Determinants of capital structure in blue chip manufacturing companies

This aim of this study is to explore the determinants of capital structure in blue chip manufacturing companies and to investigate whether these determinants are supporting Pecking Order theory (POT) or Trade-off theory (TOT). Generally, POT suggest that there is no optimal capital structure as companies prefer to use internal funds as first choice, followed by debt and equity as a last resort to finance their business. TOT, on the other hand, suggest optimal capital structure can be achieve by setting off the benefits of debt with cost. The investigation is performed using panel data procedures for a sample of 32 companies listed in Bursa Malaysia during 2011 until 2015. Variables used in this study is debt to equity ratio or known as leverage as dependent variable, whereas asset tangibility, market to book value, degree of operating leverage, return on invested capital proxy for profitability, firm size and non-debt tax shield as independent variable. The variables are regressed with Pooled Ordinary Least Square (POLS) and tested with fixed effect (cross section). The results suggest that profitability and non-debt tax shield has a negative significant to debt to equity ratio. Market-to-book value, degree of operating leverage, and firm size appear to have a positive significant to debt to equity ratio. However, asset tangibility is negative related but does not appear significant to the leverage. It appeared that asset tangibility, profitability, market to book value and non-debt tax shield is consistent with Pecking order theory, while firm size and degree of operating leverage are according to trade off theory.