Five essays on capital structure: empirical evidence from the indonesia stock exchange

Dhita, Sasha (2018) Five essays on capital structure: empirical evidence from the indonesia stock exchange. Doctoral thesis, Institut Pertanian Bogor.

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Official URL: http://lib.sb.ipb.ac.id/

Abstract

Every economic activity requires capital for its business activities. This capital is needed for the financing of assets, operational activities and for company?s expansion. Capital needed for every business stage underlies the importance of understanding and implementation of the capital structure. Additionally, a theoretical point of view is needed to explain the decision making in relation to such financial decisions. The theory of capital structure by Modigliani and Miller (1958), known as Capital Structure Irrelevance Theory, formed the basis of modern thinking on capital structure. Since then, the capital structure theories continues to be one the center of discussion among scholars and practitioners. The mostly discussed capital structure theories include among others the Trade-Off Theory, Pecking Order Theory, Agency Model Theory and Market Timing Theory. This study aimed to analyze some aspects of capital structure in Indonesia using econometric models. The data for this study is yearly secondary data, with two sets of data sample adopted to serve to different research objectives, with 14 years of observation period (2001 until 2007, and 2009 until 2015). In 2008, IDX experienced a steep drop by 48.4% resulting from the subprime mortgage crisis in the United States. The magnitude of the steep drop is not directly related to the fundamental of the Indonesian capital market or to the individual companies performance. Due to this anomaly in 2008, it is excluded from the study period. The industry chosen for this study is the non-financial industry as the business activities and the balance sheet structure of financial companies are generally different from companies in other industries. First essay of this study analyzed the existence of optimal capital structure using two approaches. The two approaches includes the calculation using WACC, which requires certain assumptions, and figures from the financial statement. The adoption of both approaches shall assist in explaining whether these two approaches can both detect the optimal capital structure. This study found that for the overall market, the two approaches of optimal capital structure resulted in the existence of optimal capital structure. The existence of optimal capital structure is indicated by the significant relationship between WACC and market capitalization, and adjustment towards the industry net debt to equity ratio. For individual industry, this study evidenced that infrastructure industry is the only industry that did not evidence the existence of optimal capital structure for both approaches. Second essay of this study analyzed the determinants of capital structure and the speed of adjustment for non-financial companies listed on Indonesia Stock Exchange. For the determinants of capital structure, this study found that from overall market perspective, variables size, profitability, asset structure, and sales growth have a significant relationship with capital structure. Profitability, asset structure, and sales growth recorded a positive relationship, while size showed a negative relationship with capital structure. From individual industry perspective, profitability is the only variable that significantly affect the capital structure for all industries. For the speed of adjustment, this study evidenced the existence of speed of adjustment for overall market, with varying speed of adjustment between industries. Third essay of this study analyzed the influence of state ownership to the capital structure. The study evidenced a significant relationship between state ownership and capital structure, with lower average net debt to equity ratio for SOEs. During the whole period of observations, the SOEs evidenced a negative net debt to equity ratio while non-SOEs evidenced a positive net debt to equity ratio. This shall be explained by the characteristics of the SOEs such as the longer period and complexity of the decision making process, as well as relatively more costly process resulting in less debt issuance by the SOEs compared to non-SOEs. Forth essay of this study analyzed the variables affecting the equity issuance. This study evidenced that from overall market perspective, the variable affecting the equity issuance is the profitability of the company, hence the existence of equity market timing. This suggests that in corporate finance decision making, managers should focus on improving the company?s profitability. For individual industry, this study found that the significant relationship between profitability and net equity issues between industries vary. Last but not the least, the fifth essay analyzed the capital structure changes prior and post Initial Public Offering. This study found that from both overall market and individual industry perspectives, the capital structure for the companies prior and post Initial Public Offering are significantly different, with lower average net debt to equity ratio following the Initial Public Offering. In the three years following Initial Public Offering, this study evidenced that the companies? net debt to equity ratio is increasing towards the pre- Initial Public Offering level. This indicates the utilization of additional debt capacity following the Initial Public Offering to support companies? business activities. For managerial implication, the capital structure of the companies is intertwined with the business landscape and potential growth of the companies. The managers should take strategic initiatives to maximize the company?s value by finding a balance between the cost of capital, competition and profitability of the company. These three factors along with the consideration of the company?s business landscape and potential growth should be the focus of the managers.

Item Type: Thesis (Doctoral)
Uncontrolled Keywords: agency model theory, corporate finance, net debt to equity ratio, pecking order theory, struktur modal, trade off theory. agency model theory, capital structure, corporate finance, net debt to equity ratio, pecking order theory, trade off theory.
Subjects: Manajemen Keuangan
Depositing User: SB-IPB Library
Date Deposited: 04 Jan 2019 08:49
Last Modified: 04 Jan 2019 08:49
URI: http://repository.sb.ipb.ac.id/id/eprint/3224

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