The relationship between economic growth and capital structure of listed companies: Evidence of Japan, Malaysia, and Pakistan

Abstract

This study attempts to characterise capital structure on the basis of country's economic factor, industry class, and firm-specific factors in three Asian countries, Japan, Malaysia, and Pakistan. Firm-specific factor studies include firm's growth, size, assets composition, profitability, operating leverage, and dividends. The study covers a period of 10 years (1989-1998). It is found that Japan and Pakistan have very high leverage levels, while Malaysia has the lowest. It can be argued that capital market development of a country plays an important role in determining capital structure across countries. Good economic policy requires both increasing the public capital stock and reorientating government spending from consumption to investment in physical capital stock. Industry class is found to be an important determinant of capital structure in Japan and Pakistan. The results on firm factors are largely mixed. However, there is a tendency for assets-related variables to be more important than sales-related variables in determining capital structure.