Effect of the global financial crisis on the financial performance of public listed construction companies in Malaysia

Abstract

Purpose

The aim of this case study is to characterize the impact of the 2008 global financial crisis on the financial performance of public listed construction companies.

Design/methodology/approach

Financial analysis was conducted on 32 public listed construction companies in Malaysia. Twelve financial ratios were examined to determine the profitability, liquidity, activity, leverage and solvency of these companies over the period between 2005 and 2010. This was complemented by a distress analysis using Altman’s Z-index. The study also used a content analysis of the Chairman’s or Managing Director’s statement to shareholders to uncover the responses and strategic initiatives undertaken by the management in response to the financial crisis.

Findings

The only direct impact of the financial crisis was a reduction in profitability. Total revenues and total assets of these companies continue to grow due to increased demand for construction from year 2007 following two large capital investment programs initiated by the Malaysian Government to mitigate the potential effects of the financial crisis. Net profits rebounded back to 5 per cent by year 2010. These companies immediately responded to the crisis with more prudent financial management; curtailing expenses, cutting dividends, reducing bank borrowings, increasing equity; and to the extent of disposing of assets to mitigate losses.

Research limitations/implications

The sample of only 32 public listed companies out of a total of more than 60,000 construction companies may be considered small, but these 32 companies represent nearly 20 per cent of the total construction volume for 2010.

Practical implications

The study documents the effects of increased capital spending by the government to mitigate the loss of investor confidence followed by a slowdown in economic growth during a period of global financial distress. Key findings will inform on prudent financial management to withstand future financial crises.

Originality/value

The responses and strategies adopted by the management to mitigate the effects and to enhance future performance of these companies have been uncovered. These are important considerations in managing construction companies; the analysis and observations will be invaluable to researchers intending to study how the construction industry responds to a future slump in demand.

Citation

Ying Lai, H., Rashid Abdul Aziz, A. and Khuan Chan, T. (2014), "Effect of the global financial crisis on the financial performance of public listed construction companies in Malaysia", Journal of Financial Management of Property and Construction, Vol. 19 No. 3, pp. 246-263. https://doi.org/10.1108/JFMPC-02-2014-0002