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Do Indonesian firms practice target capital structure? A dynamic approach

Do Indonesian firms practice target capital structure? A dynamic approach PurposeThis study aims to investigate the dynamic aspects in the capital structure decision of firms in Indonesia, offering an extension to the existing literature on Indonesia via a dynamic model, including the existence of target capital structure, the influencing factors, the speed of adjustments and the supporting theories to explain the findings. Design/methodology/approachEmploying a dynamic partial adjustment model estimated based on a generalized method of moments (GMM).FindingsIndonesian firms do practice target capital structure and is influenced by firm specific factors like profitability, business risk, firm size, liquidity and share price performance due to time varying factors. A rapid adjustment towards target leverage is detected thus supporting the existence of dynamic TOT. POT also has significant influence particularly after the new reformation of financing policy, where retained earnings is also preferred as source of financing apart from merely external financing through bank loans. There are also traces of market timing influences where firms also seem to time their equity issuance.Research limitations/implicationsDespite relatively utilizing recent data and bigger sample firms compared to the previous limited studies on Indonesia, the results of this study, however, need to be cautiously interpreted. First, the sample chosen focused on listed firms, hence may not be generalized to all Indonesian firms, listed and unlisted. Second, the study does not separate firms by sectors and their leverage positions, that is, under-levered and over-levered, so as to note that financial decisions may also be affected by the sector in which the firms operate and their leverage positions. These are to be considered in future research.Practical implicationsThere is strong evidence that the corporate financing behavior of Indonesian firms is governed by the POT and TOT. Both are dealing with the function of debt. The financial sector reformation does have a positive impact on the banking sector but not the local corporate bond market. Therefore, regulator and policy makers should bear in mind that banking as well as private bond market in Indonesia must be tailored in such a way that both could act as intermediaries of debt financing, as bond market represents an important component of a diversified financial sector.Originality/valueThis study fills the gap by providing an extension to the existing literature and a deeper insight of the capital structure of Indonesian firms using a more robust dynamic model. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Asia Business Studies Emerald Publishing

Do Indonesian firms practice target capital structure? A dynamic approach

Journal of Asia Business Studies , Volume 10 (3) – Aug 1, 2016

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1558-7894
DOI
10.1108/JABS-07-2015-0100
Publisher site
See Article on Publisher Site

Abstract

PurposeThis study aims to investigate the dynamic aspects in the capital structure decision of firms in Indonesia, offering an extension to the existing literature on Indonesia via a dynamic model, including the existence of target capital structure, the influencing factors, the speed of adjustments and the supporting theories to explain the findings. Design/methodology/approachEmploying a dynamic partial adjustment model estimated based on a generalized method of moments (GMM).FindingsIndonesian firms do practice target capital structure and is influenced by firm specific factors like profitability, business risk, firm size, liquidity and share price performance due to time varying factors. A rapid adjustment towards target leverage is detected thus supporting the existence of dynamic TOT. POT also has significant influence particularly after the new reformation of financing policy, where retained earnings is also preferred as source of financing apart from merely external financing through bank loans. There are also traces of market timing influences where firms also seem to time their equity issuance.Research limitations/implicationsDespite relatively utilizing recent data and bigger sample firms compared to the previous limited studies on Indonesia, the results of this study, however, need to be cautiously interpreted. First, the sample chosen focused on listed firms, hence may not be generalized to all Indonesian firms, listed and unlisted. Second, the study does not separate firms by sectors and their leverage positions, that is, under-levered and over-levered, so as to note that financial decisions may also be affected by the sector in which the firms operate and their leverage positions. These are to be considered in future research.Practical implicationsThere is strong evidence that the corporate financing behavior of Indonesian firms is governed by the POT and TOT. Both are dealing with the function of debt. The financial sector reformation does have a positive impact on the banking sector but not the local corporate bond market. Therefore, regulator and policy makers should bear in mind that banking as well as private bond market in Indonesia must be tailored in such a way that both could act as intermediaries of debt financing, as bond market represents an important component of a diversified financial sector.Originality/valueThis study fills the gap by providing an extension to the existing literature and a deeper insight of the capital structure of Indonesian firms using a more robust dynamic model.

Journal

Journal of Asia Business StudiesEmerald Publishing

Published: Aug 1, 2016

References