Equity-based Financing and Credit Risk: A Monte Carlo Analysis of Economic Crises in Malaysia

Umul Ain’syah Sha’ari; Siti Raihana Hamzah; Karmila Hanim Kamil; Putri Swastika

doi:10.33102/mjosht.v11i1.452

Authors

Umul Ain’syah Sha’ari Faculty of Science and Technology, Universiti Sains Islam Malaysia, 71800, Nilai, Negeri Sembilan, Malaysia. https://orcid.org/0009-0006-4716-9358
Siti Raihana Hamzah Faculty of Science and Technology, Universiti Sains Islam Malaysia, 71800, Nilai, Negeri Sembilan, Malaysia.
Karmila Hanim Kamil Faculty of Science and Technology, Universiti Sains Islam Malaysia, 71800, Nilai, Negeri Sembilan, Malaysia. https://orcid.org/0000-0003-2739-2473
Putri Swastika Metro State Islamic Institute of Religion, Lampung, Indonesia.

DOI:

https://doi.org/10.33102/mjosht.v11i1.452

Keywords:

Equity-based financing; Debt financing; Credit risk; Monte Carlo; Economic Crises.

Abstract

Financial instruments play a critical role in influencing the performance of a corporation. Corporate management may choose between debt and equity-based financing instruments to ensure the continuity of their business operations. Even so, the management will need to consider the credit risk exposure associated with the financing instruments as they tend to affect corporate performance, especially during an economic fluctuation. Therefore, this study employed Monte Carlo simulation to analyze and compare the credit risk exposure associated with debt and equity-based financing across various sectors in Malaysia, particularly in the context of significant economic crises. The sectoral data were used and segregated into two different phases of economic crises, which are from 2007 until 2018 (this period involves the Global Financial Crisis (GFC)) and from 2010 until 2021 (this period involves the COVID-19 pandemic). Through the simulation, this study finds that equity-based financing recorded consistent results of providing low credit risk exposure regardless of sectors and economic crises. Meanwhile, debt financing recorded high credit risk by all sectors during the economic crises. Therefore, this study suggests that equity-based financing is more reliable than debt in promoting corporate financial sustainability by offering lower exposure to credit risk and minimizing reliance on debt issuance.

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