Endogeneity Test: Investment Opportunity Set and Ownership Structure on Funding Policies

Abstract

A company’s funding policy is an important part of determining a company’s capital structure. The policy must consider and analyze a combination of economical funding sources for the company’s routine financing and corporate investment. The aim of this research was to examine the relationship between investment opportunity set on funding policy and the ownership structure as a moderating variable (a variable that moderates the relationship between two other variables. With moderating variable, the relationship can be better or worse, depending on the effect). The population used in this research includes all companies that were publicly listed and traded on the Indonesia Stock Exchange between 2008 to 2018. The sampling technique used a purposive sampling method. There are several steps to answering the hypotheses in this research, which include (1) confirmatory factor analysis, (2) endogeneity tests, and (3) hypothesis testing through the use of multiple linear regression and moderation regression with panel data. The results indicated that investment opportunity set (TOBIN'Q) had a positive and significant effect on the company funding policy (Debt to Equity Ratio), while institutional and family ownership was found to weaken the influence of investment opportunity set (TOBIN'Q) on the company funding policies (Debt to Equity Ratio).