Estimating Dynamic Panel Model of Leverage Decision: Evidence from Malaysia

This study investigates the impact of dynamic relationship by the presence of a lagged leverage decision (LEVEt-1) to leverage decision. Dynamic panel model is developed to identify the possible effect of previous leverage decision on leverage adjustments speed of publicly listed companies in Malaysia for the period of 2004-2013. The dynamic panel results show that Malaysian public listed companies adjust debt and the speed of adjustment is approximately 21% to 26% per annum (System Generalized Method of Moments). This indicates that Malaysian public listed firms adjust their leverage and change their financing following temporary deviations from target in order to return leverage towards its optimum. This study contributes to firm leverage decisions by estimating the mean reversion towards target which is absent specifically in Malaysia context. Critically, the results of this study pave the way for a more advanced and mixed method approach to firm leverage decision in Malaysia.