Targeting Behavior among Indonesian Firms: Two-Step Partial Adjustment Model Analysis

Dwi Cahyaningdyah

Abstract

In this research, we tested the heterogeneity of speed of adjustment toward target leverage among industries on the Indonesian stock exchange by using two-step partial adjustment model. The sample collected from 2007-2016 and consisted of firms in eight sectors, i.e. agriculture, mining, basic industries, miscellaneous, consumer goods, property and real estate, infrastructure, utilities and transportation as well as trade, services and investment sectors. Firms in the financial industry are excluded because the capital structure of firms in the financial industry reflects specific regulations and are not independent firms’ policies. The results showed that speed of adjustment ranged from 61% - 45% for book leverage and 67% - 43% for market leverage. This significant speed of adjustment is consistent with trade-off theory, which states that firms have target leverage and when firms are deviated from the target, firms will make financial decisions that will close the gap between previous year’s leverage and the target leverage of current period.

Keywords

Magnitude deviation, Target leverage; trade off theory; speed of adjustment

Full Text:

PDF

References

Abdeljawad, I., Nor, F. M., Ibrahim, I., & Abdul, R. (2013). Dynamic Capital Structure Trade-off Theory : Evidence from Malaysia. International Review of Business Research Papers, 9(6), 1–10.

Baxter, N. D. (1967). Leverage, Risk of Ruin and Cost of Capital. The Journal of Finance, 22(3), 395–403.

Bradley, M., Jarrell, G. A., & Kim, E. H. (1984). On the Existence of an Optimal Capital Structure : Theory and Evidence. The Journal of Finance, 39(3), 857–878.

Brennan, M. J., & Schwartz, E. S. (1984). Valuation of corporate claims. The Journal of Finance, XXXIX(3), 593–607.

Byoun, S. (2008). How and When Do Firms Adjust Their Capital Structures toward Targets ? Journal of Finance, LXIII(6), 3069–3096.

Clark, B., Francis, B., & Hasan, I. (2009). Do firms adjust toward target capital structures ? Some international evidence. SSRN Electronic Journal, (December 2007).

Cook, D. O., & Tang, T. (2010). Macroeconomic conditions and capital structure adjustment speed. Journal of Corporate Finance, 16(1), 73–87.

Dang, V. A., Kim, M., & Shin, Y. (2014). In search of robust methods for dynamic panel data models in empirical corporate finance. Journal of Banking, 1–47.

DeAngelo, H., & Masulis, R. w. (1980). Optimal Capital Structure Under Corporate and Personal Taxation. Journal of Financial Economics, 8, 3–29.

Drobetz, W., Schilling, D. C., & Schröder, H. (2014). Heterogeneity in the Speed of Capital Structure Adjustment across Countries and over the Business Cycle. European FInancial Management, 1–38.

Elsas, R., & Florysiak, D. (2011). Heterogeneity in the Speed of Adjustment toward Target. International Review of Finance, 11(2), 181–211.

Fama, E. F., & French, K. R. (2002). Testing Trade-Off and Pecking Order Predictions about Dividends and Debt. The Review of Financial Studies, 15(1), 1–33.

Faulkender, M., Flannery, M. J., Hankin, K. W., & Smith, J. M. (2012). Cash flows and leverage adjustments. Journal of Financial Economics, 103(3), 632–646.

Fischer, E., Heinkel, R., & Zechner, J. (1989). Dynamic Capital Structure Choice : Theory and Tests. The Journal of Finance, XLIV(1), 19–40.

Flannery, M. J., & Hankins, K. W. (2013). Estimating dynamic panel models in corporate finance. Journal of Corporate Finance, 19(1), 1–19.

Flannery, M. J., & Rangan, K. P. (2006). Partial adjustment toward target capital structures. Journal of Financial Economics, 79, 469–506.

Frank, M. Z., & Goyal, V. K. (2004). The effect of market conditions on capital structure adjustment. Finance Research Letters, 1(1), 47–55.

Frank, M. Z., & Goyal, V. K. (2009). Capital Structure Decisions : Which Factors Are Reliably Important ? Financial Management, (Spring), 1–37.

Haron, R., Ibrahim, K., Nor, F. M., & Ibrahim, I. (2013). Dynamic adjustment towards target capital structure : Thailand evidence Dynamic Adjustment towards Target Capital Structure : Thailand Evidence. Jurnal Pengurusan, (January).

Hovakimian, A., Opler, T., & Titman, S. (2001). The Debt-Equity Choice. The Journal of Financial and Quantitative Analysis, 36(1), 1–24.

Huang, R., & Ritter, J. R. (2009). Theories of Capital Structure and Testing of the Speed Adjustment Estimating. The Journal of Financial and Quantitative Analysis, 44(2), 237–271.

Jensen, C., & Meckling, H. (1976). Theory of The Firm : Managerial Behavior. Agency Cost and Ownership Structure. Journal of Financial Economics, 3, 305–360.

Kayhan, A., & Titman, S. (2007). Firms ’ histories and their capital structures. Journal of Financial Economics, 83, 1–32.

Korajczyk, R. A., & Levy, A. (2003). Capital structure choice : macroeconomic conditions and financial constraints. Journal of Financial Economics, 68, 75–109.

Kraus, A., & Litzenberger, R. H. (1973). A State-Preference Model of Optimal Financial Leverage. The Journal of Finance, 911–922.

Kuo, L.-W., Liang, H., & Wang, Y.-J. (2018). How DO Equity Mispricing and Long-term Growth Opportunities Influence Firm Level Capital Structure Dynamics of Taiwanese Publicly Listed Firms ? Advance in Pacific BAsin Business, Economics and Finance, 6, 125–155.

Leland, H. E. (1994). Corporate Debt Value , Bond Covenants , and Optimal Capital Structure. The Journal of Finance, 49(4), 1213–1252.

Lemmon, M. L., Roberts, M. R., & Zender, J. F. (2008). Back to the Beginning : Persistence and the Cross-Section of Corporate Capital Structure. The Journal of Finance, LXIII(4), 1575–1608.

Miguel, A. De, & Pindado, J. (2001). Determinants of capital structure : new evidence from Spanish panel data. Journal of Corporate Finance, 7, 77–99.

Mukherjee, T., & Wang, W. (2013). Capital Structure Deviation and Speed of. The Financial Review, 48, 597–615.

Myers, S. C. (1984). The Capital Structure Puzzle. The Journal of Finance, 39(3), 575–592.

Rajan, R. G., & Zingales, L. (1995). What Do We Know about Capital Structure ? Some Evidence from International Data. Journal of Finance, L(5), 1421–1460.

Ramjee, A., & Gwatidzo, T. (2012). Dynamics in capital structure determinants in South Africa. Mediatari Accountancy Research, 20(1), 52–67.

Stiglitz, J. E. (1989). Financial Markets and Development. Oxford Review of Economic Policy, 5(4), 55–68.

Xu, Z. (2007). Do Firms Adjust Toward a Target Leverage Level ? Bank of Canada Working Paper, October.

View Counter: Abstract - 403 and PDF - 427

Refbacks

  • There are currently no refbacks.


Bookmark and Share