Unveiling Dynamic Capital Structures on Manufacturing Firms: Insight from System GMM Estimation

Hesti Werdaningtyas, Nur Azam Achsani, Anny Ratnawati, Tony Irawan

IPB University, Indonesia

This research investigates the factors that influence the capital structure of manufacturing companies in Indonesia. The novelty of this study lies in its advanced methodology, utilising a dynamic model, system-generalised methods of moments (Sys-GMM) estimation, and post-estimation analysis. Our study employs data from 159 publicly traded manufacturing firms. We focus on firm-specific factors, including leverage, profitability, sales, equity, and non-debt tax shields. Our findings suggest that determinant of leverage in Indonesian manufacturing firms, influenced by firm-specific factors and time-varying variables, particularly profitability, which has a negative impact on leverage. Firms with high profits are more likely to use internal sources of finance, whereas firms with low profitability are more likely to use loans, as they often lack sufficient retained earnings. Leverage among manufacturing firms exhibits persistence, as reflected by the significantly positive coefficient of the lagged leverage variable. This suggests that leverage decisions are path-dependent and gradually adjusted toward a long-term target. The time effect (year dummies) is significantly positive, indicating an upward trend in corporate leverage over time, which reflects the influence of macroeconomic conditions and fiscal/monetary policies on financing decisions. The practical implications of our research are significant, as it provides valuable insights into the capital structure and economic constraints of manufacturing companies in Indonesia, aiding management and other relevant stakeholders in making informed policy decisions.

Article link: https://www.asianinstituteofresearch.org/JEBarchives/unveiling-dynamic-capital-structures-on-manufacturing-firms%3A-insight-from-system-gmm-estimation-