Why Very Low Leverage Varies Across ASEAN: A Dynamic Panel Perspective

Maya Sari; Netti Siska N; Nurhuda Nizar; Azreen Roslan; Inomjon Quadratov

doi:10.35877/454RI.daengku4907

Authors

Maya Sari Universitas Pendidikan Indonesia
Netti Siska N Universitas Pendidikan Indonesia
Nurhuda Nizar Universiti Teknologi Mara
Azreen Roslan Universiti Teknologi Mara
Inomjon Quadratov Tashkent State University of Economics

DOI:

https://doi.org/10.35877/454RI.daengku4907

Keywords:

Very low leverage, family ownership, profitability, liquidity, operating cash flow, System GMM, ASEAN firms

Abstract

This study investigates the determinants of very low leverage (VLL) among publicly listed non-financial firms in Malaysia, Indonesia and Singapore. The study evaluates whether family ownership and firm-level financial fundamentals shape firms' decisions to maintain extremely low debt levels. An unbalanced panel of 10,160 firm-year observations from 2015 to 2024 is analysed using the two-step System GMM estimator to address endogeneity, dynamic persistence and unobserved heterogeneity. Key explanatory variables include family ownership, profitability, liquidity and operating cash flow, with alternative leverage thresholds used for validation. Results show that capital structure persistence is the strongest predictor of VLL, with firms maintaining a 55 to 57% likelihood of staying in VLL positions across periods. Family ownership does not significantly influence VLL behaviour, challenging agency- and socioemotional wealth-based expectations. Financial fundamentals only matter in Malaysia; their effects disappear in Indonesia and Singapore once dynamic endogeneity is controlled. The findings reveal that several relationships identified in static models are artefacts of endogeneity bias. The strong persistence of VLL suggests that initial financing decisions have long-term effects, highlighting the need for continuous capital structure reassessment. Policymakers should consider institutional differences: Malaysia's relationship-based banking environment reinforces reliance on internal liquidity, while Indonesia requires stronger market infrastructure and creditor protections. Investors should interpret low leverage cautiously, as it may reflect historical path dependence rather than current firm performance. This study provides one of the first comparative dynamic-panel analyses of VLL behaviour in ASEAN markets using System GMM. It advances the capital structure literature by demonstrating that persistence dominates firm fundamentals and that family ownership does not determine extreme leverage choices. The study also clarifies methodological distortions found in static capital structure research

References

Abdul Rahman , Mohd Nor, F., A. (2023). Islamic finance and corporate capital structure in Malaysia. Journal of Islamic Accounting and Business Research, 14(3), 445–468.

Aggarwal, R., & Schloetzer , Williamson, R., J. D. (2019). Do corporate governance mandates impact long-term firm value and governance culture. Journal of Corporate Finance, 59, 202–217.

Allen, F., Qian, Y., & Tu , Yu, F., G. (2019). Entrusted loans: A close look at China’s shadow banking system. Journal of Financial Economics, 133(1), 18–41.

Anton , Afloarei, A. E., S. G. (2023). The impact of enterprise risk management on firm value: Empirical evidence from Romanian non-financial firms. Engineering Economics, 32(3), 257–268.

Arellano , Bond, S., M. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297.

Arosa, B., & Richie , Schuhmann, P. W., N. (2021). The impact of culture on market timing in capital structure choices. Journal of Corporate Finance, 66, 101795.

Aslam, E., Ijaz, F., & Iqbal , Hunjra, A. I., A. (2024). Corporate social responsibility and capital structure: Understanding the impact of environmental, social and governance factors. Journal of Cleaner Production, 432, 139791.

Belkhir, M., & Maghyereh , Awartani, B., A. (2021). Institutions and corporate capital structure in the MENA region. Emerging Markets Review, 26, 100606.

Bergmann, M. (2024). Capital structure determinants and industry effects: Evidence from European firms. Managerial Finance, 50(1), 123–145.

Bertrand , Schoar, A., M. (2003). Managing with style: The effect of managers on firm policies. Quarterly Journal of Economics, 118(4), 1169–1208.

Bessler, W., & Drobetz , Pensa, P., W. (2023). Do managers adjust the capital structure to market value changes. Evidence from Europe. In C. Hirsch (Ed.), Dynamic Capital Structure Choice: Theory and Tests (Pp. 113–165). Springer.

Bessler, W., Drobetz, W., & Haller , Meier, I., R. (2022). The international zero-leverage phenomenon. Journal of Corporate Finance, 23, 196–221.

Block, J. H., Fisch, C., & Vismara , Andres, R., S. (2024). Private equity investment and capital structure: New evidence from Europe. Journal of Banking & Finance, 151, 106829.

Blundell , Bond, S., R. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.

