Economics of funding instruments : an empirical analysis of conventional and Islamic instruments

Various funding instruments have been developed today in order to fulfil the funding needs of business entities. These funding instruments come in various forms, some being based on conventional methods and some on Islamic principles. This thesis focuses on the efficiency of funding instruments used by Public Listed Companies (PLCs) in Malaysia. A Data Envelopment Analysis (DEA) model of efficiency is formulated and tested for empirical evidence on PLCs in the manufacturing sector for the period 1996, and 1998 to 2000. An overall efficiency index is computed using this model, reflecting the average efficiency achieved by the PLCs at both stages of sourcing and utilisation of funding process. It is found that only one PLC, AMST, is found to have attained an overall efficiency index of 1. Hence, it is able to put itself onto the efficiency frontier for the whole period under study. A second empirical study is also undertaken to determine the choice of funding instruments by PLCs. A prediction model of choice is designed using Partial Least Square (PLS) approach. The findings of the study showed that firm’s size, earning volatility, profitability, asset structure, religion and firm’s age are significant factors in explaining the choice of funding instruments by PLCs. The thesis contributes to the current literature on (i) the study of efficiency of funding instruments in terms of (a) evaluation of the funding instruments via the two stages of funding process, (b) the use of financial leverage and operating liability leverage as proxies of funding instruments, and (c) the comparative analysis on the effect of financial leverage and operating liability leverage on performance of PLCs, and the effect of the Islamic and conventional funding instrument, and (ii) the study of the determinant of choice of funding instruments via (a) the prediction model of choice using the PLS approach, and (b) the introduction of the variable ‘Religion’ into the analysis.