The consideration and purpose of borrowing: An empirical evidence from Indonesia listed companies

Abstract

Debt often graced in most of capital structure of companies, particularly in financial statement and became issues in context of trade off theory and pecking order theory in most studies. Debt usually related with profit matter, because it is always want to be achieved by every companies. It started when companies own equity is insufficient to create investment in company's assets for making profit, then it make debt is one alternative fund for financing investments aimed at achieving the desired profit. The objective of this study is to give answers as empirical evidence for the questions about why companies need debt and what is the relevance capital structure theory to explain this behavioral tendency in these period of observation. Conducting path analysis with trimming model as method of analysis, the results shows that, degree of operating leverage is negatively significant to debt equity ratio and debt equity ratio is negatively significant to return on equity. The implication of this findings shows the application of pecking order theory, because most of companies depend their funding from internal, which is make them have more stable cash flow and beside that, the consideration of business risk is very important so they keep the capital structure in optimum debt that make them have low probability of bankruptcy. © 2014 Science Publication.