Optimal Capital Structure Based on Market Performance of Different Industry Sectors of Listed Companies at Indonesia Stock Exchange

Abstract

The purpose of this study is to determine the optimal capital structure based on static trade-off models and to analyze the differences in the capital structure of each industry sector based on Jakarta Stock Industrial Classification (JASICA) of public companies listed  in the Indonesia Stock Exchange. Capital structure is very important for a company, especially in determining financial policy that will have impact on the long-term viability of  the company. However until now there is no single theory that satisfactorily leads to an optimal capital structure concept. Unbalanced panel data from 302 companies in the period from 2000 to 2010 creates 1,955 year company observations. Pooled nonlinear regression is performed on company’s market performance variable towards capital structure to find the optimal capital structure for each industry sector. Furthermore, Monte Carlo techniques are used by resampling each industry sector 1,000 times to gain a more refined estimate. The study shows that the real use of long-term debt for nonfinancial corporate sector in Indonesia is lower than the use of equity. Capital structure by industry sector is still not optimal and still has a positive debt capacity. There are 5 of 8 industrial sectors in which the capital structure reach optimal when the amount of long-term debt is equal with the total equity.

Keywords: optimal capital structure, company's market performance, long term debt to equity, the classification of industries.