ACTIVE CAPITAL STRUCTURE ADJUSMENT OF INDONESIAN LISTED STATE OWNED ENTERPRISES (SOES)

• Main Author: Dwi Prayogo, Edo
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/72328
• Institution: Institut Teknologi Bandung

Maximizing the value of the firm has always become the north star of every company. Those, three major decisions of corporate finance through investing, financing, and dividend payment decision should be made based on that objective. If it is looked closer on the financing decision, operating at the lowest cost of capital is always be the objective in deciding capital structure. Lower cost of capital will lead into the easier way for the firm to accept profitable investment opportunity. Thus, it is the nature of most of the company to adjust for the optimum capital structure target. Most of previous studied had confirmed that typical firms do have capital structure target and they close the gap for as much as one third per year in average. It is commonly found that Indonesia’s listed SOEs have relatively high dividend payout ratio compared to typical private enterprises in order to fulfill the deficit of government’s budget. Furthermore, most of them are also underlevered in which they do not maximize the easiness they have in accessing debt to finance their investment opportunities. This fact leads into a condition that SOEs may not put the priority to maximize public shareholder’s value at the first place. If the mission of maximizing shareholders’ value does not come at the first priority, it is suspected that the managers of SOEs do not care about optimal capital structure target. Recent research had found that Indonesian listed SOEs do have target capital structure and adjust their leverage for as much as 44.37% toward the target annually. However, it is still unknown whether the speed is caused by the active adjustment intentionally done by the awareness of the managers or by passive adjustment which means that the managers do nothing regarding the leverage adjustment. This study utilizes unbalanced panel data of 14 non-financial Indonesia’s listed SOEs from 2005 until 2015 to discover the factors affecting and the speed of active capital structure adjustment. The data is analyzed using the panel regression based on the partial leverage adjustment model which recognize the portion of active adjustment only. This study found that SOEs’ managers are aware and do actively adjust the leverage toward the target with relatively slow adjustment speed as much as 16.26%. Furthermore, this research discovers the effect of several variables towards firm’s leverage in the context of active leverage adjustment. It is found that lagged leverage, lagged asset intensity, lagged firm size, and lagged non-debt tax shield have significant effect on the firm’s active capital structure. This study contributes to the development of capital structure theory especially in the area of active leverage adjustment for the firms which has uncommon policy and characteristics. Particularly, this study can help the managers and the shareholders of Indonesia’s listed SOEs to decide the direction of financing policy to get the benefit to maximize value of the firm.