Capital Structure and Corporate Performance of Malaysian Construction Sector

This paper investigates the relationship of capital structure and corporate performance of firm before and during crisis (2007). This study focuses on construction companies which are listed in Main Board of Bursa Malaysia from 2005 to 2008. All the 49 construction companies are divided into big, medium and small sizes, based on the paid-up capital. The result shows that there is relationship between capital structure and corporate performance and there is also evidence shows that no relationship between the variables investigated. For big companies, ROC with DEMV and EPS with LDC have a positive relationship whereas EPS with DC is negatively related. In the interim, only OM with LDCE has positive relationship in medium companies and EPS with DC has a negative relationship in small companies. In sum, the outcome reveals that the relationship exists between capital structure and corporate performance in selected proxies. An Overview of Capital Structure and Corporate Performance Capital structure refers to the firm's financial framework which consists of the debt and equity used to finance the firm. Capital structure is one of the popular topics among the scholars in finance field. The ability of companies to carry out their stakeholders’ needs is tightly related to capital structure. Therefore, this derivation is an important fact that we cannot omit.Capital structure in financial term means the way a firm finances their assets through the combination of equity, debt, or hybrid securities (Saad, 2010). In short, capital structure is a mixture of a company's debts (long-term and short-term), common equity and preferred equity. Capital structure is essential on how a firm finances its overall operations and growth by using different sources of funds. Modigliani-Miller (MM) theorem is the broadly accepted capital structure theory because is it the origin theory of capital structure theory which had been used by many researchers. According to MM Theorem, these capital structure theories operate under perfect market. Various assumptions of perfect market such as no taxes, rational investors, perfect competition, absence of bankruptcy costs and efficient market. MM Theorem states that capital structure or finances of a firm is not related to its value in perfect market. In reality, capital structure of a firm is difficult to determine. Financial managers are difficult to exactly determine the optimal capital structure. A firm has to issue various securities in a countless mixture to come across particular combinations that can maximum its overall value which means optimal capital structure. Optimal capital structure means with a minimum weighted-average cost of capital and thereby maximize the value of firms. Although optimal capital structure is a topic that had widely done in many researches, we cannot find any formula or theory that decisively provides optimal capital structure for a firm. If irrelevant of capital structure to firm value in perfect market, then imperfections that exist in reality may cause of its relevancy. Capital structure is closed link with corporate performance (Tian and Zeitun, 2007). Corporate performance can be measured by variables which involve productivity, profitability, growth or, even, customers’ satisfaction. These measures are related among each other. Financial measurement is one of the tools which indicate the financial strengths, weaknesses, opportunities and threats. Those measurements are return on investment (ROI), residual income (RI), earning per share (EPS), dividend yield, price earnings ratio, growth in sales, market capitalization etc (Barbosa & Louri, 2005).