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Comparative Models Between Equity-Based and Debt-Based Financing to Achieve Financial Sustainability
Date Issued
2023-05
Author(s)
Umul Ain’syah Binti Sha’ari
Abstract
The contemporary financial system has long recognized debt as a convenient financial
instrument. Nevertheless, following the crisis of 2007/2008, debt instruments were
deemed to become the root cause of the global economic collapse. Since then,
policymakers and economists have struggled to find ways to escape from interest-based
financing to achieve better overall stability.Many efforts have beenmade, yet global debt
is still at an enduring level. Hence, this research further explores the issue by
demonstrating the potential of equity-based financing in the financial system based on
several measures. Firstly, this research develops a proposed framework of equity-based
over debt-based financing. Secondly, this research investigates credit risk exposure via
the simulation of a sample company’s equity-based and debt-based financing. Lastly,
this research examines the feasibility of equity-based financing to promote the financial
sustainability to company and investors across 4 economic phases. Monte Carlo
Simulation is applied to explore a company’s risk and returns performance when issuing
equity-based and debt-based financing. Given the simulated scenarios for ten years
period of Nestle Malaysia Berhad, the result highlights the potential of equity-based
financing to reduce credit risk exposure when returns are based on the company’s
performance. Additionally, equity-based financing provides low credit risk exposure,
even for low-profitable companies. The simulation is repeated for 12 sectors across four
different economic phases from 2007 until 2021 to check the robustness of equity-based
financing. The result also highlights equity-based financing’s ability to achieve
financial sustainability during different economic phases. Equity-based financing can
therefore be an effective substitute for the current financing structure for those looking
to enhance long-term sustainability despite a financial crisis. For future study, this
research suggests the implementation of equity-based financing with a new Malaysian
benchmark - Malaysia Overnight Rate (MYOR) from the lender’s perspective to
enhance the credibility of equity financing.
instrument. Nevertheless, following the crisis of 2007/2008, debt instruments were
deemed to become the root cause of the global economic collapse. Since then,
policymakers and economists have struggled to find ways to escape from interest-based
financing to achieve better overall stability.Many efforts have beenmade, yet global debt
is still at an enduring level. Hence, this research further explores the issue by
demonstrating the potential of equity-based financing in the financial system based on
several measures. Firstly, this research develops a proposed framework of equity-based
over debt-based financing. Secondly, this research investigates credit risk exposure via
the simulation of a sample company’s equity-based and debt-based financing. Lastly,
this research examines the feasibility of equity-based financing to promote the financial
sustainability to company and investors across 4 economic phases. Monte Carlo
Simulation is applied to explore a company’s risk and returns performance when issuing
equity-based and debt-based financing. Given the simulated scenarios for ten years
period of Nestle Malaysia Berhad, the result highlights the potential of equity-based
financing to reduce credit risk exposure when returns are based on the company’s
performance. Additionally, equity-based financing provides low credit risk exposure,
even for low-profitable companies. The simulation is repeated for 12 sectors across four
different economic phases from 2007 until 2021 to check the robustness of equity-based
financing. The result also highlights equity-based financing’s ability to achieve
financial sustainability during different economic phases. Equity-based financing can
therefore be an effective substitute for the current financing structure for those looking
to enhance long-term sustainability despite a financial crisis. For future study, this
research suggests the implementation of equity-based financing with a new Malaysian
benchmark - Malaysia Overnight Rate (MYOR) from the lender’s perspective to
enhance the credibility of equity financing.