Capital Structure Effect on Firms Performance: Focusing on Consumers and Industrials Sectors on Malaysian Firms

This study seeks to investigate the impact of capital structure on firm performance by analyzing the relationship between operating performance of Malaysian firms, measured by return on asset (ROA) and return on equity (ROE) with short-term debt (STD), long-term debt (LTD) and total debt (TD). Four variables found by most literature to have an influence on firm operating performance, namely, size, asset grow, sales grow and efficiency, are used as control variables. This study covers two major sectors in Malaysian equity market which are the consumers and industrials sectors. 58 firms were identified as the sample firms and financial data from the year 2005 through 2010 are used as observations for this study, resulting in a total numbers of observations of 358. A series of regression analysis were executed for each model. Lag values for the proxies were also used to replace the non lag values in order to ensure that any extended effect of capital structure on firm performance is also examined. The study finds that only STD and TD have significant relationship with ROA while ROE has significant on each of debt level. However, the analysis with lagged values shows that non of lagged values for STD, TD and LTD has significant relationship with performance. 1