THE ROLE OF CORPORATE ZAKAT ON OPTIMAL CAPITAL STRUCTURE POLICY: EVIDENCE FROM MALAYSIAN FIRMS
In the finance literature, the relationship between capital structure and firm value has been extensively investigated, both theoretically and empirically. The main issue on corporate finance is how firms dealing with the important decision of capital structure. In this study, a model of capital structure is formulated in which corporate tax and zakat payment exist by firms into the consideration of combination of debt and equity. The theoretical model as shown by comparative statics prove the implication which is negatively relationship between leverage of the firm and the corporate zakat payment. Meanwhile, the empirical evidence reveals several implication as follows, (1) tax deduction reduces the current liability item relative to the firms that prefer equity financing, (2) the significant of zakat is consistent with the theoretical model that zakat would encourage firm to issue more equity than debt, (3) the strong significant relationship between return on assets with the leverage are the leading indicator of capital structure in all models.
Ahmad, Z. et al. (2012). Capital structure effect on firms performance -focusing on consumers and industrials sectors onmalaysian firms.International Review ofBusiness Research Papers, 8(5),137-155.
Almeida, H. &Campello, M. (2007). Financial constraints, asset tangi-bility, and corporate investment.The Review of Financial Studies,20(5),1429-1460.
Badawi, A. (2004). The 2005 budget speech: Introducing the supply bill (2005) in the Dewan Rakyat.
Bakar, N. B. A. (2007). A Zakat Accounting Standard (ZAS) for malay-sian companies. The American Journal of Islamic Social Science,24(4), 74-92.
Barakat, M., & Rao, R, P. (2003). The role of taxes in capital structure: Evidence from taxed and non-taxed Arab economies(Munich Personal RePEc Achive-MPRAPaperNo. 25472). Munich:University Library of Munich.
Besley, S., & Brigham, E. F. (2003). Principles of finance(2nded.). USA: Thomson-Learning.
Booth, L., Aivazian, V., Demirguc-Kunt, A. & Maksimovic, V. (2001). Capital structures in developing countries. The Journal of Finance,56(1), 87-130.
Bradley, M., Jarrell, G., & Kim, E. H. (1984). On the existence of an optimal capital structure: Theory and evidence. Journal of Finance, 39(3), 857-878.
Byoun, S. (2008). How and when do firms adjust their capital struc-ture toward targets?. The Journal of Finance, 63(6), 3069-3096.
Castanias, R., (1983). Bankruptcy risk and optimal capital structure. The Journal of Finance, 38(5), 1617-1635.
Dawood, M. H., Muostafa, E. I., & El-Hennawi, M. S. (2011).The deter-minants of capital structure in listed egyptian corporations. Middle Eastern Finance and Economics, No.9, 3-29.
Datta, R., Chowdhury, T. U., & Mohajan, H. K. (2013). Reasses of capital structure theories. International Journal of Research in ComputerApplication & Management, 3(10), 102-106.
DeAngelo, H. & Masulis, R.W. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Econo-mics,8(1),3-29.
De Jong, Abe., Kabir, R. & Nguyen, T.T. (2008). Capital structure around the world: The roles of firm-and country-specific deter-minants. Journal of Banking and Finance,32(9),1954-1969.
De Jong, Abe., Verbeek, M., & Verwijmeren, P. (2011). Firms' debt-equity decisions when the static tradeoff theory and the pecking order theory disagree. Journal of Banking and Finance,35(5),1303-1314.
Fama, E. F., & French, K. R. (2002). Testing trade-off and pecking order predictions about dividends and debt. Review of Financial Studies, 15(1), 1-33.
Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: Which factors are reliably important? Financial Management, 38(1), 1-37.
Gaud P., Jani E., Hoesli M., & Bender A. (2005). The capital structure of swiss companies: An empirical analysis using dynamic panel data. European Financial Management, 11(1), 51-69.
Givoly D., Hayn, C., Ofer, A. R. & Sarig, O. (1992). Taxes and capital structure: Evidence from firms response to the tax reform act of 1986. The Review of Financial Studies, 5(2), 331-355.
Gleason, K. C., Mathur, L.K., & Mathur, I. (2000). The interrelationship between cultures, capital structure, and performance: Evidence from european retailers. Journals of Business Research, 50(2), 185-191.
Graham, J. R. (1996). Debt and the marginal tax rate. Journal of Financial Economics, 41(1), 41-73.
Graham, J. R., M. L. Lemmon, and J. S. Schallheim (1998). Debt, leases, taxes, and the endogeneity of corporate tax status. The Journal of Finance,53(1), 131162.
Greene, W. (2000). Econometric analysis. Upper Saddle River, NJ: PrenticeHall.
Gujarati. (2004). Basic econometrics(4thedition). The McGraw-Hill.
Guney, Y., Li, Ling & Fairchild, R. (2011). The Relationship between product market competition and capital structure in chinese listed firms. International Review of Financial Analysis,20(1),41-51.
Haugen, Robert A. & Senbet, Lemma W. (1988). Bankruptcy and agency costs: Their significance to the theory of optimal capital structure. The Journal of Financial and Quantitative Analysis,23(1), 27-38.
