Abstract
The authors investigate the firm’s capital structure in the dynamic framework and adjustment speeds toward target leverage among Indonesian firms from 2005 to 2016. The sample firms are 407 non-financial listed companies and classified into 8 sectors based on Jakarta Industrial Sector Classification (JASICA).The explanatory variables consist of firm-level variables viz. size, growth opportunity, profitability, asset structure, liquidity, and firm risk; as well as industry-specific variables viz. industry concentration, munificence, and dynamism. By using dynamic adjustment model, it was found Indonesian firms have target leverages, and they tend to adjust toward their desired debt ratio. Based on country-level analysis, adjustment speeds toward target leverage are from around 30.20% to 36.97% per year. Meanwhile, on sector-level analysis, paces of adjustment indicate variety of adjustment speeds across sectors ranged from 26.00% to 48.32% per year.The authors also demonstrate that industry-specific variables have substantial influences on adjustment speeds toward target leverage. Industry concentration and industry munificence positively affect adjustment speeds, whereas however industry dynamism fails to show significant effect.
Highlights
During some previous decades, firm’s financial structure has become a key concern in modern corporate finance literature
The firm’s target leverages exist, and Indonesian firms partially adjust toward their desired leverage, which is observable from the coefficient value significance of lag dependent variable
By using dynamic adjustment model, the country-level analysis shows adjustment speeds toward desired debt ratio being from around 30.20% to 36.97% per year. This indicates that Indonesian firms need from around 1.50 years to 1.93 years to adjust back toward desired debt ratio
Summary
Firm’s financial structure has become a key concern in modern corporate finance literature. Due to industry-related adjustment costs, firm’s optimal leverage could be different among sectors, it is possibly similar within intra-sector level These empirical studies mostly focused on the importance of industry factor in capital structure determination across developed markets. After Mr Soeharto’s replacement, the IMF approach was rather loose than before, and new reform packages showed better progress marked with starting private capital inflows to the Indonesian market These reformation processes in Indonesia provide better access to the financial market, which influences firm managers in making decisions regarding their financing choices (Ameer, 2010). Considering the scarcity of literature in emerging market, the essence of financial reformations, and two big financial crises, which influence Indonesian firm financing decision, this study is motivated to investigate whether capital structure theories are able to explain the firm’s financing behaviors in the Indonesian market, in which economically and intuitionally they are very different from those in developed markets. The organization of the paper is as follows: the paper starts with the introduction section; section 1 provides the literature review to develop the hypotheses of this study, Section 2 elaborates methodology of this paper, describes data and sample, variables of studies, and empirical model of research, Section 3 discusses results and findings of study, and last section provides main conclusions
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