Effects of Good Corporate Governance Index and Financial Constraint toward Investment Opportunity and Capital Structure: Structural Equation Model Approach

Abstract

The purpose of this research is to examine the direct and indirect effects of good corporate governance index, financial constraint to investment opportunity and capital structure in Indonesia Stock Exchanges. We obtained the data from Indonesian Capital Market Directory (ICMD) and the Indonesian Institute for Corporate Governance (IICG) from 2009 until 2012. We used path analysis to examine our model with using data panel. We divided our model to be two categories: Structural model I used to test the direct effects of good corporate governance index, financial constraint on investment opportunity; and structural model II governed to examine the direct effects of good corporate governance index, financial constraint and investment opportunity on capital structure.  Accordingly, to test the indirect effects of our model, we multiplied the coefficients of direct effect that showed in our model. The results showed that good corporate governance index and financial constraint had positive and negative effects on investment opportunity directly and significantly. Moreover, the result also indicated that there were direct effects of good corporate governance index, financial constraint and investment opportunity on capital structure. In addition, our analysis validated the existence of indirect effects in our path model.

Keywords:          Good corporate governance index, financial constraint, investment opportunity, capital structure