CAPITAL EXPENDITURE DECISIONS: A STUDY OF MALAYSIAN LISTED COMPANIES USING AN ORDERED LOGISTIC REGRESSION ANALYSIS
DOI:
https://doi.org/10.51200/jaaab.v2i0.962Keywords:
capital expenditure, managerial style, Malaysian public-listed companies, ordered logistic regression, group effectAbstract
Capital expenditure (capex) decisions have been extensively studied except in developing countries (Mansor and Hamidi, 2008). Capex implicitly affects institutional aggregate demand, gross national product and business cycles. This research focuses on the capex decisions by Malaysian public listed companies (PLCs) between the years 2002 to 2006. Using the Pecking Order Hypothesis (POH) and Managerial Hypothesis (MH) frameworks, four independent variables are examined. These are (i) internal cash flows (ICF); (ii) Insider Ownership (I_O); (iii) Investment Opportunities (IOP); and (iv) the interaction effects of the variables. In addition, sales revenue is used as a control variable. Both hypotheses predict a positive effect of (IFC) on capex. However, their arguments differ in relation to the effects of (I_O) on capex. MH argues for a negative relationship but POH proposes no effect between the two. POH suggests a positive effect of (IOP) on capex whereas MH predicts no relationship between them. Using a pool Ordered Logistic Regression (OLR) model, capex is categorised into five ordinal categories and the control variable is divided into four groups, which are ranked to capture the variability of the capex. The result of this study shows that the (ICF) has a positive and significant effect on capex, and this finding supports both studied hypothesis. However, (I_O) and (IOP) show a negative and significant effect on capex. The study also found that there is a conflict of interest between managers and shareholders base on the negative coefficient of (I_O). This finding is consistent with Kim (2006) and supports the MH. This study provides mixed-support for the two hypotheses and reveals interesting characteristics with regards to the managerial style in Malaysian PLCs.
References
Aggarwal, R. K., and Samwick, A. A. (2003). Why do managers diversify their firms? Agency
costs reconsidered, Journal of Finance, Vol. LVIII, No. 1, pp. 71 – 118.
Agrawal, A., and Mandelker G. N. (1987). Managerial incentives and corporate investment and
financial decisions, Journal of Finance, Vol. 42 (September), pp. 823 – 837.
Arsiraphongphisit, O., Kester, G. W., and Skully, M. T. (2000). Financial policies and practices of
listed firms in Thailand: capital structure, capital budgeting, cost of capital and dividends.
Journal of Business Administration, Vol. 88 (October – December), pp. 72 – 93.
Benston, G. (1985). The self-serving management hypothesis: some evidence. Journal of
Accounting and Economics, Vol. 7 (April), pp. 67 – 84.
Berndt, E. R., Fuss M. and Waverman L. (1980). Empirical analysis of dynamic adjustment
models of the demand for energy in US manufacturing industries, 1947 – 74. Final
Report (Electric Power Research Institute, Palo Alto).
Brant, R. (1990). Assessing proportionality in the proportional odds model for ordinal logistic
regression. Biometrics, 46(4), 1171 – 1178.
Brigham, E. F., and Gapenski, L. C. (1996). Fundamental of financial management, Fifth Edition,
The Dryden Press.
Bromiley, P. (1986). Corporate capital investment: a behavioral approach. Cambridge University
Press, London.
Chung, K. H., Wright, P., and Charoenwong, C. (1998). Investment opportunity and market
reaction to capital expenditure decisions. Journal of Banking & Finance, Vol. 22, pp.
– 60.
Cooper, D. R. and Emory, C. W. (1995). Business Research Methods (fifth edition). Richard D.
IRWIN, Inc.
Crutchley, C. E. and Hansen, R. S. (1989). A test of the agency theory of managerial ownership,
corporate leverage and corporate dividends. Financial Management, Vol. 18 (winter),
pp. 36 – 46.
Dornbusch, R. and Fischer, S. (1987). Macroeconomic (fourth edition). McGraw-Hill: New York.
Dusenberry, J. S. (1958). Business cycle and economic growth. McGraw-Hill: New York.
Elliot, J. W. (1973). Theories of corporate investment behavior revisited. American Economic
Review, Vol. 63 (March), pp. 195 – 207.
Fama, E. (1980). Agency problems and the theory of the firm. Journal of Political Economy, Vol.