Hirota, S. (1999). Are corporate financing decisions different in Japan?: An empirical study on capital structure. Journal of the Japanese and International Economies,13(3),201-229.
Hook, Law Siong. (2012, November). Dynamic panel data. Paper presented at Panel Data Analysis Workshop, Universiti Sains Malaysia, 28-29November2012.
Huang, G., & Song, F. M. (2006). The determinants of capital struc-ture: Evidence from China. China Economic Review, 17(1), 14-36.
Islam, S. Z., & Khandaker, S. (2015).Firm leveragedecisions: Does industry matter?. North American Journal of Economics and Finance, Vol.31, 94-107.
Jensen, M. C., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Jensen, M. C. (1986). Agency cost of free-cash-flow, corporate finance, and takeovers. American Economic Review, 76(2), 323-329.
Kayo, Eduardo K. & Kimura, Herbert (2011). Hierarchical determinants of capital structure. Journal of Banking & Finance,35(2),358-371.
Kraus, Alan and Litzenberg, R.H. (1973). A state-preference model of optimal financial leverage. Journal of Finance,28(4),911-922.
Mateev, M., Poutziouris, P. & Ivanov, K. (2013). On the determinants ofSME capital structure in Central and Eastern Europe: Adyna-mic panel analysis. Research in International Business and Finance,27(1),28-51.
Mackie-Mason, J. (1990). Do taxes affect corporate financing deci-sions?. Journal of Finance,45(5),1471-1493.
McMillan, David G. &Camara, Omar. (2012). Dynamic capital struc-ture adjustment: US MNCs & DCs. Journal of Multinational Financial Management,22(5),278-301.
Miller, M. (1977). Debt and taxes. The Journal of Finance,32(2),261-275.
Modigliani, Franco &Miller, Merton H. (1958). The cost of capital, corporation finance and the theory of investment. The Ame-rican Economic Review,48(3),261-297.
Modigliani, F., & Miller, M. H. (1963). corporate income taxes and the cost of capital: A correction. American Economic Review, 53(3), 433-443.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-175.
Myers, S. C. (1984). The capital structure puzzle. Journal of Finance 39(3),575-592.
Myers, S. C. (2001). Capital structure. Journal of Economics Perspec-tive, 15(2), 81-102.
Negash, M. (2002). Corporate tax and capital structure: Some evidence and implications. Investment Analysts Journal, 31(56), 17-27.
Othman, H. J.M. (2013, October). Zakat and tax treatment. Paper presented at National Business Zakat Symposium 2013, Kuala Lumpur.
Overesch, M., & Voeller, D., (2008). The impact of personal and corporation taxation on capital structure choices(Discussion PaperNo.08-020). Mannheim:ZEW-Centre for European Economic Research.
Psillaki, M., & Daskalakis, N. (2008). Are the determinants of capital structure country or firms specific? Evidence from SMEs. Small Business Economics, 33(3),319-333.
Qian, Y., Tian, Y. & Wirjanto, T.S. (2009). Do chinese publicly listed companies adjust their capital structure toward a target level?. China Economic Review,20(4),662-676.
Rajan, R.G & Zingales, L. (1995). What do weknow about capital structure? Some evidence from international data. Journal of Finance,50(5),1421-1460.
Rasiah, D., & Kim P. K. (2011). A theoretical review on the use of the static trade off theory, the pecking order theory and the agency cost theory of capital structure. International Research Journal of Finance and Economics, No. 63,150-159
Sanusi, N. A. (2014). The dynamics of capital structure in the presence of zakat and corporate tax. International Journal of Islamic and Middle Eastern Finance and Management,7(1), 89-111.
Shahid, M.A., Wasim. H. A., Khan. M.A. (2014). Analysis of determi-nants of capital structure: with special reference to indian listed non-financial companies in S and P CNX Nifty. Business Dimensions, 1(2),147-155.
Scott, J. H. (1976). A theory of optimal capital structure. The Bell Journal of Economics and Management Science, 7(1),33-54.
Sheikh, N. A., & Wang, Z. (2011). Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan. Managerial Finance, 37(2), 117-133.
Shyam Sunder, L. & Myers, S.C. (1999). Testing static tradeoff against pecking order models of capital structure. Journal of Financial Economics,51(2),219-244.
Song, H. S. (2005). Capita structure determinants: an empiric al study of swedish companies(Electronic Working Paper SeriesNo.25).Stockholm: Royal Institute of Technology, Centre of Excellence for Studies in Innovation and Science.
Tongkong, Supa (2012). Key factors influencing capital structure decision and its speed of adjustment of thai listed real estate companies. Procedia Social and Behavioral Sciences,Vol.40,716-720.
Titman, S. & Wessels, R. (1988). The determinants of capital structure choice. Journal of Finance,43(1),1-19.
Voutsinas, Konstantinos & Werner, Richard A. (2011). Credit supply and corporate capital structure: Evidence from Japan. Interna-tional Review of Financial Analysis,20(5),320-334.
Journal of Islamic Monetary Economics and Finance is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.