Bucci, F., & La Torre , Liberatore, G., M. (2022). Does the EU Directive on non-financial information influence the value relevance of ESG disclosure. Evidence from Italian Listed Companies. Journal of Applied Accounting Research, 23(3), 621–645.

Cespedes, J., & Gonzalez , Molina, C. A., M. (2022). Price support in IPOs: Evidence from emerging markets. Journal of Corporate Finance, 70, 102088.

Chang, X., & Dasgupta , Hilary, G., S. (2024). Analyst coverage and financing decisions. Journal of Finance, 79(1), 485–532.

Chang, Y. K., & Chou , Huang, T. H., R. K. (2019). Corporate governance and the dynamics of capital structure: New evidence. Journal of Banking & Finance, 48, 374–385.

Chen, L.-R., Chen, F.-S., & Chen, D.-F. (2023). Effect of Social Presence toward Livestream E-Commerce on Consumers’ Purchase Intention. Sustainability, 15, 3571. https://doi.org/10.3390/su15043571

Claessens, S., & Djankov , Nenova, T., S. (2019). Corporate risk around the world. In S. C. et al. (Ed.), Corporate governance and development (pp. 79–122). World Bank Publications.

Cruz, C. C., Larraza-Kintana, M., & Garces-Galdeano , Berrone, P., L. (2023). Family firms’ socioemotional wealth and firm risk taking: The moderating role of ownership stakes. Entrepreneurship Theory and Practice, 47(2), 517–548.

Damodaran, A. (2022). Equity risk premiums: Determinants, estimation and implications. Financial Markets, Institutions & Instruments, 31(4), 89–156.

Dang , Phan, H. V., V. A. (2023). CEO inside debt and corporate debt maturity structure. Journal of Banking & Finance, 146, 106397.

Dang, V. A., & Kim , Shin, Y., M. (2020). In search of robust methods for dynamic panel data models in empirical corporate finance. Journal of Banking & Finance, 53, 84–98.

Dang, V. A., Phan, H. V, & Nguyen , Nguyen, T. T., C. V. (2021). Institutional ownership and corporate leverage: New evidence from East Asia. International Review of Economics & Finance, 73, 249–267.

Davydov, D., & Filat , Moraru, A., S. (2021). The optimal leverage of corporate risk management: Evidence from Eastern Europe. Economics Letters, 203, 109849.

DeAngelo , DeAngelo, L., H. (2007). Capital structure, payout policy, and financial flexibility. Marshall School of Business Working Paper No. FBE 02-06.

DeAngelo , DeAngelo, L., H. (2019). The illiquidity discount in public firm takeovers. Journal of Financial Economics, 133(1), 242–263.

DeAngelo , Stulz, R. M., H. (2022). Why high leverage is optimal for banks. Journal of Financial Economics, 144(3), 697–721.

Denis , McKeon, S. B., D. J. (2021). Persistent negative cash flows, staged financing, and the stockpiling of cash balances. Journal of Financial Economics, 142(1), 293–313.

Domenichelli, O. (2019). Family firms, debt and corporate distress: Evidence from the global financial crisis. Journal of Family Business Management, 9(2), 169–188.

Duong, H. K., & Hoang , Lee, E., T. V. (2022). The spillover effects of credit default swap market: Evidence from the Asia-Pacific region. International Review of Financial Analysis, 81, 102107.

Eckbo , Masulis, R. W., B. E. (2021). Corporate financial leverage and liquidity management. In B. E. Eckbo (Ed.), Handbook of corporate finance: Empirical corporate finance (Vol. 2, pp. 87–168). Elsevier.

Fardnia, P., & Giudici , Paleari, S., G. (2023). Family control and performance of newly public firms. Journal of Corporate Finance, 82, 102450.

Faulkender, M., Flannery, M. J., & Hankins , Smith, J. M., K. W. (2012). Cash flows and leverage adjustments. Journal of Financial Economics, 103(3), 632–646.

Fischer, E. O., & Heinkel , Zechner, J., R. (1989). Dynamic capital structure choice: Theory and tests. Journal of Finance, 44(1), 19–40.

Frank , Goyal, V. K., M. Z. (2019). Pecking order theory of capital structure: Evidence from panel data. In B. E. Eckbo (Ed.), Handbook of empirical corporate finance (Vol. 2, pp. 135–172). Elsevier.

Frank , Goyal, V. K., M. Z. (2022). The profits-leverage puzzle revisited. Review of Finance, 26(6), 1485–1533.

Gomez-Mejia, L. R., & Patel , Zellweger, T. M., P. C. (2019). In the horns of the dilemma: Socioemotional wealth, financial wealth, and acquisitions in family firms. Journal of Management, 44(4), 1369–1397.