(April), pp. 288 – 307.
Fan, D. K. K. and So, R. W. (2004). What managers think of capital structure: the evidence from
Hong Kong. Journal of Asian Economics, Vol. 15, pp. 817 – 830.
Fazzari, S. M. and Athey, M. J. (1987). Asymmetric information, financing constrains, and
investment. Review of Economics and Statistics, Vol. 69 (August), pp. 481 – 487.
Fazzari, S. M., Hubbard, R. G. and Petersen, B. C. (1988). Financing constrains and corporate
investment. Brookings papers on Economic Activity (I), pp. 141 – 206.
Fraser, D. R., Zhang, H. and Derashid, C. (2006). Capital structure and political patronage: The
case of Malaysia. Journal of Banking & Finance, Vol. 30, pp. 1291 – 1308.
Gaver, J. J. (1992). Incentive effects and managerial compensation contracts. Journal of
Accounting, Auditing, and Finance, Vol. 7 (spring), pp. 137 – 156.
Gaver, J. J. and Gaver K. M. (1992). Additional evidence on the association between the investment
opportunity set and corporate financing, dividend and compensation policies. Journal of
Accounting and Economics, Vol. 16, pp. 125 – 160.
Grabowski, H. G. and Mueller, D. C. (1972). Managerial and stockholder welfare models of firm
expenditures. The Review of Economics and Statistics, Vol. 54 (February) pp. 9 – 24.
Graham, B., Bromson, G., Ma, A. and Pak, S. L. (1992). The capital structure puzzle. Securities
Journal, June, pp. 20 – 23.
Griner, E. H. and Gordon, L. A. (1995). Internal cash flow, insider ownership, and capital expenditure.
Journal of Business Finance and Accounting, Vol. 22 (March), pp. 179 – 199.
Haugen, P., and Senbet, L. (1981). Resolving the agency problem of external capital through
options. Journal of Finance, Vol. 36 (June), pp. 629 – 647.
Jensen, G. R., Solberg, D. P., and Zorn, T. S. (1992). Simultaneous determination of insider
ownership, debt, and dividend policies. Journal of Financial an Quantitative Analysis,
Vol. 27 (June), pp. 247 – 263.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American
Economic Review, Vol. 76 (May), pp. 323 – 329.
Jensen, M. C., and Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency
costs and ownership structure. Journal of Financial Economics, Vol. 3 (October), pp.
– 360.
Jensen, M. C., and Ruback, R. S. (1983). The market of corporate control: The scientific evidence.
Journal of Financial Economics, Vol. 11 (April), pp. 5 – 50.
Jorgenson, D. W. (1963). Capital theory and investment behaviour. American Economic Review,
Vol.53 (May), pp. 247 – 259.
Jorgenson, D. W., and Siebert, C. D. (1968). A comparison of alternative theories of corporate
investment behavior. American Economic review, Vol. 58 (September), pp. 681 – 712.
Kester, G. W., Chang, R. P., & Tsui, K. C. (1994). Corporate financing policy in the pacificBasin: Hong Kong and Singapore. Financial Practice and Education, Spring/Summer,
pp. 117 – 127.
Kim, E. (2006). The impact of family ownership and capital structures on productivity performance
of Korea manufacturing firms: corporate governance and the “Chaebol Problem”,
Journal of The Japanese and International Economies, Vol. 20, pp. 209 – 233.
Kuh, E., and Meyer, J. R. (1957). The investment decision. Harvard University Press: Cambridge.
Kuh, E. (1963). Capital stock growth: microeconomic approach. North-Holland, Amsterdam.
Larcker, D. F. (1983). The association between performance plan adoption and corporate capital
investment. Journal of Accounting and Economics, Vol. 5 (April), pp. 3 – 30.
Lang, L. H. P., Stulz, R. and Walking, R. A. (1991). A test of the free cash flow hypothesis: The
case of bidder returns. Journal of Financial Economics, Vol. 29 (June), pp. 315 – 335.
Lehn, K. and Poulsen, A. (1989). Free cash flow and stockholder gains in going private transactions.
The Journal of Finance, Vol. XLIV, No. 3, pp. 771 – 787.
