Debt and entrenchment: Evidence from Thailand and Indonesia

Ownership and Debt Financing: Indonesia Evidence

“…Ruslim et al [29] analyze a sample of 18 Indonesian firms for the period of 2000-2006 and find that profitability has no significant impact on the debt financing of firms in Indonesia, again implying no evidence of pecking order theory influence in the financing decisions in Indonesia which is in line with [28]. Bunkanwanicha et al [30], on a different strand, incorporate corporate governance arrangement in their study on Indonesia and find that weaker corporate governance seems to have higher debt level especially during financial crisis. They also highlight that country-level determinants could also impact empirical results.…”

“…Lenders are more willing to lend to firms with high tangible assets as these assets are easier to repossess in bankruptcy; thus, a positive relationship is anticipated between tangible assets and debt financing as explained by the trade-off theory. Moosa and Li [24], Bunkanwanicha et al [30], and De Jong et al [43] all share similar significant positive relationship between tangibility and debt financing in their studies on Indonesian firms. Tangible asset is represented by net fixed asset over total asset [25,43].…”

“…Tangible assets help firms obtain more debt from lenders as tangible assets act as collateral, making debt less risky. Moosa and Li [24], Bunkanwanicha et al [30], Financial Management from an Emerging Market Perspectiveand De Jong et al [43] all share similar significant positive relationship between tangibility and debt financing in their studies on Indonesian firms. Degryse et al [49] argue that the positive effect of tangibility on total debt comes entirely from long-term debt as these tangible assets are used to secure long-term debt.…”

“…Highly profitable firms in Indonesia choose to use their retained earnings to finance their investments, thus reflecting the influence of pecking order theory in their debt financing decisions. Supporting [24,30] the negative relationship reported may be the results of the financial reformations taken place in Indonesia which have opened up and encouraged firms to turn to their retained earnings instead of merely bank loans to finance their investments. For the case of family-owned firms, using retained earnings can become the main agenda as to avoid dilution of power and unnecessary intrusion from outsiders via equity financing [13].…”

“…Debt financing (leverage) in this study, as applied in other capital structure studies, is defined as the ratio of total debt to total asset (at book value) [17,30,46]. To examine the determinants of leverage, this study employs the Generalized Method of Moment (GMM).…”