Skip to main content
SpringerLink
Log in

The Dynamic Capital Structure Decision of Firms in Indonesia

  • Chapter
  • First Online:
Future of Organizations and Work After the 4th Industrial Revolution

Part of the book series: Studies in Computational Intelligence ((SCI,volume 1037))

  • 1201 Accesses

Abstract

This study examines the impact of firm specific factors and ownership and the governing theories on the capital structure (CS) decision of firms in Indonesia. To meet its objective, a dynamic GMM-System is employed utilizing a panel data from 2004 to 2018. The study concludes that growing firms and firms operating in a highly concentrated industry consume high debt to benefit from interest tax shield. Conversely, firms operating in a highly dynamic environment consume less debt as to elude bankruptcy risk. This study suggests that Indonesian firms choose debt financing possibly to act as a controlling mechanism to mitigate agency conflicts that may exist between the controlling and minority shareholders. Long established and profitable firms with high tangible and intangible assets and high liquidity operating in a high dynamic environment follow the POT. The insights on the influence of ownership concentration and industry characteristics on CS decision are novel specifically on Indonesia thus contribute to the corporate finance literature.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 189.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 249.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 249.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Similar content being viewed by others

Notes

  1. 1.

    The three industry variables were removed to ensure that the findings are robust by removing any similar related explanatory variables with controlling variables.

References

  • Alahdal, W. M., Alsamhi, M. H., Tabash, M. I., & Farhand, N. H. S. (2020). The impact of corporate governance on financial performance of Indian and GCC listed firms: An empirical investigation. Research in International Business and Finance, 51(1), 1–13.

    Google Scholar 

  • Alareeni, B. (2018a). The impact of firm-specific characteristics on earnings management: Evidence from GCC countries. International Journal of Managerial and Financial Accounting, 10(2), 85–104.

    Article  Google Scholar 

  • Alareeni, B. (2018b). Does corporate governance influence earnings management in listed companies in Bahrain Bourse?. Journal of Asia Business Studies, 12(4), 551–570.

    Article  Google Scholar 

  • Alareeni, B. A., & Hamdan, A. (2020). ESG impact on performance of US S&P 500-listed firms. Corporate Governance: The International Journal of Business in Society.

    Google Scholar 

  • Ang, J. S., Fatemi, A., & Tourani, A. (1997). Capital structure and dividend policies of Indonesian firms. Pacific-Basin Finance Journal, 5(1), 87–103.

    Article  Google Scholar 

  • Brahmana, R. K., Setiawan, D., & Hooy, C. W. (2019). Controlling shareholders and the effect of diversification on firm value: Evidence from Indonesian listed firms. Journal of Asia Business Studies, 13(3), 362–383.

    Article  Google Scholar 

  • Bunkanwanicha, P., Gupta, J., & Rokhim, R. (2008). Debt and entrenchment: Evidence from Thailand and Indonesia. European Journal of Operational Research, 185(1), 1578–1595.

    Article  MATH  Google Scholar 

  • Carney, R. W., & Hart, H. N. (2015). What do changes in corporate ownership in Indonesia tell us? Bulletin of Indonesian Economic Studies, 51(1), 123–145.

    Article  Google Scholar 

  • Cespedes, J., Gonzalez, M., & Molina, C. A. (2010). Ownership and capital structure in Latin America. Journal of Business Research, 63(3), 248–254.

    Article  Google Scholar 

  • Claessens, S., Djankov, S., Fan, J. P., & Lang, L. H. (2002). Disentangling the incentive and entrenchment effects of large shareholdings. Journal of Finance, 57(6), 2741–2771.

    Article  Google Scholar 

  • Claessens, S., & Fan, J. P. (2002). Corporate governance in Asia: A survey. International Review of Finance, 3(2), 71–103.

    Article  Google Scholar 

  • Cordazzo, M., Papa, M., & Rossi, P. (2017). The interaction between mandatory and voluntary risk disclosure: A comparative study. Managerial Auditing Journal, 32(7), 682–714.

    Article  Google Scholar 

  • Driffield, N., Mahambare, V., & Pal, S. (2007). How does ownership structure affect capital structure and firm value? Recent evidence from East Asia. Economics of Transition, 15(3), 535–573.

    Article  Google Scholar 

  • El-Halaby, S., Alzunaydi, M., & El-Ghazaly, M. (2018). The determinants of capital structure and dividend policy: Empirical evidence from the Kingdom of Saudi Arabia Market. International Journal of Business Ethics and Governance, 1(2), 45–71.

