Speed of Adjustment of Capital Structure (Empirical Study on the Aviation Industry in Indonesia and Malaysia)

Abstract

The purpose of this study is to prove how much SOA capital structure, what factors affect the optimal leverage and what factors affect the SOA capital structure in the airline industry in Indonesia and Malaysia. Hypothesis testing in this study was conducted using panel data regression. The sample used is 10 aviation industry companies in Indonesia and Malaysia with 100 observations from 2010-2019. The regression model is determined based on the results of the Chow and Hausman tests. Empirical findings from 100 observations of panel data variables of company size, short-term debt and non-debt tax shield have a positive and significant effect on optimal leverage. Profitability, asset growth, and business risk variables have a negative and significant effect on optimal leverage. Partial adjustment model (PAM) to measure the speed of firm adjustment to optimal leverage. From the partial adjustment model estimation results, the significant leverage lag indicates that airline industry companies in Indonesia and Malaysia adjust their capital structure towards optimal leverage with SOA of 46.20% per year. Generalized methods of moments (GMM) to estimate the speed of capital structure adjustment. The results show that macroeconomic variables, namely GPD growth, have a negative and significant influence on the speed of capital structure adjustment. In conclusion, it is evident that the funding behavior in the airline industry in Indonesia and Malaysia tends to follow the dynamic trade off theory.