Gibrat’s law and liquidity constraints: evidence from Malaysia industrial sector companies

Gibrat’s Law, or the Law of Proportionate Effect (LPE), presupposes that the growth rate of a given company is independent of its initial size. While older studies have a tendency to confirm the LPE, recent studies generally reject it. Only very few empirical studies have examined the validity of Gibrat’s Law in developing countries, with most studies focused on developed countries. In this study, we investigated the validity of the LPE in Malaysia. We also investigated whether liquidity constraints have any influence on firm growth and firm growth-size dynamics. By employing the Generalized Method of Moments (GMM) system to estimate a panel data model of the firm growth of 210 firms that were part of the Malaysian industrial sector from 2005 to 2014, we found that Gibrat’s Law was invalid and liquidity constraints had no role in explaining both the firms’ growth and growth-size dynamics, whereas age was found to positively affect the firms’ growth

The structure-performance Nexus and efficiency in the Malaysian banking sector

The debate on whether Islamic banks (IBs), given their unique attributes and business model, outperform their conventional counterparts in the context of a dual banking system has been ignited, with no conclusive evidence yet reached. This study conducts a comparative empirical analysis of performance between IBs and conventional banks (CBs) in the dual banking system of Malaysia. It investigates whether banks’ performance in Malaysia has been driven by market structure or efficiency. It also investigates whether bank managers have been demotivated and settled for a quiet life due to market power or have been aggressive due to the search for efficiency and market share. Further, it investigates how concentration within one sector influences its counterpart’s performance. Generalised Method of Moments (GMM) and Data Envelopment Analysis (DEA) techniques are employed. The findings revealed that Efficient Structure (FS) and Structure-Conduct-Performance (SCP) hypotheses are rejected for all categories. The Quiet Life Hypothesis (QLH) is accepted for CBs, implying persistency of profits and validity of the Relative Market Power (RMP) hypothesis; however, it is rejected for IBs, implying IBs’ pursuit of market power. Islamic banking sector structure showed no influence on the performance of both IBs and CBs, while CBs negatively influenced the performance of both types of banks and the sector at large. Policy markets can capitalise on the findings, regulators, and banks’ managers to promote performance, efficiency, and set merger policies

Does capital adequacy ratio influence risk-taking behaviour of conventional and Islamic banks differently? Empirical evidence from dual banking system of Malaysia

Purpose – The purpose of this study is to investigate the influence of capital adequacy ratio (CAR) prescribed in Basel III on the risk-taking behaviour of Islamic and conventional commercial banks in Malaysia. It also investigates the claim that the risk-taking behaviour of Islamic banks (IBs) and conventional banks (CBs) managers is identically influenced by CAR. Design/methodology/approach – Secondary data for all CBs operating in the Malaysian banking sector are gathered from FitchConnect database for the 2011–2017 period. Both dynamic ordinary least squares and generalised method of moments techniques are used to estimate a panel data of 43 commercial banks, namely, 17 IBs and 26 CBs. Findings – The findings of this study lend support to the favourable influence of CAR set in Basel III accord on risk-taking behaviour of both types of banks. CBs appeared to be remarkably better off in terms of capital buffers. Evidence is established on the identicality of the risk-taking behaviour of IBs and CBs managers under CAR influence. Practical implications – Even though a high CAR is observed to hamper risk-taking of banks, the findings may serve as a signal to regulators to be mindful of the implications of holding a high CAR. Similarly, managers may capitalise on the findings in terms of strategising for efficient use of the considerable capital buffers. Shareholders are also concerned about managers’ use of the considerable capital buffers. Originality/value – This study is among a few studies that endeavoured to provide empirical evidence on the claim that IBs mimic the conduct of CBs in light of the influence of CAR prescribed in Basel III on risktaking behaviour, particularly banks operating within the same banking environment

Influence of economic freedom and its subcomponents on risk-taking behavior Evidence from dual banking system of Malaysia

The purpose of this paper is to investigate the influence of economic freedom and six relevant sub-components of it on the risk-taking behavior of banks in the Malaysian dual banking system. It also aims to make a comparative analysis between Islamic and conventional banks operating in this dual banking sector. Moreover, the study is an effort to enrich the existing literature by presenting empirical evidence on the argument that the risk-taking behavior of the two types of banks is indistinguishable given that they operate in the same regulatory environment. Secondary data of all banks operating in the Malaysian banking sector are collected from FitchConnect database, in addition to the economic freedom index from Foundation Heritage for the period 2011–2017. Generalized least squares technique is employed to estimate the influence of economic freedom and the six relevant subcomponents of it on the risk-taking behavior of banks. Findings – The level of economic freedom influenced risk-taking behavior within the banking sector as a whole, conventional and Islamic banking sectors negatively during the study period (2011–2017). Risk-taking behavior of conventional and Islamic banks is similar. However, conventional banks turn to be less influenced by economic freedom level as compared to Islamic banks. The government and regulators may benefit from the results by rethinking and setting the best economic freedom index that better serves the stability of the banking system, and lessens banks’ risk-taking inclination. To the present time, this paper is thought to be of a significant contribution. Given the argument that Islamic and conventional banks behave in the same way. This is one of the first attempts to address this issue in light of the influence of economic freedom and six sub-components of it on the risk-taking behavior of banks operating in a dual banking system

Competition between conventional and Islamic banks in Malaysia revisited

Purpose – This paper aims to assess the nature of competition between conventional and Islamic banks operating in Malaysia. It is an effort to enrich the existing literature by offering an empirical compromise on the differences in the results of studies related to competition between the two types of banks. Design/methodology/approach – Secondary data on all banks operating in Malaysia’s diversified banking sector is collected from the FitchConnect database for the period 2011-2017. A non-structural measure of competition (H-statistic) as informed by Panzar–Rosse is used to measure the competition between conventional and Islamic banks. Panel data analysis techniques are used to estimate H-statistic. Wald test for the market structure of perfect competition/monopoly is used to affirm the validity and consistency of the results. Findings – The findings of this study signify that the Malaysian banking sector operated under monopolistic competition during the period of study. The long-run equilibrium condition holds for the Malaysian banking sector. Competition among conventional banks is more intense than that among Islamic banks. Financial reform endeavours of Bank Negara Malaysia (BNM) along with the liberalisation wave of the financial system were successful in promoting competition, rendering the financial system contestable, resilient and dynamic. Practical implications – Regulators and policymakers may find the results beneficial in terms of rethinking the number of banks operating in the Islamic sector. The number of banks, however, is not the only determinant of competition in the banking sector. Implications of competition change for stability and risktaking behaviour of banks should be considered. Originality/value – Within the context of Malaysia’s diversified banking system, given the contradictory results reported in studies on competition, this study is an effort to provide a plausible middle ground. It suggests a possible answer as to why competition nature has not changed since the policy change initiatives of BNM, namely, banks merger, expansion of Islamic banking operation scope and liberalisation process