The Effect of Leverage on Performance of Shari’ah and Non-Shari’ah companies in Malaysia Using Partial Least Squares

Abstract

This study focus on the effect of shari’ah and non-shari’ah compliant companies on the relationship between leverage and performance listed on Bursa Malaysia. Based on the existing literature, a conceptual model was developed to test the relationships between the variables under investigation. Data from 916 companies were used for the year 2009 using the SEM -PLS in testing the research hypotheses. The results showed that leverage has a significant negative relationship with performance (ROA) but has no significant relationship with other performance indicators which is ROE. However the existent of TYPE (shari’ah and non-shari’ah compliant companies) as a moderator influence the negative relationship between leverage and performance for both indicators ROA and ROES used in this study. The result reveals that variance of the relationship towards ROA improve from 26.5% to 27.6% same goes to variance in ROE where R2 increases from 15% to 21.8%. This study found that most of the Malaysian listed companies performed better in a low leverage situation but not during high leverage situation, especially for shari’ah compliant companies. It was recommended that the policy makers of the firm should not underestimate the effect of leverage on performance in strategic business decisions.