Financial System Design and Firm Investment in Malaysian Listed Firms

This paper investigates the impact of financial system design on investment. It is aimed to provide additional empirical evidence based on the original paper by Demirguc-Kunt and Maksimovic (2002). The firm-level data of Malaysian companies between 2000 and 2007 are used. This paper also extends the previous literatures by using a panel data methodology, applying a random-effects estimator. The findings show that: First, the growth investment of 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 (more long-term financing), and debt for equity in the presence of an increase in banking activity (less long-term financing). Second, the internal growth financing, short-term growth financing and long-term growth financing have shown a significant impact on growth investment by firms. It implies that these financing constraints are complements to the development of banking system and stock market activity. Therefore, well-developed stock markets facilitate long-term financing, whereas a well-developed banking sector facilitates short-term financing. It is recommended that policy makers stress more on banking system for short-term financing and capital market for long-term financing.