The influence of firm, industry and concentrated ownership on dynamic capital structure decision in emerging market
| DOI | https://doi.org/10.1108/JABS-04-2019-0109 |
| Published date | 16 August 2021 |
| Date | 16 August 2021 |
| Pages | 689-709 |
| Author | Razali Haron,Naji Mansour Nomran,Anwar Hasan Abdullah Othman,Maizaitulaidawati Md Husin,Ashurov Sharofiddin |
The influence of firm, industry and
concentrated ownership on dynamic
capital structure decision in emerging
market
Razali Haron, Naji Mansour Nomran, Anwar Hasan Abdullah Othman,
Maizaitulaidawati Md Husin and Ashurov Sharofiddin
Abstract
Purpose –This study aims to evaluate the impact of firm, industry level determinants and ownership
concentration on the dynamic capital structure decision in Indonesia and analyses the governing
theories.
Design/methodology/approach –This study uses the dynamicpanel model of generalized method of
moments-System (one-step and two-step) by using a panel data from 2000 to 2014 to examine the
relationship between the determinants and leverage. The results are robust to the various definitions of
leverage,heterogeneity, autocorrelation,multicollinearity and endogeneity concern.
Findings –Growing firms and firms operating in a highly concentrated industryuse high level of debt,
taking advantage of the tax shield (trade-off theory). However, if the firms are operating in a highly
dynamic environment,they take on less debt as to avoid bankruptcy risk. Firms in Indonesiaopt for debt
financing perhapsto act as a controlling mechanism to mitigate agency conflictsthat may exist between
the large controlling shareholders and the minority. Aged and highly profitable firms with high tangible
and intangibleassets and liquidity level operatingin a high dynamic environment follow the peckingorder
theory.
Research limitations/implications –This study doesnot perform each industry regression individually.
All the industries are pooled together,as the main focus of this study is to examine the factors affecting
leverageof firms in general without giving particular attentionto individual industry.
Originality/value –The insights on the impact of ownership concentration and industry characteristics
are novel especiallyon Indonesia, thus fill the gap in the literature.
Keywords Indonesia, Ownership, Emerging market, Capital structure, Thin capitalization
Paper type Research paper
1. Introduction
When a firm decides on its financial assistance methods either using debt or equity
or even a combination of both, firms need to take into account several influencing
factors in their capital structure. Capital structure is undoubtedly a crucial element in
the operation of a firm which aims primarily at reducing cost of capital as well as
achieving maximum firm value (Khaw, 2019;Musallam, 2020) and serve as strong
pillars that lend competitive advantage to a firm (Kumar et al., 2017;Zamzamin et al.,
2021). Recognized as an important subject matter of discussion because of its
significant influence over firm value, it has been a highly debated issue among
researchers and policymakers in the finance literature, covering the developed as
Razali Haron is based at
the IIUM Institute of Islamic
Banking and Finance,
International Islamic
University Malaysia, Kuala
Lumpur, Malaysia.
Naji Mansour Nomran is
based at the University of
Saba Region, Marib,
Yemen and Department of
Finance and Banking,
Faculty of Administrative
Sciences, Thamar
University, Thamar, Yemen.
Anwar Hasan Abdullah
Othman is based at the
IIUM Institute of Islamic
Banking and Finance,
International Islamic
University Malaysia, Kuala
Lumpur, Malaysia.
Maizaitulaidawati Md Husin
is based at the Azman
Hashim International
Business School, Universiti
Teknologi Malaysia, Kuala
Lumpur, Malaysia.
Ashurov Sharofiddin is
based at the IIUM Institute
of Islamic Banking and
Finance, International
Islamic University Malaysia,
Kuala Lumpur, Malaysia.
Received 6 April 2019
Revised 22 December 2019
7 August 2020
DOI 10.1108/JABS-04-2019-0109 VOL. 15 NO. 5 2021, pp. 689-709, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 689
well as the emerging markets over the decades worldwide (Haron, 2016;Kumar
et al., 2017;Ramli et al., 2019;Khaw, 2019).
In the past few decades, researchers and policymakers realize the importance of capital
structure studies in the emerging market. Thebody of knowledge starts to examine whether
the emerging and developed market landscapes share similar atmosphere and influencing
factors in their capital structure decision or are they expected to be different due to different
institutional and country specific factors as well as its individual corporate governance
system (De Jong et al.,2008;Muchtar et al.,2018;Khaw, 2019). Reacting to this, this study
gives a particular attention to the emerging market, particularly in the East Asian region.
History sees these markets been severely affected by the 1997 Asian financial crisis
because of, as commonly reported, the mismanagement of the corporate governance
system (Brahmana et al., 2019). Realizing this fact, there has been an urgent call for a
comprehensive review and a post-mortem on the corporate governance system then to
restructure the governance system and to look closely at each of its mechanism.
Researchers and policymakers then agreed that one of the main mechanisms contributing
to sound and effective corporate governance is the ownership structure; thus, this aspect
needs to be scrutinized and studied even further (Utama et al., 2017;Khaw, 2019;
Musallam, 2020). Claessens et al. (2002),Utama et al. (2017),Brahmana et al. (2019) and
Musallam (2020) assert that the East Asian markets including Indonesia are popularly
known as having a highly concentrated ownership structure and mostly are family
controlled. This kind of environment can easily trigger agency problems between the
controlling shareholder and minority shareholders and thus may have such prevalent
influence and impact on the capitalstructure decision of the firms (Chen and Strange, 2005;
Utama et al., 2017;Khaw, 2019). This situationoffers intriguing setting for a capital structure
study more so being an emerging market;thus, this study intends to do so.
With respect to the above background, this study sets four distinctive objectives. First is to
examine the impact of firm level determinants on the dynamic capital structure of firms
using a dynamic model of the generalized method of moments (GMM). This study focuses
on an emerging market of Indonesia, being the largest economy in Southeast Asia
(Soetanto and Liem, 2019) and the second largest emerging economy behind China
(Brahmana et al., 2019). This study uses a set of longitudinal data over a period of 15 years
from 2000 to 2014, covering 402 firms in Indonesia. Second is to examine the impact of
industry characteristics on the capital structure of firms in Indonesia. Industry
characteristics in this study include the industry dynamism, industry munificence and
industry concentration. Third, acknowledging the argument made in previous findings that
ownership structure is a crucial mechanism in corporate governance, this study intends to
examine at how ownership structure influences the capital structure decisions of firms in
Indonesia as well. Indonesia is featured by higher ownership concentration and family
control (Claessens et al.,2002;Utama et al.,2017;Brahmana et al.,2019;Musallam, 2020),
weaker legal system and investor protection and weaker disclosure requirements (La Porta
et al.,1999
;Claessens and Fan, 2002;Carney and Hart, 2015;Brahmana et al.,2019).
Indonesia’s capital market is thus a perfect setting to investigate further the impact of
ownership on firm capital structure. This will enrich the literature covering the emerging
market. Fourthly, this study then concludes its finding by analysing and identifying the
governing capital structure theories to explain the behaviour of the capital structure of firms
in Indonesia as depicted. These four objectives highlight the significance of this study
comparative to others as it tackles four important aspects in a capital structure study using
an emerging market background. It offers policy implications to take into account when
choosing, deciding and implementing effective capital structure decision as well as a
perfect corporate governancesystem of not just for emerging market but also other markets
as well. To date, to the best of our knowledge, there is no similar study incorporating and
analysing the impact of ownership structure plus the influence of industry characteristics on
the financing decision of firms in Indonesia.
PAGE 690 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 15 NO. 5 2021
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