Capital Structure Determinants: Evidence in Indonesia Food Processing Firms

This study examines the determinants of capital structure. Leverage is measured by debt-to-equity ratio and decompose to three regression models: short-term debt, long-term debt, and total debt. The purpose of this study is to test whether there are differences in the capital structure determinants across three debt regression models. The sample consists of 13 food processing firms publicly traded on the Indonesia Stock Exchange during the period 2015–2024. Panel regression tests indicate that the fixed effects model is the appropriate model for all three debt regression models. The adjusted r-squared is highest for long-term debt regression model which is 80,66% and short-term debt model has the lowest which is 59,3%, while total debt regression model has adjusted r-square of 76,91% The study finds that significant determinants differ across the various debt measures. Asset tangibility and non-debt tax shields are significant determinants in all three models, and the signs consistent with theoretical expectations. Intangible assets and growth opportunities are significant only for the long-term and total debt regression models. Firm size is a significant determinant in the short-term and total debt regression models. Uniqueness is found to be significant only in the long-term debt regression model. The findings of this research support the agency cost theory, that increasing value of collateralizable assets will reduce the risk of wealth transfer from creditor to shareholders as debt increases. It also confirms the trade-off theory that firms tend to utilize less debt when they benefit from non-debt tax shields as substitute for tax advantage of debt financing. Intangible assets are found to complement tangible assets in facilitating access to long-term and total debt and support the signaling theory. Size significance supports the trade-off theory which confirms that large firms borrow more since they have lower agency cost. The significance of growth opportunities aligns with pecking order theory for long-term debt and total debt, indicating that high growth firms will use more debt to fund growth because of the less impact of asymmetric information. Furthermore, firms facing high costs associated with uniqueness tend to reduce their debt levels to minimize liquidation costs.