According to Datta et al. 2013), the term of capital structure is used to represent the proportional relationship between debt and equity. The majority of research into the capital structure of companies focuses on searching for an optimal capital structure, which stems from the trade-off theory. The debate about the decision on the company's optimal capital structure has been ignited by the pioneering work of Modigliani &.
That is, none of the three theories can give a complete picture of the practice of capital structure. However, despite research in the capital structure field, it has been dominated by three main theories: the trade-off theory, pecking order. As previously discussed, the optimal capital structure will take into account various factors such as corporate taxes, and costs of financial distress.
Myers (1999) stated that capital structure theory has been dominated by the search for optimal capital structure. Companies subject to lower corporate tax rates will use more debt in their capital structure (keeping earnings constant). The tax shield bankruptcy cost theory of optimal capital structure allocation of future earnings, business risk, default costs and taxes (Castanias, 1983).
Consistent with previous studies analyzing determinants of the capital structure choice, the measure of profitability is earnings before interest payments and income taxes (EBIT) divided by total assets or commonly referred to as return on assets (ROA).
METHODOLOGY 3.1 Theoretical Model
Moreover, the moral hazard risks are reduced when the firm offers tangible assets as collateral, because it is a positive signal to the creditors who may request the sale of these assets in case of default. Almeida and Campello (2007) showed that tangibility is particularly important when the firm is financially constrained and therefore has limited access to external resources. The model captures the essence of the tax benefit and bankruptcy cost trade-off models of Kraus and Litzenberger (1973) and Scott (1976); the agency costs of debt arguments of Jensen and Meckling (1976) and Myers (1977); the potential loss of non-debt tax shields in non-default states in DeAngelo and Masulis (1980); the differential personal tax rates between income from stocks and bonds in Miller (1977), and the extensions of Miller's model by DeAngelo and Masulis (1980), and Bradley et al.
Investors face a progressive tax rate on bond returns, while the company faces a constant corporate tax rate, as well as a constant zakat rate. The company will incur various costs related to financial distress if it does not fully meet the end-of-term payment promised to its bondholders. If the firm defaults on its debt obligation to the bondholder, ̂, the costs associated with financial distress will reduce the value of the firm by a constant proportion.
Furthermore, under the above assumptions of the model, the cash flow of debt and equity after corporate tax and zakat payment then the uncertain end-of-period pretax r. Meanwhile, the end-of-period pre-tax return to bondholders in Equation (2) follows from Assumption 8 and the fact that bondholders have limited liability in the event that the. According to assumption 1, that of risk neutrality, equations (1) and (2) provide the following beginning-of-period market value of.
Under this condition, the payment for ̃ less the total costs of the financial distress, k ̃ and the value of the period before taxes and debt payments. The second integral represents states of the world in which the pre-tax value of the period, ̃, is greater than its debt obligation ( ) but less than the maximum level of profits that would result in a corporate tax at the end of the period. bill. In these states, the firm does not have a corporate tax bill; however, payments to bondholders and shareholders are subject to personal tax rates.
The comparative statics of the leverage relevance model can be shown by differentiating the optimal state (6) with respect to each of the relevant exogenous variables. The optimal level of debt is inversely related to the level of non-debt tax shields. The optimal level of debt is positively related to the personal tax rate on equity.
Based on their model, they predict that leverage of the firm is i) positively related to corporate tax rates; ii) negatively related to marginal bankruptcy costs; and iii) negatively related to the non-debt tax shields. Moreover, the comparative statics prove the implications, which is a negative relationship between the firm's leverage and the firm's zakat payment.
RESULTS AND ANALYSIS
A common specification in panel data models is the unbalanced two-way fixed effects model, which includes a set of fixed effects for primary units indexed by i. The second test commonly used in applied panel data analysis seeks to determine which is more appropriate: random or fixed effects. However, the result shows that the p-value for the test is < 5%, reject the null hypothesis.
This indicates that the random effects model is not appropriate and that the fixed effects specification should be preferred. However, the result shows that there is no multicollinearity in the model since the mean vif<5. The second diagnostic check is the heteroscedasticity test using the Modified Wald Statistic for group heteroscedasticity in the residuals of a fixed effect regression model (Greene, 2000).
Then, the third diagnostic check is serial correlation testing using the Wooldridge test or a Lagram-Multiplier test. This means that there is a serial correlation problem and concludes that the data has first-order autocorrelation. In line with the diagnostic check, it can be concluded that model 5 (OLS with hetero and serial correlation) is the best model to explain the significant level of each explanatory variable.
Theoretically, one of the determining factors determining the choice of corporate capital structure is the effective tax rate. As a result, the effective tax rate and debt level are positively correlated to business value. Interestingly, the results of all models, as shown in Table 3, show the negative correlation between corporate income tax and leverage.
More interestingly, the empirical result proved that there is a significant negative relationship between zakat and leverage. While this study reveals that ROA as the measurement of profitability has a strong negative relationship with leverage. Numbers in parentheses are t-statistics, except for Breusch-Pagan LM test, Hausman test, Heteroskedasticity, and Serial Correlation, which are p-values.
CONCLUSION AND RECOMMENDATION 5.1 Conclusion
Ultimately, the increase in profits will not only benefit the business owner, but will also increase the payment of zakat by the businesses, which then contribute benefits to the people receiving zakat (shohibul maal) through the zakat institution. Because it is not only beneficial for the business environment, but could also improve the welfare of people in need.
On the determinants of the capital structure of SMEs in Central and Eastern Europe: a dynamic panel analysis. A theoretical review of the application of static trade-off theory, pecking order theory, and agency cost theory to capital structure. Analysis of Determinants of Capital Structure: With Special Focus on Indian Non-Financial Listed Companies in S and P CNX Nifty.
Key factors affecting capital structure decisions and the speed of adjustment of Thai listed property.
