Debt Policy: Affecting Factors and Their Impact on Company Values

Abstract

One of the main sources of funding for operational activities and company expansion is derived from debt. The company's debt policy is a policy made by the management as the manager of the company. The debt policy will have an impact on the company value as reflected in the market price of the company's shares. This study aims to prove the factors that influence the company's debt policy and the impact of the debt policy on the company value. The factors that influence debt policy as an independent variable of this study are: managerial ownership, institutional ownership, company growth, free cash flow and company size. The company's debt policy is proxied by the Debt to Equity (DER) ratio and the company value is proxied by the Price to Book Value (PBV) ratio. The research sample is a manufacturing company selected based on criteria, so as to obtain as many as 91 companies registered in 2014-2016. Using multiple regression analysis on alpha = 5%, the results show that managerial ownership and Free cash flow affect the company's debt policy, while other variables have no effect on it. Debt policy did not affect the value of the company.

Keywords: Debt policy, company value, managerial ownership, free cash flow, company size

DOI: 10.7176/RJFA/10-14-14

Publication date:July 31^st 2019