Project

Financial Constraints and Firm Performance

In Malaysia

Nogaraju Guru Moorthy S/o Krishna Moorthy

Bachelor of Finance

Universiti Tenaga Nasional

gurumoorthy91@ymail.com

Abstract

Purpose –The purpose of this paper is to examine the effect of financial constraints on firm investments spending. The focal point is to investigate the presence of financial constraints and how firms behave in facing these constraints in order to smooth investment activities.

Design/methodology/approach – The following research design has been employed panel estimation technique to explore this issue and finds that indeed, financial constraints are present in the Malaysian capital market. Examines industrial sector wise Bursa listed companies panel data for financial constraint over the period 2003-2012 using fixed effects regression analysis and correlation.

Findings – The finding gives the policy maker a good visual perception on capital market conditions in order to prepare precautionary measures regarding any possible external economic shocks for example setting special financial funds to provide financial avails to the effected firms. However, to identify which types of firms are more astringently constrained and which are less needs further research. This is because the fluctuations in the economy may become worse under the existence of financial constraints because the constraints can magnify the macroeconomic effect of shocks to cash flow or liquidity that will reduce some firms’ access to low-cost finance and worsen their balance sheet finance at the firm level.

Research limitations/implications – This finding implicatively insinuates that in general, firms in Malaysia are affected by financial constraints. However, when the sample of firms is split into sub-samples according to their size, the results show that only diminutive firms suffer from these constraints. This study additionally finds that the prior postulations regarding the role of financial...