Page 53 - FREN-C2021 PROCEEDINGS

DETERMINANTS OF FIRMS’ PROFITABILITY: EVIDENCE FROM
NON-FINANCIAL SHARIAH COMPLIANT FIRMS IN MALAYSIA

1*
Farah Farzana Pidrus , Intan Mardhiah Abdul Samad, Puteri Nur Awatif Aini Megat Khairuddin, Siti Ili
Syuhada Ahmad Zaid, Abdul Hafiz Yusof & Norhisam Bulot

1 Faculty of Business and Management, Universiti Teknologi MARA Cawangan Perlis, Kampus Arau, 02600 Arau Perlis,
Malaysia

* Corresponding author: farzanapidrus@gmail.com

Abstract
The main objective of this study is to investigate the determinants of a firm’s profitability for
consumer product firms listed as shariah-compliant in Malaysia. A better understanding of factors
affecting a firm’s profitability is important not only to enrich empirical studies in this field but also for
cross-country comparison. The use of non-financial shariah-compliant firms to analyze the
determinants of a firm’s profitability and the use of variable selection techniques are the unique
contribution of this present research. The data for the final sample consists of 40 firms. The study is
conducted using panel data analysis techniques to identify the key determinants of a firm’s
profitability. The study finds that the profitability of these firms is significantly affected by the level
of efficiency, debt, and firm size. Surprisingly, this research found that there is no significant
relationship between the firms’ level of liquidity and their profitability. Although this paper provides
empirical evidence, several areas need to be refined with future empirical research. First, this paper
uses only a limited number of firms in the analysis. The inclusion of a larger number of firms might
lead to a new set of findings and conclusions. Second, this paper has not taken into consideration the
effect of using different data analysis techniques (such as GMM). Future studies might want to
explore the use of other techniques in analyzing the data.

Keywords: Profitability, Variable Selection, Shariah-compliant, non-financial firms, Firm’s Performance

Introduction
Profitability is considered as one of the most vital subjects in finance and it has called the attention of
many researchers that have to be, mostly, developing empirical or theoretical studies. (Yüksel, 2018;
Gaganis, 2019; Chen, 2018; Kumar, 2017; Alvarez, 2021; Husnain, 2021). One of the basic objectives
of a study on profitability is to identify factors explaining the firms’ decision concerning its financial
leverage. The firm’s level of profitability is likely to be determined by a combination of factors that
are related to the characteristics of the firm as well as to the institutional environment. Profitability
determinants have been discussed for many years and still represent one of the main unsolved issues
in the corporate finance literature. Many academic studies and much empirical research have
addressed these issues (Vu, 2021; Athari, 2021; Ledley, 2020; Abeyrathna, 2019), but there is not yet a
fully supported and unanimously accepted theory. Indeed, what makes the profitability debate so
exciting is that only a few of the developed theories have been tested by empirical studies and the
theories themselves lead to different, not mutually exclusive, and sometimes opposed results and
conclusions (Giacomo Morri & Christian Beretta, 2008). This proposed study may be contributing to
the existing literature in two ways: The first contribution is the use of a new population and sample.
Previous studies have been conducted on a sample of firms from different sectors such as banks
(Almaqtari, 2019; Athari, 2021; Yüksel, 2018; Le, 2020), pharmaceutical (Ledley, 2020; Farhan,
2020), real estate and property (Pattiruhu, 2020; Martins, 2019; Mangâ, 2018) and industrial sector
(Basu, 2018). A major shortcoming of profitability studies is that they generally restrict their analysis
to conventional and bank companies (Altavilla, 2018; Bikker, 2018). Consequently, we know a little
about the applicability of various profitability theories to firms classified as shariah-compliant. Our

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