Does Debt Structure Affect Firm's Performance? Panel Evidence From Shariah Approved Firm In Malaysia

High reliance on debt proved contributes to the downfalls of large U.S. corporations such as Enron (2001), Lehman Brothers (2008) as well as during the 2009 Greek depression. Given the current uncertainty in the global economic condition, it is important to examine the return from debt in order to ascertain the optimal use of debt. Thus, this paper aims to assess the impact of the debt level on the performance of Shariah-approved firms listed on Bursa Malaysia. Various studies have been conducted to explain the influence of debt on the firm’s performance, given different sets of periods, countries, methodologies as well as the selection of the variables. However, less attention is given to the Shariah approved firms. Uniquely, this study focuses on the consistent Shariah approved firms only, for the period of 2000 to 2014 according to Malaysia’s Securities Commission. Our main explanatory variable is debt ratio and several firm characteristics, industry characteristics, as well as economic variables, are chosen as a controlled variable. ROA is chosen as a firms performance proxy. This study employs a panel linear regression model which includes the pooled OLS, random effect model (REM) and fixed effect model (FEM). Our analysis proved that debt is not a robust determinant to determine the performance of Shariah approved firms in Malaysia. However, several controlled variables such as growth, size and Z-score are found robust to determine Shariah approved firms’ performance. Our analysis also found that there is a variation in terms of debt structure of the Shariah approved firms in Malaysia and our further analysis revealed that variation in debt structure contributes differently to the performance of the firms. The output from this study provides new insight and understanding in determining the relationship between performance and debt of Shariah approved firm in Malaysia specifically. This study largely contributes in terms of the sampling selection in which a firm must be consistently Shariah approved during the period of analysis.