The Utmost Shareholder and Financial Leverage: Proof From Telecommunication Firms in Southeast Asian Countries

Abstract

Financial leverage is the source of external funds with the fixed expense, i.e., interest, to elevate the investor's wealth. On one side, this leverage can benefit the shareholders: tax savings; on the other, it can be harmful if it cannot be organized well: bankruptcy. Consequently, this leverage is essentially managed. This manuscript examines the free cash flow of agency theory by relating the utmost shareholder to financial leverage with profitability as the control variable. As the population, we utilize the telecommunication companies in the capital market of Southeast Asia from 2015 to 2020 and a simple random sampling technique to take them as the sample. To test the hypothesis, we use the t-statistic to examine the coefficients in the regression model with pooling data. The study summarizes a positive impact of the utmost shareholder on financial leverage; however, profitability negatively affects this leverage. This circumstance means that the debt is still adequate to be utilized by the largest shareholder in disciplining managers for unproductive spending on projects.