Analyzing the relationships between capital structure and bank's specific factors: evidence from Malaysia

The purpose of this study is to examine the relationships of capital structure determinants against the leverage ratio and the capital structure approach adopted by all eight (8) domestic commercial banking institutions in Malaysia. Correlation analysis is deployed to analyse the data collected from the financial
statements of the domestic commercial banks in Malaysia as of January 2016. Seven variables, i.e. leverage, profitability, tangibility, size, growth, dividend and liquidity, are studied over a five-year period. Results show that the leverage ratio is in direct relationship with profitability, growth and liquidity, whilst in indirect relationship with tangibility, size and dividend payout. This concludes that highly profitable banks, banks with high potential growth and
high liquidity prefer debt over equity capital while larger banks, banks with high tangible assets and higher dividend pay-out ratio prefer equity over debt capital. It is further observed that all banks under review relied more on debt rather than equity capital, with Malayan Banking Berhad, the largest domestic commercial bank in Malaysia maintain the lowest leverage ratio for the entire review period. The writer recommends that the stakeholders of commercial banking sector in
Malaysia, i.e. investors, shareholders, bank’s management, lenders and policy makers, would have better understanding on the factors which may influence the capital structure of the domestic commercial banks in Malaysia, and take benefit from the findings observed in making informed decision to their interest and advantage and to enhance competitiveness in Malaysian banking sector.