.3.4 Liquidity
H0: There is no significant positive relationship between Debt
Ratio and Liquidity.
39

H1: There is a significant positive relationship between Debt
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<0.05). Thus, this study reject null hypothesis
which explained that there is negative significant relationship
between liquidity and total debts. The study of Capital structure
around the world: The roles of firm- and country-specific
determinants by Jong, Rezaul and Nguyen (2007) found that there
are limited results for liquidity even though modern theories suggest
the negative relationship between liquidity and debt ratio. Mostly,
companies or countries with advances economies will obtain
significant negative coefficients.
4.3.5 Asset Tangibility
H0: There is no positive significant relationship between Debt
Ratio and Asset Tangibility.
40

H1: There is a significant positive relationship between Debt
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<0.05). Thus, this study reject null
hypothesis which explained that there is significant positive
relationship between asset tangibility and total debts.

4.4 ANOVA
Table 4.4: F-Test
Model Sum of Squares Df Mean Square F Sig.
1
Regression 0.762 5 0.152 24.936 0.000
b

Residual 0.147 24 0.006

Total 0.908 29

a. Dependent Variable: Debt_Ratio
b. Predictors: (Constant), ASSET_TANGIBILITY, Profitbility, lgSIZE_, LIQUIDITY,
Growth
41


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
42

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).

43

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.



44


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.
45

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.






46

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