Investigation of optimal capital structure in Malaysia: a panel threshold estimation

The purpose of this paper is to investigate the effect of leverage on Malaysian listed firms' value and the optimal level of debt at which a firm could maximize its value.

The authors employ an advanced panel threshold regression estimation developed in 1999 by Hansen that will indicate whether there are positive and negative impacts of leverage on firm value. This estimation procedure has the advantage of quantifying the threshold level of debt as compared to the ad hoc classification procedure of splitting the sample.

The results show that debt is only pertinent to the firm value up to a threshold level of 64.33 per cent. Additional debt beyond the threshold level does not add to a firm's value. The appropriate level of debt should be applied, which would thus maximize the firm and stockholders' value.

To the best of the authors' knowledge, this is the first study to look at this issue for Malaysian listed firms. The findings from this paper may provide a critical analysis of the usage of debt in firms' capital structure. An excessive level of debt could lead to a debt overhang situation and insolvency at the microeconomic firm level; this could eventually could cause vulnerability in financial systems and thus lead to the financial catastrophes.