Managed float regime and capital structure determinants: Evidence from Malaysia

Abstract

In the aftermath of the devastating 1997 Asian financial and currency crisis, the adoption of capital control regime by Malaysian government which pegged the Ringgit at an exchange rate of RM3.80 per one US dollar on 1 September 1998 is very much controversial. Despite being highly criticized, it is argued that Malaysia economy has successfully stabilized, recovered, and did so more quickly and effectively than IMF program countries [Kaplan and Rodrik, 2001]. On 21 July 2005, the Malaysian government announced the scrapping of the seven-year-old Ringgit’s peg to the US dollar and the Ringgit will be allowed to operate in a managed float regime with reference to a basket of currencies. As Ringgit depegging marks a significant change of the capital control policies to managed float policies, an early assessment of these policies’ effectiveness is timely. This paper is interested to examine the impact of managed float on the overall leverage ratios of Malaysian companies during the period 21 July 1999 – 20 July 2007. In additional, this paper investigates the issues of managed float and the capital structure determinants of Malaysian companies. The evidence found that managed float regime has a positive statistically significant change on the overall leverage ratios between the capital control regime and the managed float regime period. For the capital structure determinants, the result showed that the leverage ratio of Malaysian companies is mainly driven by four factors, namely the profitability, company size, liquidity, and growth.