Long, J. S & Jeremy Freese (2001). Predicted Probability for Count Model. The Stata Journal,
Vol. 1(1), pp. 51 – 57
Madan, D. B. and Prucha, I. R. (1989). A note on the estimation of non-symmetric dynamic factor
demand models. Journal of Econometrics, Vol. 42 (October), pp. 275 – 283.
Mansor, N. and Hamidi, M. (2008). Capital expenditure decisions of Malaysian listed companies.
The Malaysian Finance Association Proceeding. 5 – 6 June 2008, Kucing, Sarawak,
Malaysia.
Marchica, M. T. and Mura, R. (2007). Cash holding policy and ability to invest: How do firms
determine their capital expenditures? http://papers.ssrn.com/sol3/results.cfm
Marris, R. (1964). The economic theory of managerial capitalism, The Free Press, Glencoe, IL.
Maury, B. (2006). Family ownership and firm performance: empirical evidence from Western
European corporations. Journal of Corporate Finance, Vol. 12, pp. 321 – 341.
McConnell, J. J., and Muscarella, C. J. (1985). Corporate capital expenditures decisions and
the market value of the firm. Journal of Financial Economics, Vol. 14 (September),
pp. 399 – 422.
Morck, R. A., Shleifer, A., and Vishny, R. W. (1988). Management ownership and market valuation.
Journal of Financial Economics, Vol. 20 (January/March), pp. 293 – 315.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, No.
, pp. 147 – 175.
Myers, S. C. (1984). The capital structure puzzle. Journal of Finance, Vol. 39 (July), pp. 575 – 592.
Myers, S. C., and Majluf, N. S. (1984). Corporate financing and investment decisions when firms
have information that investors do not have. Journal of Financial Economics, Vol. 39
(June), pp. 187 – 221.
Nair, R. D. (1979). Economic analyses and accounting techniques: an empirical study. Journal of
Accounting Research, Vol. 17 (spring), pp. 225 – 242.
Nicholson, W. (1992). Microeconomic Theory: Basic Principles and extensions, fifth edition, The
Dryden Press, Hinsdale, IL.
Rose. C. (2005). Managerial ownership and firm performance in listed Danish firm: in search of
the missing link. European Management Journal, Vol. 23, No. 5, pp. 542 – 553.
Sami, Heibatollah, S. M. Simon Ho, and C. K. Kevin Lam. (1999). Association Between the
Investment Opportunity Set and Corporate Finance, Dividend Leasing, and Compensation
Policies: Some Evidence from an Emerging Market, Working Paper, Presented at
Program MSi-Economics Faculty Gadjah Mada University, dated Augustus 2nd 1999.
Sartono, A. (2001). Pengaruh aliran kas internal dan kepemilikan manajer dalam perusahaan
terhadap pembelanjaan modal: managerial hypothesis atau pecking order hypothesis?,
Jurnal Ekonomi dan Bisnis Indonesia, Vol. 16, No. 1 (January), pp. 54 – 63.
Scott, W. R. (2003). Financial accounting theory (3rd edition). Toronto: Prentice Hall.
Sicherman, N. W., and Pettway R. H. (1987). Acquisition of divested assets and shareholder
wealth. Journal of Finance, Vol. 42 (December), pp. 1261 – 1273.
Smith, C. W. J., and Watts, R. L. (1992). The investment opportunity set and corporate financing,
dividend, and compensation policies. Journal of Financial Economics, Vol. 32, pp.
– 292.
Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of Financial
Economics, Vol. 26, pp. 3 – 27.
Tandelilin, E. (2001). Analisis investasi dan manajemen portofolio (Edisi Pertama). BPFE
Yogyakarta.
Waegelein, J. F. (1988). The association between the adoption of short-term bonus plans and
corporate expenditures. Journal of Accounting and Public Policy, Vol. 7 (spring), pp.
– 63.
Wivattanakantang, Y. (1999). An empirical study on the determinants of the capital structure of
Thai firms. Pacific Basin Finance Journal, Vol. 7, pp. 371 – 403.
Wu, X., and Wang, Z., (2005). Equity financing in a Myers-Majluf framework with private benefits
of control, Journal of Corporate Finance, Vol. 11, pp. 915 – 945.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2013 Journal of the Asian Academy of Applied Business (JAAAB)
This work is licensed under a Creative Commons Attribution 4.0 International License.
Total Views: 786
| 
Total Downloads: 1251
