FINANCIAL SUSTAINABILITY OF A FIRM: DEBT-BASED OR EQUITY-BASED FINANCING TO PURSUE?

Abstract

This study examines the potential of utilizing equity-based financing by companies in achieving financial sustainability as compared to debt-based financing. To this end, a conceptual framework of equity-based financing over debt-based financing is developed to provide an understanding of the concept of equity-based financing. Subsequently, this study analyses the credit risk exposure between equity and debt for selected sectors in Malaysia. More specifically, a Monte Carlo method is employed to examine the feasibility of the equity-based financing model in fostering the financial sustainability of companies through simulation of equity-based and debt-based financing models from the global financial crisis (GFC) period to the Covid-19 phase. This study finds that equity-based financing can reduce credit risk exposure when returns are tied to the company's performance. The findings also show that equitybased financing can achieve financial sustainability regardless of any economic events. To conclude, equity-based financing can thus be a viable capital financing option for companies because it can contribute to long-term financial sustainability.