Macroeconomic Condition and Capital Structure Adjustment Speed - Evidence from the Indonesian Stock Market

This paper presents the impact of the macroeconomic condition on the speed of adjustment of capital structure for non-financial firms listed in the Indonesian Stock Exchange from 1992 to 2010. Based on a two-stage OLS and integrated partial adjustment approach, the paper finds that Indonesian firms adjust their leverage faster in bad economic condition and the adjustment speed of the over-levered firms is higher than the under-levered firms. By controlling the variable of GDP growth rate, the over-levered firms exhibit a faster adjustment on their capital structure measured by book value but an insignificant adjustment measured by market value. By controlling the variable of inflation rate, the over-levered firms show a faster adjustment in their capital structure measured by book value when the GDP growth rate is high. In contrast with previous literature, the results provide different interpretations about the adjustment speed toward target leverage measured by book and market debt ratios.