CAPITAL STRUCTURE AFFECTS FIRM VALUE: TECHNOLOGY SECTOR IN MALAYSIA BY FOO WEI FEN MOK YEE WAH TAN LEE YEN WAH WEN XIN A research project submitted in partial fulfilment of the requirement for the degree of BACHELOR OF BUSINESS ADMINISTRATION (HONS) BANKING AND FINANCE UNIVERSITY TUNKU ABDUL RAHMAN FACULTY OF BUSINESS AND FINANCE DEPARTMENT OF FINANCE MAY 2012 i Copyright @ 2012 ALL RIGHTS RESERVED. No part of this paper may be reproduced, 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. ii 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 ALLsources 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 _______20,763_______ Name of Student: Student ID: Signature: 1. FOO WEI FEN 09ABB06846 2. MOK YEE WAH 09ABB05938 3. TAN LEE YEN 09ABB06328 4. WAH WEN XIN 09ABB06142 Date: 20/04/2012 iii ACKNOWLEDGEMENT We would like to express our sincere gratitude and appreciation to our supervisor, Ms.Zuriawati binti Zakaria for her encouragement, comments, advice and giving us brilliant ideas and suggestions in preparation and completion of this project. It is our honour to thank Ms.Zuriawati for her professional guidance in the area on capital structure and support from the initial to the final level in enabled us to develop an understanding of the project. This thesis would not have been possible without the kind support and supervision by Ms.Zuriawati. Lastly, thanks to our friends who have, in one way or other, given us in valuable help, assistance and advice. We offer our regards and blessings to all of those who supported us in any respect during the completion of the project. Thank you. iv TABLE OF CONTENTS Page Copyright Page ................................................................................................. ii Declaration ...................................................................................................... iii Acknowledgement .......................................................................................... iv Table of Contents ..............................................................................................v List of Tables ................................................................................................. .ix List of Figures ...................................................................................................x List of Abbreviations ...................................................................................... xi List of Appendices ......................................................................................... xii Preface ........................................................................................................... xiii Abstract ......................................................................................................... xiv CHAPTER 1 : RESEARCH OVERVIEW 1.0 Introduction .................................................................................................1 1.1 Research Background ...........................................................................1 1.1.1 Capital Structure ..........................................................................1 1.1.2 Capital Structure in Malaysia ......................................................3 1.1.3 Firm Value and the Enterprise Value .........................................5 1.1.4 Firm Value and Marketing Philosophy ......................................6 1.1.5 Overview of Malaysia Services Sector ......................................6 1.1.6 The impact of IT to business ......................................................7 1.1.7 Technology Implementation in Malaysia ...................................8 1.2 Problem Statement ...................................................................................11 1.3 Research Objectives .................................................................................14 1.3.1 General Objective ...................................................................14 1.3.2 Specific Objectives ................................................................14 v 1.4 Research Questions ..................................................................................15 1.5 Hypothesis of the Study ...........................................................................16 1.6 Significant of Study .................................................................................16 1.7 Chapter Layout .........................................................................................18 1.8 Conclusion ...............................................................................................18 CHAPTER 2: LITERATURE REVIEW 2.0 Introduction .....................................................................................................19 2.1 Review of Relevant Theoretical Models .............................................19 2.1.1 The Modigliani-Miller Theorem Proposition I ..................19 2.1.2 Pecking Order Theory .......................................................21 2.1.3 Static trade off theory ........................................................23 2.1.4 Free Cash Flow and Agency Theory ................................24 2.2 Review of the Literature .....................................................................27 2.2.1 Firm Value ........................................................................27 2.2.1.1 Return on Asset (ROA) ......................................27 2.2.1.2 Return on Equity (ROE) ....................................30 2.2.1.3 Tobin‘s Q ...........................................................31 2.2.2 Capital structure ................................................................32 2.2.2.1 Profitability ........................................................32 2.2.2.2 Tangibility ..........................................................34 2.2.2.3 Firm Size ............................................................35 2.2.2.4 Growth Opportunity ...........................................36 2.2.2.5 Liquidity .............................................................37 2.2.2.6 Leverage .............................................................39 2.3 Theoretical Framework .......................................................................42 2.4 Hypothesis on Dependence Variables ................................................43 2.4.1 Profitability and firm value ...............................................43 2.4.2 Tangibility and firm value ................................................44 2.4.3 Firm size and firm value ...................................................44 2.4.4 Growth opportunity and firm value ..................................46 2.4.5 Liquidity and firm value ...................................................47 2.4.6 Leverage and firm value ...................................................47 vi 2.5 Theories of Capital Structure ..............................................................49 CHAPTER 3: METHODOLOGY 3.0 Introduction .....................................................................................................51 3.1 Research Design ..................................................................................51 3.2 Data Collection Methods ....................................................................52 3.2.1 Secondary Data .................................................................53 3.3 Sampling Design .................................................................................53 3.3.1 Target Population ..............................................................53 3.3.2 Sampling Frame and Sampling Location ..........................54 3.4 Data Processing ...................................................................................54 3.4.1 Return on Asset .................................................................55 3.4.2 Profitability .......................................................................57 3.4.3 Tangibility .........................................................................57 3.4.4 Firm size ............................................................................58 3.4.5 Growth opportunity ...........................................................58 3.4.6 Liquidity ............................................................................59 3.4.7 Leverage ............................................................................59 3.5 Data Analysis ......................................................................................60 CHAPTER 4 : DATA ANALYSIS 4.0 Introduction ....................................................................................................61 4.1 Frequency Analysis .............................................................................61 4.2 Descriptive Analysis ...........................................................................63 4.3 Panel Data Findings ............................................................................65 4.3.1 Normality Test ..................................................................65 4.3.2 Regression results .............................................................66 4.3.3 Hypothesis Testing ............................................................69 4.3.3.1 Test of β1 (Profitability) ....................................69 4.3.3.2 Test of β2 (Tangibility) ......................................70 4.3.3.3 Test of β3 (Firm Size) ........................................70 4.3.3.4 Test of β4 (Growth Opportunities) ....................71 vii 4.3.3.5 Test of β5 (Liquidity) .........................................71 4.3.3.6 Test of β6 (Leverage) .........................................72 CHAPTER 5 : DISCUSSION, CONCLUSION,AND IMPLICATIONS 5.0 Introduction ....................................................................................................73 5.1 Summary of Statistical Analysis .........................................................73 5.1.1 Descriptive Statistical and Panel Data Result ...................73 5.2 Discussions of Major Findings ...........................................................74 5.2.1 Effect of Profitability, Firm Size and Liquidity to the firm value ..........................................................................75 5.2.2 Effect of Tangibility, Growth opportunity and Leverage to the firm value ................................................................79 5.2.3 The Influence of Firm Size to the Technology and Software Firm Performance ...............................................77 5.2.4 Explanations of Pecking Order Theory on the Firm Performance ......................................................................81 5.3 Implication of the Study ......................................................................82 5.3.1 Capital Management and Planning Implication ................82 5.4 Limitation of the Study .......................................................................82 5.5 Recommendation ................................................................................83 5.6 Conclusion ..........................................................................................84 References .............................................................................................................86 Appendices ..........................................................................................................101 viii LIST OF TABLES Page Table 1.1: Third Industrial Master Plan (IMP3) - Towards Global Competitiveness 7 Table 4.1: Summary descriptive statistics of all variables 63 Table 4.2: Regression results 66 Table 4.3: Jarque-Bera test 66 Table 5.1: Summarize of significant of independent variable in different level of significance 74 ix LIST OF FIGURES Page Figure 1.1: Capital structure and market structure 4 Figure 1.2: Capital structure and profitability 4 Figure 1.3: The growth of MSC Malaysia over the recent year 10 Figure 1.4: The growth in the SSO sector over the recent year 11 Figure 2.1: shows the determinants of capital structure affect firm value 42 Figure 4.1: Sum of profitability and ROA for 50 firms from the period 2005 to 2009 61 Figure 4.2: The relationship between growth and ROA (firm value) 62 x