    Article  Google Scholar 

  • Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: Which variables are reliably important? Financial Management, 38(1), 1–37.

    Article  Google Scholar 

  • Getzmann, A., Lang, S., & Spremann, K. (2010). Determinants of the target capital structure and adjustment speed-evidence from Asian, European and US-capital markets. European Financial Management, 16(4), 1–41.

    Google Scholar 

  • Hardiyanto, A. T., Achsani, N. A., Sembel, R., & Maulana, N. A. (2014). Testing trade-off theory of capital structure: Empirical evidence from Indonesian listed companies. Economics and Finance Review, 3(6), 13–20.

    Google Scholar 

  • Haron, R. (2014). Capital structure inconclusiveness: Evidence from Malaysia, Thailand and Singapore. International Journal of Managerial Finance, 10(1), 23–38.

    Article  Google Scholar 

  • Haron, R. (2016). Do Indonesian firms practice target capital structure? A dynamic approach. Journal of Asia Business Studies, 10(3), 318–334.

    Article  Google Scholar 

  • Haron, R., & Adeyemi, A. A. (2016). Islamic capital market and debt financing of Shariah-compliant firms in Indonesia. Al-Shajarah (Special Issue Islamic Banking and Finance), 67–86.

    Google Scholar 

  • IIMA. (2018). Institute of International Monetary Affairs—Indonesian economy: Recent developments and its challenges. https://www.iima.or.jp/en/docs/newsletter/2019/nle2019.5.pdf

  • Jensen, M. C., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

    Article  Google Scholar 

  • Kayo, E. K., & Kimura, H. (2011). Hierarchical determinants of capital structure. Journal of Banking and Finance, 35(1), 358–371.

    Article  Google Scholar 

  • La Porta, R., Lopez de Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance, 54(2), 471–517.

    Article  Google Scholar 

  • Lim, S. C., Macias, A. J., & Moeller, T. (2020). Intangible assets and capital structure. Journal of Banking and Finance, 105873.

    Google Scholar 

  • Linda, F., Rym, T., & Mounir, K. (2018). The impact of governance on the level of disclosure and its role in attracting and supporting foreign investment: Model of Qatar Stock Exchange. International Journal of Business Ethics and Governance, 1(1), 37–63.

    Article  Google Scholar 

  • MacKay, P., & Phillips, G. M. (2005). How does industry affect firm financial structure? The Review of Financial Studies, 18(1), 1433–1466.

    Article  Google Scholar 

  • Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48(3), 261–297.

    MATH  Google Scholar 

  • 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.

    Google Scholar 

  • Muchtar, D., Mat Nor, F., Albra, W., Arifai, M., & Ahmar, A. S. (2018). Dynamic performance of Indonesian public companies: An analysis of financial decision behaviour. Cogent Economics and Finance, 28(6), 1–14.

    Google Scholar 

  • Musallam, S. R. M. (2020). State ownership and firm value: Simultaneous analyses approach. Journal of Asia Business Studies, 14(1), 50–61.

    Article  Google Scholar 

  • Myers, S. C. (2003). Financing of corporations. Handbook of the Economics of Finance, 1(1), 215–253.

    Article  MathSciNet  Google Scholar 

  • Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221.

    Article  Google Scholar 

  • Nassar, S. (2018). The impact of intellectual capital on corporate performance of IT companies: Evidence from Bursa Istanbul. International Journal of Business Ethics and Governance, 1(3), 1–10.

    Article  Google Scholar 

  • Nomran, N. J., & Haron, R. (2019). Dual board governance structure and multi-bank performance: A comparative analysis between Islamic banks in Southeast Asia and GCC countries. Corporate Governance, 19(6), 1377–1402.

    Article  Google Scholar 

  • Organisation Economic Cooperation and Development (OECD). (2018). OECD economic surveys Indonesia overview. http://www.oecd.org/economy/surveys/Indonesia-2018-OECD-economic-survey-overview.pdf

  • Pratama, A. (2017). Does corporate governance reduce thin capitalization practice? The case of Indonesian manufacturing firms. Review of Integrative Business and Economics Research, 6(4), 276–284.

    Google Scholar 

  • Qamar, M. A. J., Farooq, U., Afzal, H., & Akhtar, W. (2016). Determinants of debt financing and their moderating role to leverage-performance relation: An emerging market review. International Journal of Economics and Finance, 8(5), 300–311.

    Article  Google Scholar 

  • Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. Journal of Finance, 50(5), 1421–1460.

