Dynamics of Firm’s Capital Structure Along The Life Cycle of Indonesian Manufacturing Firms

Erika Putri Cempakasari,Muhammad Firdaus,Arief Tri Hardiyanto

doi:10.17358/ijbe.5.1.21

Abstract

Life cycle of the firm has an important role in the dynamics of firm’s capital structure. A firm will take different funding decision along the life cycle because the firm’s characteristics that affect the capital structure will adjust itself as the tranformation of the life cycle occuring. The research objectives were to analize the dynamic of firm’s capital structure across three-life cycle stages of Indonesian manufacturing companies listed with a total sample of 121 companies observed during the period from 2011 to 2016. By using dynamic panel data analysis with Generalized Method of Moments (GMM) model, we find that profitability and liquidity affect the firm’s life cycle for a growing stage, meanwhile the fixed asset, growth opportunities, profitability, and liquidity affect the capital structure for a mature stage, whereas only liquidity that affects capital structure for a decline stage. The coefficient of lag dependent variable of GMM model representing the previous year capital structure showed an adjustment rate of capital structure. The lowest speed of adjustment occurred on the decline stage which was orderly followed by the growth and mature stage. Keywords: capital structure, life cycle of firm, firm’s characteristics, dynamic panel data analysis

Highlights

Capital is one of the important components of a firm as the addition of the human resources, machines, and technology
By using dynamic panel data analysis with Generalized Method of Moments (GMM) model, we find that profitability and liquidity affect the firm’s life cycle for a growing stage, the fixed asset, growth opportunities, profitability, and liquidity affect the capital structure for a mature stage, whereas only liquidity that affects capital structure for a decline stage
Based on the results obtained in this study, it is proved that the life cycle of a firm has an important role in the dynamics of firm’s capital structure

Summary

Introduction

Capital is one of the important components of a firm as the addition of the human resources, machines, and technology. When the firm is going to expand its business as the effort to produce competitive advantage among business competitions in globalization era. It is, the funding decision management becomes fundamental. It occurrs because funding decision related to the firm’s capital structure will determine the firm’s value in the future, which will affect the shareholders’ welfare as the main purpose of the firm establishment. Mardiyanto (2009) says that the decision of firm’s capital structure is the funding decision related to the long term funding composition obtained through the debt issuance or owner’s equity. The capital cost is the cost incurred as the consequence of the funding decision taken by the firm

Methods

Results

Conclusion