The Capital Structure Dynamics of Malaysian Firms: Timing Behavior Versus Adjustment Towards the Target
Publication Type
Original research

Purpose This study investigates how the timing behavior and the adjustment towards the target of capital structure interact with each other in the capital structure decisions. Past literature finds that both timing and targeting are significant in determining the leverage ratio which is inconsistent with any standalone framework. This study argues that the preference of the firm for timing behavior or targeting behavior depends on the cost of deviation from the target. Since the cost of deviation from the target is likely to be asymmetric between overleveraged and underleveraged firms, the direction of the deviation from the target leverage is expected to alter the preference toward timing or targeting in the capital structure decision. Design/methodology/approach This study used the GMM-system estimators with the Malaysian data for the period of 1992-2009 to fit a standard partial adjustment model and to estimate the speed of adjustment of capital structure. Findings This study finds that Malaysian firms, on average, adjust their leverage at a slow speed of 12.7% annually and this rate increased to 14.2% when the timing variable is accounted for. Moreover, the speed of adjustment is found to be significantly higher and the timing role is lower for overleveraged firms compared with underleveraged firms. Overleveraged firms seem to find less flexibility to time the market as more pressure is exerted on them to return to the target regardless the timing opportunities because of the higher costs of deviation from the target leverage. Underleveraged firms place lower priority to rebalance toward the target compared with overleveraged firms as the costs of being underleveraged are lower and hence, these firms have more flexibility to time the market. Research limitations/implications The findings of this study support that firms consider both targeting and timing in their financing decisions. No standalone theory can interpret the full spectrum of empirical results. The empirical work is based on partial adjustment model of leverage; however, this model has been criticized by inability to distinguish between active adjustment behavior and mechanical mean reversion. This is an avenue for future research. Originality/value this study investigates if targeting and timing behaviors are mutually exclusive as theoretically expected or they can coexist. A theoretical explanation and an empirical investigation supports the conclusion that firms consider both targeting and timing in their financing decisions. This study provide evidence from Malaysian firms that are characterized by concentrated ownership structure and separation of cash flow rights and control rights of the firm due to pyramid ownership structure. therefore, it provides evidence on how environmental characteristics may affect the capital structure determinants of the firm

International Journal of Managerial Finance
Emerald Group Publishing Limited
Publisher Country
United States of America
Impact Factor
Publication Type
Both (Printed and Online)