Open AccessCapital Structure’s Dynamic Response to Exogenous Variables: A Case of Listed Manufacturing Firms in Indonesia
Author(s) -
Siti Saadah,
Ruslan Prijadi
Publication year - 2012
Publication title -
international journal of financial research
Language(s) - English
Resource type - Journals
eISSN - 1923-4031
pISSN - 1923-4023
DOI - 10.5430/ijfr.v3n2p86
Subject(s) - leverage (statistics) , capital structure , econometrics , economics , microeconomics , quadratic equation , monetary economics , industrial organization , macroeconomics , mathematics , statistics , debt , geometry
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.