Gopalan, R., & Kalda , Manela, A., A. (2023). Hub-and-spoke regulation and bank leverage. Journal of Finance, 78(5), 2867–2918.

Gottardo , Moisello, A. M., P. (2019). Family firms, risk-taking and financial distress. Journal of Family Business Management, 9(3), 319–336.

Graham , Leary, M. T., J. R. (2011). A review of empirical capital structure research and directions for the future. Annual Review of Financial Economics, 3, 309–345.

Graham , Leary, M. T., J. R. (2019). The evolution of corporate cash. Review of Financial Studies, 31(11), 4288–4344.

Guizani , Ajmi, A. N., M. (2021). Islamic banking and female board representation: Are they complementary or substitutive in enhancing firm performance. Pacific-Basin Finance Journal, 68, 101601.

Guizani , Ajmi, A. N., M. (2023). Ownership structure and dividend policy: The moderating role of board gender diversity in an emerging market. Cogent Business & Management, 10(1), 2156525.

Haas , Peeters, M., R. (2023). The dynamic adjustment to target leverage. Review of Financial Studies, 19(2), 433–465.

Halling, M., & Yu , Zechner, J., J. (2020). How did COVID-19 affect firms’ access to public capital markets. Review of Corporate Finance Studies, 9(3), 501–533.

Haron, R. (2019). Capital structure inconclusiveness: Evidence from Malaysia, Thailand and Singapore. International Journal of Managerial Finance, 10(1), 23–38.

Ho, P. H., Huang, C. W., & Lin , Yen, J. F., C. Y. (2024). CEO overconfidence and financial crisis: Evidence from bank lending and corporate investment. Review of Financial Studies, 29(6), 1496–1533.

Jansen, K. L., & Smedema , Khaw, K. L. H., A. R. (2022). Family firms and innovation: A meta-analysis. Family Business Review, 35(4), 420–442.

Jansen, S., & Siegel , Waldkirch, M., D. S. (2023). Product market competition and corporate governance. Corporate Governance: An International Review, 31(3), 385–405.

Javeed, S. A., Latief, R., & Cai , San Ong, T., X. (2024). The impact of corporate social responsibility on corporate financial performance: The mediating role of financial management practices. Borsa Istanbul Review, 24(1), 24–41.

Jensen, M. C. & W. H. M. (1976). Theory of The Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305–360.

Jiang, F., & Jiang , Kim, K. A., Z. (2023). Capital structure and corporate investment: Evidence from a structural estimation. Review of Financial Studies, 36(12), 4859–4899.

Jiang, L., & Kim , Pang, L., J. B. (2024). Corporate policies with permanent and transitory shocks: A dynamic panel threshold analysis. Journal of Financial and Quantitative Analysis, 55(3), 1019–1053.

Karolyi , Liao, R. C., G. A. (2024). State capitalism’s global reach: Evidence from foreign acquisitions by state-owned companies. Journal of Corporate Finance, 86, 102578.

Khurana, I., & Moser , Raman, K. K., W. J. (2025). Tax avoidance, managerial ability, and investment efficiency. Abacus, 61(1), 83–113.

Korteweg, A. (2023). The costs of financial distress across industries. Journal of Finance, 78(1), 479–531.

La Porta, R., & Lopez-de-Silanes , Shleifer, A., F. (1999). Corporate ownership around the world. Journal of Finance, 54(2), 471–517.

Leary , Roberts, M. R., M. T. (2005). Do firms rebalance their capital structures. Journal of Finance, 60(6), 2575–2619.

Lee, I. (2024). CIA Triad Definition. Examples of Confidentiality, Integrity, and Availability. Wallarm.

Li , Qiu, J., C. (2020). Does bank competition matter for portfolio choice of investors. Evidence from Bank Branch Deregulation. Journal of Banking & Finance, 116, 105809.

Lim , Yen, S. H., C. Y. (2023). Independent director tenure and corporate social responsibility performance. Journal of Corporate Finance, 78, 102300.

Martin-Garcia , Herrero, B., R. (2020). Boards of directors: Composition and effects on the performance of the firm. Economic Research, 33(1), 1015–1041.

Mensah, E., & Duodu , Agyei, S. K., B. (2024). Corporate governance and capital structure: Evidence from West Africa. Journal of African Business, 25(1), 89–107.

Miglo , Lee, D. D., A. (2020). Optimal capital structure in the modern theory of finance. Management Science Letters, 10(11), 2593–2602.

Morais, F., & Serrasqueiro , Ramalho, J. J., Z. (2020). The zero-leverage phenomenon: A bivariate probit with partial observability approach. Research in International Business and Finance, 53, 101201.

