Trade-off or Pecking Order Theory in Indonesia

Abstract

The objectives are (1) to find out the dynamic TOT or POT theory in making capital structure decisions. The research approach is quantitative, with a type of explorative research, to determine the applicability of the TOT or POT theory.  Data used are secondary data on interval scale and ratio used (1) debt asset ratio and business risk come from ICMD, annual report, IDX statistics (2) interest rates are from Bank Indonesia. The sample of this company is 63 companies that have document completeness for 10 years (2006-2015), so that there are 630 observation units, with each sector (1) 18 companies basic industry and chemical sectors (28.6%) (2) 13 sector companies trade, services and investment (20.6%) (3) 5 miscellaneous industry sector companies (7.9%) (4) 11 consumer goods industry sector companies (17.5%) (5) 6 sector construction companies (9.5%) (6) 4 sector companies infrastructure, utilities and transportation (6.3%) (7) 4 sector mining companies (6.3%) and (8) 2 agriculture sector companies (3.2%). The results of the study are public companies in Indonesia tend to use dynamic trade-off approach compared to dynamic pecking orders. The company adds debt in the capital structure because marginal benefits are greater than marginal costs