Investigating Capital Structure Speed of Adjustment (SOA) of Indonesian Companies for Corporate Value

Abstract The objective of this study is to evaluate influence of growth potential, profitability, company size, ratio between capital structure and its target, short-term loan, asset maturity, growth of GDP and inflation rate towards capital structure SOA. The study involved secondary data in the form of financial reports from manufacturing companies listed in Indonesian Stock Exchange (ISE) published in ISE website, www.idx.co.id, and National Bureau of Statistics data about Indonesian economy published in www.bps.go.id, National Bureau of Statistics. From the result of partial adjustment model estimation, significant leverage lag shows that Indonesian manufacturing companies adjust their capital structure towards target leverage with SOA of 64.73% per year. This finding confirms in Darminto and Manurung (J Bus Manag 1(1):35–52, 2008) that capital structure SOA of Indonesian companies is relatively faster than that in the developed countries like USA (30%) (Flannery and Rangan in J Financ Econ 79(3):469–506. http://doi.org/10.1016/j.jfineco.2005.03.004, 2006). Capital structure SOA of manufacturing companies in Indonesia is similar to Ramjee and Gwatidzo (Medit Account Res 20(1):52–67, 2012)’s study on capital structure SOA of manufacturing companies in South Africa (between 62.3 and 65.5% per year). Originality of this study is capital structure measurement used in the study. Until recently, two major theories, trade-off theory and pecking order theory, have been used to explain capital structure of companies. Previous studies evaluated both theories separately. This study is based on ‘‘dynamic tradeoff theory’’ in which the trade-off theory and pecking order theory are evaluated simultaneously instead of partially. Keywords Capital structure Manufacturing industry Speed of adjustment JEL Classification G30 O16 G34