ACTIVE LEVERAGE ADJUSTMENT OF INDONESIAN CONSTRUCTION ENTERPRISES

• Main Author: Geraldus
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/67704
• Institution: Institut Teknologi Bandung

Management always tries their best in order to get the value of their companies to the optimum level. There are three important decisions in the world of corporate finance which are investing, dividend policy, and financing. In terms of financing, having optimum capital is important in order to have lower cost of capital. Companies will adjust their capital structure until the company reaches the optimum point. Therefore, company can maximize the firm value with lower cost of capital. The lower cost of capital can be used by the firms to realize the profitable investment opportunity. Indonesia is currently undergoing rapid development. Many infrastructure projects are being undertaken by the government in collaboration with construction companies in order to further develop the Indonesian economy. Many toll roads, dams, high-rise buildings, and other construction projects have been built in recent years. As a result, with so many projects to complete, Indonesian Construction Enterprises require massive funding to make the projects a reality. Indonesian Construction Enterprises are well-known for having a high level of leverage. This is the result of massive financing needed to realize and make the project happen. Furthermore, it may cause financial distress, increasing the likelihood of bankruptcy and incurring high financial costs. Therefore, the goals to maximize firm value is not the main goal for the management, instead the management are more focused on fulfilling the infrastructure and construction projects. There are two models when the management tries adjusting the leverage into the targeted leverage which is passive adjustment and active adjustment. The passive adjustment is done without management intention to adjust the leverage while the active adjustment is the management action to adjust the leverage into the optimum level. Active adjustment speed can be one parameter whether the management tries to achieve optimum capital structure by actively adjusting the firm leverage. Previous research conducted by Soekarno and Prayogo (2018) found that Indonesian State Owned Enterprises actively adjust their leverage with speed 16.26% towards the optimum leverage target. This research will used 17 companies from IDX J211 which is heavy construction and civil engineering will be used as the research subject with a time frame from 2010 until 2020 to determine the Indonesian Construction Enterprises active adjustment speed. The data will be gathered from a financial report that has been audited and published. Then, the data will be analyzed using the panel data regression with robust estimation method in order to get the partial effect of each variable that is being used. Seven independent variables are being used in this research which are profitability, tangibility, size, growth, adjusted leverage, cash flow, liquidity, and one dependent variable which is leverage. It is found that with 10% significance level, cash flow t-1, growth opportunity t-1 , profitability t-1 , and firm size t-1, and adjusted leverage t-1 of the adjusted leverage t-1 significantly affecting the active adjustment speed. From the coefficient the active adjustment speed of Indonesian Construction Enterprises was found to be as much as 10.96% which is relatively slow. This indicates that the management does not prioritize to maximize firm value. Therefore, it is recommended that Indonesian Construction Enterprises management is more active to adjust their leverage to the optimum target in order to maximize firm value. Keywords: Construction, optimum leverage, active leverage adjustment speed