Morais, F., & Serrasqueiro , Ramalho, J. J., Z. (2022). Determinants of the capital structure of young firms: An analysis combining quantitative and qualitative methods. Review of Managerial Science, 16(7), 2173–2209.

Morellec, E., & Nikolov , Schurhoff, N., B. (2022). Dynamic capital structure under management entrenchment. Journal of Financial Economics, 113(3), 411–431.

Moussa, F. B. (2024). The mediating role of board gender diversity between female CEO and capital structure: Evidence from European firms. Journal of Management and Governance, 28(1), 245–278.

Myers, S. C. (1984). The capital structure puzzle. Journal of Finance, 39(3), 575–592.

Nelson , Winter, S. G., R. R. (1982). An evolutionary theory of economic change. Harvard University Press.

Nguyen, H. T., & Nguyen , Hoang, N. T., A. H. (2022). Institutional environment and determinants of firm leverage: Evidence from Vietnam. International Journal of Emerging Markets, 17(1), 22–46.

Pham, C. D., & Phan , Nguyen, D. D., N. T. (2023). Corporate leverage and the pandemic: The role of liquidity creation. Pacific-Basin Finance Journal, 81, 102107.

Phan , Yoshikawa, T., T. V. (2021). Board characteristics and corporate social responsibility: A meta-analysis. Journal of Business Research, 133, 15–32.

Pindado , Requejo, I., J. (2022). Family business performance from a governance perspective: A review of empirical research. International Journal of Management Reviews, 17(3), 279–311.

Rahman, M. M., Zheng, C., & Ashraf , Rahman, M. M., B. N. (2020). Capital requirements, the cost of financial intermediation and bank risk-taking: Empirical evidence from Bangladesh. Research in International Business and Finance, 44, 488–503.

Ramli, N. A., & Latan , Solovida, G. T., H. (2022). Determinants of capital structure and firm financial performance: A PLS-SEM approach. Quarterly Review of Economics and Finance, 83, 103–116.

Roberts , Whited, T. M., M. R. (2013). Endogeneity in empirical corporate finance. In M. H. G. M. Constantinides & R. M. Stulz (Ed.), Handbook of the economics of finance (Vol. 2, pp. 493–572). Elsevier.

Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86–136.

Saona, P., & Muro , Alvarado, M., L. (2023). Do financial constraints and intangible assets affect capital structure. Evidence from Latin American Markets. International Review of Economics & Finance, 86, 799–820.

Sardo , Serrasqueiro, Z., F. (2021). Intellectual capital, growth opportunities, and financial performance in European firms: Dynamic panel data analysis. Journal of Intellectual Capital, 22(2), 240–259.

Setyawan, A., Darmawan, A., & Susanto , Rahmawati, R., A. (2023). The moderating effect of corporate social responsibility on leverage and financial performance: Evidence from Indonesia. Cogent Business & Management, 10(1), 2175110.

Sheikh , Qureshi, M. A., N. A. (2019). Determinants of capital structure of Islamic and conventional commercial banks: Evidence from Pakistan. International Journal of Islamic and Middle Eastern Finance and Management, 10(1), 24–41.

Strebulaev , Yang, B., I. A. (2013). The mystery of zero-leverage firms. Journal of Financial Economics, 109(1), 1–23.

Strebulaev, I. A. (2007). Do tests of capital structure theory mean what they say. Journal of Finance, 62(4), 1747–1787.

Stryckova, L. (2023). Board diversity and corporate innovation: Evidence from European listed firms. Review of Managerial Science, 17(3), 833–875.

Sumani, S. (2020). The effect of leverage, profitability and firm size on firm value: Evidence from food and beverages companies in Indonesia. European Journal of Business and Management Research, 5(1), 1–6.

Teo , Wong, S. H., M. (2024). Corporate governance and performance: Evidence from Singapore. Singapore Management Review, 46(1), 1–28.

Tran , Nguyen, H. N., Q. T. (2023). Family ownership and earnings management in Vietnam: The moderating role of foreign ownership. Cogent Business & Management, 10(1), 2165011.

Trinugroho, I., Agusman, A., Ariefianto, M. D., & Darsono , Tarazi, A., D. (2022). Determinants of cross-border bank acquisitions in ASEAN countries: The role of regulatory environments. Pacific-Basin Finance Journal, 71, 101700.

Vieira, E. S. (2021). Determinants of Portuguese firms’ financial performance: Panel data evidence. International Journal of Productivity and Performance Management, 63(4), 389–409.

Vo , Ellis, C., X. V. (2021). International financial integration: The role of state ownership in emerging markets. Research in International Business and Finance, 42, 1335–1348.

Wintoki, M. B., & Linck , Netter, J. M., J. S. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105(3), 581–606.