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Background and Purpose: This study investigates the impact of environmental reporting on speed of adjustment and adjustment costs which is evaluated based on the ability of firms to adjust to target leverage level for non-financial firms listed in the Malaysian Stock Exchange (Bursa Malaysia).

The current study looks at the impact of compliance to Shari'ah principles on the capital structure for Malaysian firms. Examination of impact of compliance is based on the classification by the Securities Commission of Malaysia. Given that the literature on adjustment tends to ignore non-linear models, the current study utilises Generalised Regression Neural Network (GRNNs). Results are compared to conventional panel data regression models via performing a hold-out sample. Initial results confirm stability of the data allowing predictive ability. The results indicate that compliant firms tend to finance a greater portion of their financing imbalance via equities relative to non-compliant firms. This provides a strong indication towards compliant firms reducing overall risk taking where the financing pattern incorporates a greater aspect of risk sharing which is in-line with Shari'ah principles. In addition, two more factors are ranked as important in deciding compliant firms issue choice to resolve financial imbalance: profitability and size. The rest of the determinants have low impact on explaining net debt issues. Diagnostics for results provide evidence of lower RMSE and MSE for GRNNs for the training, testing and overall datasets. The potential benefit of this research allows managers and investors of Islamic capital markets to understand potential risk exposure and financing costs of compliant firms. Findings also provide a roadmap for development of a sustainable capital market model which has wider implications on a global scale. [ABSTRACT FROM AUTHOR]

The dynamic trade-off view of capital structure is based on partial adjustment models that find that firms adjust towards target levels. In this paper, we estimate the speed of adjustment based on the first difference of the lead leverage levels (actual lead) and lag leverage levels (actual lag) to the first difference of simulated lead (target) leverage levels and lag levels (actual lag leverage) for UK firms. Consistent with the literature we find that firms adjust the lag (current) leverage levels faster to lead levels when they are above lead levels relative to periods when they are below lead levels. This is due to managerial actions in minimizing present value of bankruptcy costs when firms are over-levered. Bringing in the market timing view of capital structure, we measure deviation of market prices to predicted theoretical values, and find that speed of adjustment is influenced by equity mispricing. We find that firms adjust faster to lead levels when lag levels are above lead levels and the extent of deviation above theoretical values is not excessive relative to when deviations of prices from theoretical levels are too high. Furthermore, looking at firms below lead levels, we find that firms adjust faster to lead levels when equities prices below theoretical values severely deviate; suggesting that firms increase debt issues when equity prices are acutely suppressed. This indicates managers are consistently looking at windows of opportunities when issuing or repurchasing to ensure successful timing attempts. Thus, our findings suggest that although market timing could also work within a trade-off framework where managers are timing based on the deviation from theoretical prices as well as moving towards simulated lead levels, the extent of the integration of both explanations of capital structure remains puzzling. [ABSTRACT FROM AUTHOR]

This study looks at how firms react to shocks in equity prices based on a classification which arises from social pressures rather than the financial objective of maximizing shareholders' wealth. In order to meet the objective of the study, a sample of Malaysian firms from the period of 2003 to 2018 was utilized to evaluate the relationship between market and book debt ratios based on a social distinction. The study is based on the theoretical expectation that managers are inclined to adjust book debt ratios to converge with market debt values which arise from changes in equity values over time. We introduce a unique institutional setting into the relationship which is readily observable in the Malaysian capital market given the existence of Shari'ah and non-Shari'ah compliant company classifications on the stock exchange (Bursa Malaysia), as screened by the Securities Commission. The classification forms the basis for distinguishing Socially Responsible Investment options for investors. The findings reveal the existence of asymmetries in how both categories of firms adjust towards shocks in equity prices. The findings document that both compliant and non-compliant firms decrease book debt ratios in line with increases in firms' equity values. Compliant firms, on the other hand, are more likely to increase book debt ratios during periods of decreases in equity values. Non-compliant firms do not significantly alter book debt ratios during periods of declining equity prices. The findings indicate that whilst firms tend to decrease debt levels in the presence of future growth potential, the response is asymmetric during periods of suppression of share prices. Thus, the screening of compliant versus non-compliant firms allows investors to distinguish sustainable firms in the long run, which further allows diversification when holding socially responsible investment portfolios. Our conclusions have wide reaching implications on a global scale for the development of sustainable capital markets. [ABSTRACT FROM AUTHOR]