Abstract:

The main focus of this study is to explore the behavioural aspects of government-owned companies (GLCs) related to debt management as many parties including practitioners and academics and even the government are completely kept in the dark about their financing decisions. Undoubtedly, lack of understanding of their sources of capital, capital structure optimality, financing strategies and leverage effect on value maximization, are regarded as the major dilemma faced by many stakeholders including the financial markets. As to add value in our discussions, in relation to the contemporary theoretical arguments, a sample of non-government-linked companies (NGLCs) is also considered for comparison purposes. Specifically, this paper makes an attempt to examine the patterns of financing strategies of GLCs and NGLCs that mainly include the testing of the trade-off model and pecking order model on the listed GLCs
and NGLCs. This paper also investigates the speed of adjustment towards debt optimality registered by GLCs as compared to that of NGLCs. As to maintain homogeneous characteristics of the firms considered in the study, only non-financial firms are chosen for the empirical work. Relevant hypotheses are developed to test on their financing patterns with the use of appropriate variables and measures. A sample of 31 GLCs and 298 NGLCs are considered as to equate to the total market capitalization of the 31 GLCs selected. This empirical work is based on the financial data gathered over the period 1999 to 2008 using the Datastream Database. Econometrics methodology that comprises of panel unit root test, panel data analysis, dynamic modelling, OLS with adjustment for heteroskadesticity and use of interacting dummy variables, is adopted for empirical testing. Use of the panel data analysis is also extended on detecting yearly effects of each variable especially on GLCs as this offers some insights of the implications of the ‘revamp plan’ imposed on the GLCs in 2004 and for robustness check as well. The results show no evidence on the use of the tradeoff theory among the Government-Linked Companies. In contrast, it is evident that Non- Government-Linked Companies are in favour of the adoption of the trade-off Business Transformation through Innovation and Knowledge Management: An Academic Perspective 2826 theory. As compared to NGLCs, greater efficiency of debt management is discovered in GLCs as they face lower adjustment costs and thus, GLCs experience higher speed of adjustment towards debt optimality. It is also evident that the revamp plan imposed by the government does not hold any major shift in the financing decisions of GLCs.