The Determinants Of Capital Structure: Trade-Off Theory Vs Pecking Order Theory

DOI

10.2991/978-2-38476-204-0_13How to use a DOI?

Keywords

Determinants Capital Structure; The Trade-Off Theory; The Pecking Order Theory

Abstract

This paper aims to examine the determinants of capital structure based on the views of the trade-off theory and the pecking order theory. A hundred and three companies were observed 618 times, differentiated for companies using debt below and above 50% and applying multiple regression to find out the determinants of capital structure in manufacturing companies in Indonesia from 2011 to 2017. The results of the study prove that there are differences in the determinants of capital structure when viewed from the trade-off and pecking order theories. Companies that use a debt proportion of <50% are theoretically more following the pecking order theory, and companies that use a debt proportion of ≥ 50% are theoretically more suitable with the trade-off theory. But, in companies that use a debt proportion of <50%, three variables produce coefficients that match predictions (Firm Age, Profitability, and Liquidity), and three variables do not match the predicted direction (Firm Size, Debt tax shield, and Business Risk). One variable is not significant (Growth). These results indicate that sample companies that are more mature, more liquid, and more profitable tend to prioritize internal sources of funds in financing company activities, so they use a lower proportion of debt in their capital structure, in line with the view of the pecking order theory. But on the other hand, the larger the size of the company, which has a certainty of profit (low business risk) tends to take advantage of the tax advantages of debt by increasing the proportion of debt in its capital structure, more in line with the trade-off theory. In companies that use a debt proportion of ≥ 50%, only one variable produces a coefficient that follows predictions (Firm Age), and four variables are not following the prediction direction (Firm Size, Profitability, Business Risk, and Liquidity). Two variables are not significant (Debt tax shield and growth). These results indicate that more mature sample firms tend to use lower debt which is more in line with the trade-off theory. On the other hand, the larger the company’s size, the more profitable it has a certainty of profit and is more liquid; it tends to use a lower proportion of debt in its capital structure, more in line with the pecking order theory.

Copyright

© 2023 The Author(s)

Open Access

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TY  - CONF
AU  - Ronny Malavia Mardani
AU  - Moeljadi Moeljadi
AU  - Sumiati Sumiati
AU  - Nur Khusniyah Indrawati
PY  - 2024
DA  - 2024/03/25
TI  - The Determinants Of Capital Structure: Trade-Off Theory Vs Pecking Order Theory
BT  - Proceedings of the 2nd International Conference on Multidisciplinary Sciences for Humanity in Society 5.0 Era (ICOMSH 2022)
PB  - Atlantis Press
SP  - 140
EP  - 165
SN  - 2352-5398
UR  - https://doi.org/10.2991/978-2-38476-204-0_13
DO  - 10.2991/978-2-38476-204-0_13
ID  - Mardani2024
ER  -