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Capital Structure¡¯s Dynamic Response to Exogenous Variables: A Case of Listed Manufacturing Firms in Indonesia

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  • Siti Saadah
  • Ruslan Prijadi

Abstract

Research on capital structure has been shifting from static to dynamic approaches. This shift is denoted by efforts to verify the presence of optimal leverage and how a firm would adjust to changes in variables that affect the leverage. This research derives an Error Correction Model from a quadratic cost function to investigate the presence of optimal leverage and how a firm adjusts its capital structure toward the optimal one. This research reveals the existence of the dynamic adjustment process. The negative signs of error correction terms confirm that the firm would have a reversal response to its current leverage position. If it is below the optimal level, the firm would adjust upward; and vice versa. The speed of adjustment are different across industry. This research confirms the importance of the trade-off and market timing theories in explaining the dynamics of capital structure of manufacturing firms in Indonesia.

Suggested Citation

  • Siti Saadah & Ruslan Prijadi, 2012. "Capital Structure¡¯s Dynamic Response to Exogenous Variables: A Case of Listed Manufacturing Firms in Indonesia," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 3(2), pages 86-95, April.
    • Handle: RePEc:jfr:ijfr11:v:3:y:2012:i:2:p:86-95
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    References listed on IDEAS

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    Cited by:

    1. Razali Haron, 2018. "Firm Level, Ownership Concentration and Industry Level Determinants of Capital Structure in an Emerging Market: Indonesia Evidence," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 14(1), pages 127-151.

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