Capital Structure and Firm Performance in Government-Linked Companies: Moderating Role of Board Composition and Ethnic Diversity

The performance of state-owned enterprises (SOEs) has been subjected to a wide range of debate around the globe. In Malaysia, SOEs or government-linked companies (GLCs) play a significant role in shaping the economy. This study investigates whether GLCs with large debts suffer from poor financial performance as proposed by Public Choice Theory, and whether corporate governance mechanisms and board diversity as suggested by Agency Theory and Human Capital Theory can moderate the impact of debt on the GLCs' financial performance. Utilizing longitudinal data from 20 largest GLCs listed on Bursa Malaysia from 2005 to 2019, our results show that the negative relationship between leverage and financial performance is not statistically significant, hence Public Choice Theory is not supported. CEO duality is found to significantly exacerbate the negative relationship between leverage and financial performance, while a higher proportion of independent directors attenuate, thus supporting Agency Theory. We also found that ethnic diversity weakens the negative relationship between leverage and financial performance, supporting the presumption in Human Capital Theory that diversity in personalities strengthen organizational performance. This study offers theoretical and policy implications surrounding corporate governance practices.