Testing of Dynamic Trade-Off Theory on Leverage Decision

Chairunnisa, Septianti and Sudarsono, Rachmat and Tjandrasa, Benny Budiawan (2018) Testing of Dynamic Trade-Off Theory on Leverage Decision. South East Asia Journal of Contemporary Business, Economics and Law, 15 (5). pp. 27-35. ISSN 2289-1560

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This study aims to investigate the dynamic model on leverage decisions of non-financial listed firms in Indonesia, through identification of target leverage and speed of adjustment as characteristics of dynamic trade-off theory. Partial adjustment model is used and estimated through generalized method of moments. Multicollinearity test is conducted as diagnostic test for the estimation model. Non-financial firms in Indonesia do pursue target leverage constructed by firm-specific factors such as profitability, liquidity, and tangibility. Meanwhile, non-debt tax shield, business risk and size do not significantly affect leverage decision. The adjustment toward the target defines the symmetric speed adjustment of 78.05% across the firms. The result of this study contributes to analyze leverage decision of non-financial firm in Indonesia by using dynamic model with more realistic assumption and more advanced method in order to offer a deeper insight regarding firms leverage behavior.

Item Type: Article
Uncontrolled Keywords: Dynamic Trade-Off Theory, Target Leverage, Speed of Adjustment, Partial Adjustment Model
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Depositing User: Perpustakaan Maranatha
Date Deposited: 19 Jun 2019 05:59
Last Modified: 19 Jun 2019 05:59
URI: http://repository.maranatha.edu/id/eprint/26781

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