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Testing Trade-Off Theory of Capital Structure: Empirical Evidence from Indonesian Listed Companies

The purpose of this research is to test the Trade-Off Theory of capital structure in public listed Indonesian companies by using Partial Adjustment Model. The model is applied to a specific balance panel data from 228 companies by using different regression techniques; Pooled Least Square (PLS), Fixed Effect Model (FEM), and Generalized Method of Moments (GMM). Findings of the research are Indonesian companies adjust their capital structures towards an unobservable target at the speed of 43.79% a year. It means that Indonesian companies need around 2 years and 3 months to adjust their existing capital structure toward a target. This finding supports the advantages of Trade-Off Theory over the Pecking Order Theory. This paper also highlights the long term parameter of dynamic model of capital structure and the determinants of capital structure.