Dynamic Capital Structure and Its Speed of Adjustment: a Case of Listed Manufacturing Firms in Indonesia

Novia Putri Anisti, Dony Abdul Chalid

Abstract

This study examines the determining factors and the speed of adjustment of manufacturing firms’ capital structure in Indonesia. This research uses data of 118 listed manufacturing companies from 2014 to 2018 and offers a continuation of Indonesia’s existing literature by applying a dynamic model.  The results reveal that Indonesian manufacturing firms practice optimal capital structure and are altered by firm-specific and time-varying factors. Firms’ decisions regarding capital structure are determined by firm-specific factors: non-debt tax shields, tangibility, and stock price performance. The results also indicate the speed of adjustment does exist, although the speed of adjustment finds lower than in previous research. The slowdown of the manufacturing industry growth from 2014 to 2018 turns out to be in line with the slow pace of leverage adjustment.  

Keywords

Capital structure, Optimal leverage, Pecking Order Theory, Trade-off Theory, Speed of adjustment

Full Text:

PDF

References

Al-Najjar, B., & Hussainey, K. (2011). Revisiting the Capital-Structure Puzzle: UK Evidence. Journal of Risk Finance, 12(4), 329-338.

Ameer, R. (2010). Financial Liberalization and Firms’ Capital Structure Adjustments Evidence from Southeast Asia and South America. Journal of Economics and Finance, 37(1), 1-32.

Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. The Review of Economic Studies, 58(2), 277.

Assaf, A., & Finance, M. (2014). Capital Structure and Inflation Uncertainty: Evidence from a Pooled Sample of Dutch firms. unpublished master thesis, Tilburg University.

Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital Structures in Developing Countries. Journal of Finance, 56(1), 87-130.

Chen, L. J., & Chen, S. Y. (2011). How the Pecking-Order Theory Explain Capital Structure. Journal of International Management Studies, 6(3), 92-100.

DeAngelo, H., & Masulis, R. W. (1980). Optimal Capital Structure Under Corporate and Personal Taxation. Journal of Financial Economics, 8(1), 3-29.

Deesomsak, R., Paudyal, K., & Pescetto, G. (2009). Debt Maturity Structure and the 1997 Asian Financial Crisis. Journal of Multinational Financial Management, 19(1), 26-42.

De Haas, R., & Peeters, M. (2006). The Dynamic Adjustment towards Target Capital Structures of Firms in Transition Economies. Economics of Transition, 14(1), 133-169.

De Jong, A., Kabir, R., & Nguyen, T. T. (2008). Capital Structure Around the World: the Roles of Firm-and Country-Specific Determinants. Journal of Banking and Finance, 32(9), 1954-1969.

Drobetz, W., & Wanzenried, G. (2006). What Determines the Speed of Adjustment to the Target Capital Structure? Applied Financial Economics, 16(13), 941-958.

Eldomiaty, T.I. (2007). Determinants of Corporate Capital Structure: Evidence from an Emerging Economy. International Journal of Commerce and Management, 17(1), 25-43.

Gajurel, D. (2006). Macroeconomic Influences on Corporate Capital Structure. Social Science Research Netword, 1(May), 1-9.

Gujarati, D. N., & Porter, D. C. (2009). Basic Econometrics (Fifth). McGraw-Hill/Irwin.

Haron, R. (2014). Capital Structure Inconclusiveness: Evidence from Malaysia, Thailand and Singapore. International Journal of Managerial Finance, 10(1), 23-38.

Haron, R. (2016). Do Indonesian Firms Practice Target Capital Structure? a Dynamic Approach. Journal of Asia Business Studies, 10(3), 318-334.

Harris, M., & Raviv, A. (1991). The Theory of Capital Structure. The Journal of Finance, 46(1), 297-355.

Huq, A. M. (2016). Effect of Earnings Volatility on Cost of Debt: the case of Swedish Limited Companies. Dalarna University.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360.

Jermias, J., & Yigit, F. (2019). Factors Affecting Leverage during a Financial Crisis: Evidence from Turkey. Borsa Istanbul Review, 19(2), 171-185.

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

Memon, P. A., Rus, D. R. B. M., & Ghazali, D. Z. B. (2015). Dynamism of Capital Structure: Evidence from Pakistan. Journal of International Business and Economics, 3(1), 52-63.

Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48(3), 261-297.

Moosa, I., & Li, L. (2012). Firm-specific Factors as Determinants of Capital Structure: Evidence from Indonesia. Review of Pacific Basin Financial Markets and Policies, 15(2), 1-17.

Myers, S. (1977). Determinants of Corporate Borrowings. Journal of Financial Economics, 5(2), 147- 175.

Öztekin, Ö., & Flannery, M. J. (2012). Institutional Determinants of Capital Structure Adjustment Speeds. Journal of Financial Economics, 103(1), 88-112.

Rajan, R. G., & Zingales, L. (1995). What Do We Know about Capital Structure? Some Evidence from International Data. The Journal of Finance, 50(5), 1421-1460.

Ramjee, A. and Gwatidzo, T. (2012). Dynamics in Capital Structure Determinants in South Africa. Meditari Accountancy Research, 20(1), 52-67.

Saadah, S., & Prijadi, R. (2012). Capital Structure’s Dynamic Response to Exogenous Variables: A Case of Listed Manufacturing Firms in Indonesia. International Journal of Financial Research, 3(2), 86-95.

Setyawan, I. R., & Frensidy, B. (2013). Empirical Tests for Market Timing Theory of Capital Structure: The Case of IPOs in Indonesia Stock Exchange. SSRN Electronic Journal, 2003, 1-19.

Strebulaev, I. A. (2007). Do Tests of Capital Structure Theory Mean What They Say? Journal of Finance, 62(4), 1747-1787.

Titman, S., & Wessels, R. (1988). The Determinants of Capital Structure Choice. The Journal of Finance, 43(1), 1-19.

Tzang, S. W., Wang, K. Y. and Rahim, R. N. (2013). Macroeconomic Condition and Capital Structure Adjustment Speed-Evidence from the Indonesian Stock Market: Seventh International Conference on Innovative Mobile and Internet Services in Ubiquitous Computing. Taichung, Taiwan, 784-789.

View Counter: Abstract - 554 and PDF - 580

Refbacks

  • There are currently no refbacks.


Bookmark and Share