    Article  Google Scholar 

  • Ramli, N. A., Latan, H., & Solovida, G. T. (2019). Determinants of capital structure and firm financial performance—APLS-SEM approach: Evidence from Malaysia and Indonesia. The Quarterly Review of Economics and Finance, 71(1), 148–160.

    Article  Google Scholar 

  • Ruslim, H. (2009). Pengujian struktur modal (Teori Pecking Order): Analisis empiris terhad saham di LQ-45. Jurnal Bisnis Dan Akuntansi, 11(3), 209–221.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • Saghi-Zedek, N., & Tarazi, A. (2015). Excess control rights, financial crisis and bank profitability and risk. Journal of Banking & Finance, 55(1), 361–379.

    Article  Google Scholar 

  • Salman, M., & Laouisset, J. (2020). The governance in the corporate excellence model—The 4th generation model. International Journal of Business Ethics and Governance, 3(2), 73–95. https://doi.org/10.51325/ijbeg.v3i2.34

    Article  Google Scholar 

  • Setyawan, I. R., & Budi, F. (2012). Empirical tests for market timing theory of capital structure: The case of IPOs in Indonesian Stock Exchange. In Proceedings of the 14th Malaysian Finance Association Conference, Kuala Lumpur, Malaysia (pp. 103–120).

    Google Scholar 

  • Siregar, S. V., & Utama, S. (2008). Type of earnings management and the effect of ownership structure, firm size, and corporate-governance practices: Evidence from Indonesia. The International Journal of Accounting, 43(1), 1–27.

    Article  Google Scholar 

  • Soetanto, T., & Liem, P. F. (2019). Intellectual capital in Indonesia: Dynamic panel approach. Journal of Asia Business Studies, 13(2), 240–262.

    Article  Google Scholar 

  • Soewarno, N., & Tjahjadi, B. (2020). Measures that matter: An empirical investigation of intellectual capital and financial performance of banking firms in Indonesia. Journal of Intellectual Capital, 21(6), 1085–1106.

    Google Scholar 

  • Utama, C. A., Utama, S., & Amarullah, F. (2017). Corporate governance and ownership structure: Indonesia evidence. Corporate Governance: the International Journal of Business in Society, 17(2), 165–191.

    Article  Google Scholar 

  • Utami, E. S., Gumanti, T. A., Subroto, B., & Khasanah, U. (2021). Static or dynamic capital structure policy behavior: Empirical evidence from Indonesia. Journal of Asian Finance, Economics and Business, 8(1), 71–79.

    Google Scholar 

  • Wang, W. K., Ting, I. W. K., Kuo, K. C., Kwe, Q. L., & Lin, Y. H. (2018). Corporate diversification and efficiency: Evidence from Taiwanese top 100 manufacturing firms. Operational Research International Journal, 18(1), 187–203.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia, Gombak, Malaysia

    Razali Haron & Anwar Hasan Abdullah Othman

  2. Department of Finance and Accounting, College of Business Administration, Kingdom University, Riffa, Bahrain

    Naji Mansour Nomran

Authors
  1. Razali Haron
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Naji Mansour Nomran
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Anwar Hasan Abdullah Othman
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Razali Haron .

Editor information

Editors and Affiliations

  1. College of Business & Finance, Ahlia University, Manama, Bahrain

    Allam Hamdan

  2. Department of Business Studies, Box Hill College Kuwait, Kuwait City, Kuwait

    Arezou Harraf

  3. International Centre for Cross Cultural Research and Human Resource Management (ICccR and HRM), University of Jammu, Jammu, Jammu and Kashmir, India

    Pallvi Arora

  4. Middle East Technical University​, Northern Cyprus Campus, Kalkanlı, Güzelyurt, KKTC​, Mersin, Turkey

    Bahaaeddin Alareeni

  5. University College of Bahrain, Manama, Bahrain

    Reem Khamis Hamdan

Rights and permissions

Reprints and permissions

Copyright information

© 2022 The Author(s), under exclusive license to Springer Nature Switzerland AG

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Haron, R., Nomran, N.M., Othman, A.H.A. (2022). The Dynamic Capital Structure Decision of Firms in Indonesia. In: Hamdan, A., Harraf, A., Arora, P., Alareeni, B., Khamis Hamdan, R. (eds) Future of Organizations and Work After the 4th Industrial Revolution. Studies in Computational Intelligence, vol 1037. Springer, Cham. https://doi.org/10.1007/978-3-030-99000-8_6

Download citation

Publish with us

Policies and ethics

Search

Navigation