The role of industrial factors on optimal capital structure proxy: an empirical study on Indonesia manufacture companies
Abstract
The objective of this study is to improve the model of optimal capital structure. This research aims to investigate the role of the industrial factors on the optimal capital structure proxy by including industry factors in the existing model and using the company characteristic variables as control variables. This research applies seven industrial variables: 1) Number of Firms in Industry (NFI), 2) Industry Competitive Dynamic (ICD), 3) Firm Response to Industry Competitive (FRI), 4) Numbers of Employees in an Industry (NEI), 5) Employees’ Share of Firm Quasi Rents (ESQ), 6) Category of Product Diversificatio (CPD), and 7) Diversification level of Relatedness (DRD). This research determines whether the proposed proxy in this research is better than the two other proxies. The testing procedure is designed to replicate the procedure of Farhat (2003). The data used in the study consist of 83 companies from 13 industries listed on IDX for the period of 2001-2014. The results showed that the industry variables can improve the existing optimal capital structure proxies. This finding contributes to the industry in that it can improve the dynamic trade-off model of capital structure.
References
Baltagi, B.H. (2008). Econometric Analysis of Panel Data. Chichester: John Wiley & Sons Ltd.
Byoun, S., & Rhim, J. (2005). Testing of the pecking order theory and tradeoff theory of optimal capital structure. The Global Business and Finance Review, 10, 1-26.
Collins, J., & Ruefli, T. (1992). Strategic Risk: An Ordinal Approach. Management Science, 38, 1707-1731.
Cook, D.O., & Tang, T. (2010). Macroeconomic conditions and capital structure adjustment speed. Journal of Corporate Finance, 16 (1), 73-87.
D'Mello, R., & Farhat, J. (2008). A comparative analysis of proxies for an optimal leverage ratio. Review of Financial Economics, 17, 213-227.
Fama, F.E., & French, R.K. (2002). Testing Trade-Off and Pecking Order Predictions about Dividents and Debt. The Review of Financial Studies, 15 (1), 1-33.
Farhat, J. B. (2003). Essays on the Dynamics of Capital Structure. A Dissertation, University of New Orleans.
Flannery, J. M., & Rangan, P. K. (2006). Partial Adjustment Toward Target Capital Structures. Journal of Financial Economics, 79, 469-506.
Graham, J., & Harvey, C. (2001). The theory and practice of corporate finance: evidence from the field. Journal of Financial Economics, 60, 187-243.
Hovakimian, A., & Li, G. (2011). In search of conclusive evidence: How to test for adjustment to target capital stucture. Journal of Corporate Finance, 17, 33-44.
Hovakimian, A., Opler, T., & Titman, S. (2001). The debt-equity choice: An analysis of issuing firms. Journal of Financial and Quantitative Analysis, 36, 1-24.
Hull, R.M. (1999). Leverage Ratios, Industry Norms, and Stock Price Reaction: An Empirical Investigation of Stock-for-Debt Transactions. Financial Management, 32-45.
Irawan, J.F.P. (2013). Interdependence of Company Capital Structure with Peer Capital Structure Through Herding Behavior on Manufacturing Companies in BEI. Jakarta: University of Indonesia.( in Indonesian)
Jacquemin, A., & Berry, C. (1979). Entropy Measure of Diversification and Corporate Growth. Journal of Industrial Economics, 27, 359-369.
Jalilvand, A., & Haris, R. (1984). Corporate behavior and adjusting to capital structure : The case of dual debt and equity issues. Journal of Finance, 39, 127–144.
Kayo, E. K., & Kimura, H. (2011). Hierarchical determinats of capital structure. Journal of Banking & Finance, 35 (2), 358-371.
Kochhar, R., & Hitt, M. (1998). Linking Corporate Strategy to Capital Structure : Diversification Strategy, Type and Source of Financing. Strategic Management Journal, 19 (6), 601-610.
Korajczyk, R., & Levy, A. (2003). Capital structure choice : macroeconomic conditions and financial constraints. Journal of Financial Economics, 68 (1), 75-109.
Leary, M., & Roberts, M. (2005). Do Firm rebalance their capital structure? Journal of Finance, 60 (6), 2575-2619.
Leary, M., & Roberts, M. (2009). Do Firm's Financing Decisions Affect One Another. Prelimanary and Incomplate.
Lemmon, M., Roberts, M., & Zender, J. (2008). Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Strucure. The Journal of Finance, 63 (4), 1575-1608.
Pandey, I. (2004). Capital Structure, Profitability and Market Structure: Evidence from Malaysia. Asia Pasific Journal of Economics & Business, 8 (2), 78-91.
Parsons, C., & Titman, S. (2009). Empirical Corporate Finance. Dalam Handbook of Corporate Finance (hal. 204-233). Amsterdam: Elsevier.
Sarig, H.O. (1998). The effect of Leverage on bargaining with a corporation. The Financial Review, 33, 1-16.
Shyam-Sunder, L., & Myers, S. (1999). Testing static trade-off against pecking order models of capital structure. Journal of Financial Economics, 51 (2), 219–244.
Synder, C. (1996). Negotiation and Renegotiation of Optimal Financial Contracts Under the Threat of Predation. Journal of Industrial Economics, 325-343.
The Author wishes to submit the Work to SJM for publication. To enable SJM to publish the Work and to give effect to the parties’ intention set forth herein, they have agreed to cede the first right to publication and republication in the SJM Journal.
Cession
The Author hereby cedes to SJM, who accepts the cession, to the copyright in and to the paper.
The purpose of the cession is to enable SJM to publish the Work, as first publisher world-wide, and for republication in the SJM Journal, and to grant the right to others to publish the Work world-wide, for so long as such copyright subsists;
SJM shall be entitled to edit the work before publication, as it deems fit, subject to the Authors approval
The Author warrants to SJM that:
- the Author is the owner of the copyright in the Work, whether as author or as reassigned from the Author’s employee and that the Author is entitled to cede the copyright to SJM;
- the paper (or any of its part) is not submitted or accepted for publication in any other Journal;
- the Work is an original work created by the Author;
- the Author has not transferred, ceded, or assigned the copyright, or any part thereof, to any third party; or granted any third party a licence or other right to the copyright, which may affect or detract from the rights granted to SJM in terms of this agreement.
The Author hereby indemnifies the SJM as a body and its individual members, to the fullest extent permitted in law, against all or any claims which may arise consequent to the warranties set forth.
No monetary consideration shall be payable by SJM to the Author for the cession, but SJM shall clearly identify the Author as having produced the Work and ensure that due recognition is given to the Author in any publication of the Work.
Should SJM, in its sole discretion, elect not to publish the Work within 1 year after the date of this agreement, the cession shall lapse and be of no further effect. In such event the copyright shall revert to the Author and SJM shall not publish the Work, or any part thereof, without the Author’s prior written consent.