Does Manager’s Perceived Competition Affect the Capital Structure Decisions of Malaysian Firms? A Text Mining Approach on the Chairman’s Statement

This study examines the validity of the limited liability effect theory using the ex-ante measure of competition as a framework for analysing the capital structure determinants of Malaysian firms. The limited liability theory argues that, given the tougher competitive environment, debt has a limited liability effect; hence, debt induces managers to pursue more risky projects. Despite its consistency with the underpinning model, the majority of studies that test the validity of the limited liability effect theory use ex-post measures for competition instead of ex-ante measures. This study endevours to fill this gap in the literature by introducing a new variable construct for competition utilizing a text mining approach on the chairman's statement. The findings suggest that manager's perceived competition has a positive relationship with the changes in a firm's leverage. Thus, this study confirms the limited liability effect theory in the context of a developing country.