Firm Characteristics and Capital Structure: Evidence from ASEAN-4 Economies

Using a 10,709 firm-year sample covering the 1998–2007 period, we investigate the determinants of capital structure among 1,491 ASEAN-4 (Indonesia, Malaysia, the Philippines, and Thailand) emerging market firms. Building on the work of previous authors, we apply the two-step generalized method of moments (Arellano & Bond, 1991) to develop country-specific dynamic models of target leverage decisions. The right-hand variables incorporate a lagged leverage term that controls for the firms' target adjustment process and the following four explanatory variables: firm size, profitability, tangibility, and nondebt tax shields. The sign and significance of each coefficient provides evidence regarding whether the impact of the associated variable is consistent with the trade-off or pecking order theories. We find that size is negatively associated with leverage among Malaysian, Philippine, and Thai firms but positively associated among Indonesian firms. Profitability is negatively associated with leverage among Indonesian and Malaysian firms but positively associated among Philippine firms. Tangibility is negatively associated with leverage among Malaysian firms but positively associated among Philippine firms. While the impacts of size and profitability are consistent with pecking order theory, the impact of tangibility is not supportive of a specific theory. Of the four variables, size is consistently influential, while nondebt tax shields have no significant impact among firms in any country.