Modeling of investment and financial design: Empirical evidence from Malaysian Shariah listed firms

This paper investigates the impact of financial design on investment. It is aimed to provide additional empirical evidence based on previous literatures. The firm-level data for Malaysian Shariah listed firms between 2000 and 2007 are used. This paper also utilizes the same estimation method i.e. generalised method of moments for panel data, as proposed by Arellano and Bond [5]. The findings show that: first, the investment of Shariah listed firms are positively related to the development of the banking system but negatively related to the capital market. These firms substitute equity for debt associated with an increase in stock market activity and debt for equity in the presence of an increase in banking activity. Second, the cash flow shows a significant impact on investment of firms. This positive relationship is consistent with previous empirical evidence where a firm is likely to have a larger investment when it has good investment opportunities. Third, the debt asset ratio has a negative impact on firm investment. This negative relationship shows that the investment to capital ratio decreases when the debt level increases. Fourth, both real gross domestic product growth and inflation have impacts on investment of firms. This is consistent with previous evidence which state firms have a larger investment capacity when their economy is good.