An Empirical Analysis Of Debt-Equity Choice In Indonesian Companies
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Date
2004
Authors
SANTOSO, AUGUSTINUS SETIAWAN
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Abstract
This study offers new insights by employing Indonesian data. The uniqueness of
Indonesian companies is reflected by the common occurrence of ownership
concentration among a few large families and affiliation with a corporate group in
which seems nonexistent in many developed countries. With regard to the
methodology problem, this study uses simultaneous equations model to overcome the
endogeneity problem in debt-equity study. It is reported that the external block
ownership has dominant position by having majority control and impact on powerless
Indonesian managers. The inadequate legal framework for investors' protection,
insufficient internal financing and improper development of the capital market occur.
With regard to this situation, debt-equity chQice was widely practiced. There is
evidence that Indonesian companies relied heavily on loans to finance unrealistic
rapid corporate expansion. The insignificant relationship between the level of debt
and tangibility of assets and profitability indicate the appearance of moral hazard
problem before the crisis. This study points out that the dominant external block
ownership can have a detrimental effect on the shareholders and debtholders relation.
It induces the higher cost of debt which is typically described in forms of asset
substitution or risk shifting problem. As a result, severe agency conflict occurs is not
between shareholders and managers as often assumed in the previous studies but
between shareholders and debtholders.
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Keywords
An Empirical Analysis Of Debt-Equity Choice , In Indonesian Companies