Firm Level, Ownership Concentration and Industry Level Determinants of Capital Structure in an Emerging Market: Indonesia Evidence

Abstract

This study evaluates the impact of firm and industry level determinants plus ownership concentration on the capital structure decisions in Indonesia. This study finds that growing firms seem to employ high level of debt, taking advantage of the tax shield as explained by the trade-off theory. However, if the firms are operating in a highly dynamic environment they tend to take on less debt as to avoid bankruptcy risk. Known to be in a highly concentrated ownership structure, firms in Indonesia opt to debt financing perhaps to act as a controlling mechanism to mitigate agency conflicts that may exist between the large controlling shareholders and the minority. Aged and highly profitable firms with high tangible and intangible assets and liquidity level operating in a high munificence environment follow the pecking order theory. The insights on the impact of industry characteristics are novel especially on emerging market thus fill the gap in the literature.