Title: Firms' speed of adjustment and rational financing behaviour: Malaysian evidence

Authors: Razali Haron

Addresses: Department of Finance, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, Jalan Gombak, 53100, Kuala Lumpur, Malaysia

Abstract: Malaysian firms which are examined based on a dynamic framework appear to practise target capital structure and take into account certain firm characteristics in their capital structure decisions. These firms readjust instantaneously when they are off the target indicating low adjustment cost while the pecking order hypothesis seems to influence the financing decisions. Found to be over-levered most firms behave rationally by cutting down the amount of debt in their capital structure to reach the target. In terms of the proximity to the target, under-levered firms are found to be much closer to target than over-levered firms. This study contributes to the literature by identifying the rational financing behaviour and the proximity of Malaysian firms to target leverage. This indication of firms' proximity to target can help managers to outline and set the next steps to be taken in order to reach the target capital structure to maximise firm value.

Keywords: speed of adjustment; dynamic modelling; firm financing; rational financing behaviour; Malaysia; firm value; target leverage.

DOI: 10.1504/JGBA.2014.063869

Journal for Global Business Advancement, 2014 Vol.7 No.2, pp.151 - 162

Published online: 30 Apr 2015 *

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