Title: LEVERAGE DEVIATION AND CAPITAL STRUCTURE BEHAVIOR OF COMPANIES LISTED ON THE INDONESIA STOCK EXCHANGE.

Authors: Dwi Cahyaningdyah

Item Type: Thesis

Affiliations: Master of Science in Management Study Program, Faculty of Economics and Business, Universitas Airlangga , Surabaya, Indonesia

Publisher: Universitas Airlangga

Abstract

How companies finance investments is a crucial question that continues to be researched in corporate finance because a company's decision to choose funding sources will affect its capital structure. Three dominant theories studied in capital structure theory are the trade-off theory, the pecking order theory, and the market timing theory. In capital structure research, these three theories are beginning to be studied as complements rather than as stand-alone theories. It is highly likely that companies consider two financing behaviors, represented by two different theories, simultaneously in their financing decisions. This study examines the trade-off theory and the market timing theory as complements that can explain the capital structure behavior of companies listed on the Indonesia Stock Exchange. This study aims to examine the effect of timing behavior (represented by the market timing theory) on targeting behavior (represented by the trade-off theory) by calculating the direction and magnitude of the deviation. This allows us to identify conditions under which timing behavior dominates targeting behavior and conversely, conditions under which timing behavior does not influence targeting behavior. The analysis was conducted using a two-step partial adjustment model, where in the first stage, the target leverage per industry was estimated using unbalanced panel data with Eviews 10. The second stage was to estimate the speed of adjustment and the influence of timing behavior on the targeting behavior of companies that were the research sample. The estimation of the speed of adjustment and analysis of the influence of timing behavior on targeting behavior were conducted using robust least squares regression with Eviews 10. The results of the hypothesis testing indicate an asymmetry in the speed of adjustment between the group of companies that deviated above the target leverage and the group of companies that deviated below the target leverage. The group of overleveraged companies had a higher speed of adjustment than the speed of adjustment of the underleveraged group. These results confirm the hypothesis that companies that deviated above the target leverage bear greater costs of deviation so that the pressure to return to the target is also greater, resulting in a higher speed of adjustment towards the target leverage. Further testing was conducted on four analysis groups formed based on the direction and magnitude of the deviation. The regression analysis for each group showed that the speed of adjustment of the four analysis groups was statistically significant, and economically indicated that there was a difference in the speed of adjustment between the compared groups (economically significant). The group of companies deviating far above the target showed the highest adjustment speed because they faced the greatest cost pressure compared to other groups, while the group of companies deviating close below the target showed the slowest adjustment speed because this group of companies bore the smallest deviation costs compared to other groups. However, statistical testing showed that the adjustment speed between analysis groups was not statistically different (statistically insignificant). Testing the effect of timing on targeting behavior showed that in all analysis groups, the adjustment speed after accounting for timing was no different from the adjustment speed before accounting for timing. In the overleveraged group and the groups deviating far from the target leverage (the far under and far above groups), this condition was consistent with the hypothesis. In all three groups, the pressure to quickly return to the target was high, so regardless of market conditions, companies in all three groups would prioritize returning to the target leverage. In the underleveraged group and the groups deviating close to the target (close below and close above), timing behavior was suspected to slow the adjustment speed toward the target leverage. However, statistical testing showed that the adjustment speed after accounting for timing was no different from the adjustment speed before accounting for timing, meaning that timing behavior did not affect the adjustment speed toward the target leverage. This condition is thought to originate from the large number of equities traded at underpriced conditions (market prices lower than the intrinsic value of the shares) during the research period.

Keywords: trade off theory, market timing theory, targeting behavior, timing behavior, leverage deviation, speed of adjustment towards target leverage

Sources: http://repository.unair.ac.id/88961/