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Macro Uncertainties and Tests of Capital Structure Theories across Renewable and Non-Renewable Resource Companies

Author

Listed:
  • Deni Irawan

    (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI); Crawford School of Public Policy, Australian National University, Australia; Centre for Applied Macroeconomic Analysis (CAMA), Australian National University, Australia)

  • Tatsuyoshi Okimoto

    (Crawford School of Public Policy, Australian National University, Australia; Research Institute of Economy, Trade and Industry (RIETI), Japan; Centre for Applied Macroeconomic Analysis (CAMA), Australian National University, Australia)

Abstract

Capital structure is one of the most critical decisions for firms in business. This study examines the role of macro (economic and non-economic) uncertainties in affecting firms’ capital structure management. Three prominent capital structure theories are tested for global resource firms: (1) static trade-off, (2) pecking order, and (3) market timing theory. The results suggest that no single theory prevails, although both pecking order and market timing theories have certain explanatory power to explain sample firms’ financing behaviour. The pecking order theory is strongly supported by the results of the leverage target adjustment model. However, the downward cyclical patterns of pecking order coefficients suggest that the resource firms tend to choose debt financing less and less over time, particularly after 2008. The market timing theory holds strong, as indicated by the significance of macro condition (uncertainties) variables in determining sample firms’ capital structure, especially after 2008 and for non-renewable firms. However, the main proxies of the cost of debt are not statistically significant. In conclusion, this study finds that resource firms have a particular pecking order preference when they need financing, and the influence of macro uncertainties are vital in determining their capital structure.

Suggested Citation

  • Deni Irawan & Tatsuyoshi Okimoto, 2021. "Macro Uncertainties and Tests of Capital Structure Theories across Renewable and Non-Renewable Resource Companies," LPEM FEBUI Working Papers 202168, LPEM, Faculty of Economics and Business, University of Indonesia, revised 2021.
    • Handle: RePEc:lpe:wpaper:202168
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    References listed on IDEAS

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    More about this item

    Keywords

    capital structure — trade-off theory — pecking order theory — market timing theory — macro uncertainties;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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