The determinants of capital structure of SMEs in Malaysia: evidence from diverse plastic product manufacturers

The success of a company, especially Small and Medium Enterprises (SMEs), depends on the right decision in relation to its capital structure, whether to choose debt and/or equity. This paper analysed the capital structure of SMEs focusing on diverse plastic product manufacturers in Malaysia. In order to determine the capital structure of selected SMEs, the regression analysis was performed by focusing on the financial performance of 127 companies in the diverse plastic product industry in Malaysia from the period of 2009 to 2013. In this paper, the short term and long term debts ratio are used to represent capital structure as the Dependent Variables. Meanwhile, age, size, profitability, asset structure, and growth are used as the Independent Variables. The result has confirmed that the SMEs business is in line with the Pecking Order Theory but not parallel with the Trade-off Theory. This study found that age, size, profitability, and asset structure are the major determinants of capital structure of SMEs. Age is positively related to the short term debts ratio. Meanwhile, size is negatively related to the short term debts ratio. In addition, this paper found that profitability is negatively related to both short term and long term debt ratio while asset structure is positively related to both short term and long term debt ratio. Growth factor does not influence the capital structure of the SMEs.