Author details

Razali Haron

Certain firm-level determinants like ownership concentration, ownership identity, NDTS, size, risk, tangibility, liquidity, profitability, and age of firm do have significant influence on the debt financing of the firms understudy. However, certain hypotheses cannot be supported like size, liquidity and age where the study reveals contrasting results from what

The concentrated ownership phenomenon among the emerging market and in this case Indonesia does have a significant impact on debt financing of firms. The positive relationship recorded in this study may be explained by the reluctance of large shareholders to engage with equity financing as to avoid ownership dilution and thus can maintain the control of the firm. In terms of family-owned firms, it is revealed that family-owned firms in Indonesia consume lesser leverage compared to the non-family-owned firms perhaps for several reasons depending on the management of the firm. Literature acknowledges family-owned firms as being risk averse [19]; thus, debt engagement is very much avoided. The lesser consumption depicted could also be the result of the alignment of interest between shareholders and managers, which makes issuing debts as manager's disciplinary tool less crucial for familyowned firms. It is expected that family-owned firms do not suffer from agency cost considering that the owner and the management of firms are the same people, and hence no issue of

From the study, it is apparent that large firms with higher profitability in Indonesia seem to employ low level of debt for they fear of bankruptcy risk and insolvency. These large firms seem to use the non-debt tax shield in their capital structure as to avoid the cost of debt. The riskier it gets, the lesser debt engagement it would be for these firms, and they would opt to retained earnings accumulated being a large firm with a high profitability level. The fear of business risk and insolvency reflects the effect of trade-off theory, and at the same time the pecking order theory is also in the picture when internal financing is more preferred. Nevertheless, aged firms with high tangible assets and high level of liquidity seem to engage with a higher level of debt in their capital structure. This must be due to the tax shield advantage that comes with debt employment as explained by the trade-off theory. Another possible explanation is that these aged, very liquid firms with high tangible assets employ debt to mitigate

The finding from this study has important policy implications. This study reveals that firms in Indonesia do not seem to consider equity issuance as an alternative to debt financing with insignificant impact on the influence of share price performance being detected from the analysis. This may be perhaps, according to Ref. [51], Indonesia has a limited number of nonbank financial institutions and the equity and debt markets are still under developed. This phenomenon also reflects the distinctive characteristic of family-owned firms where controlling power and succession of firms onto the next generation being the main agenda instead of economic advantage. The fear of dilution of power from the intrusion of outsiders through equity issuance has slashed out equity financing in their capital structure agenda. Managers should be sensitive over the interests of the shareholders who are normally the board of directors of the firms to preserve the controlling power among the family forever without any

have been hypothesized.

20 Financial Management from an Emerging Market Perspective

diverging interests is between the two parties [7].

agency conflict that may occur.

Address all correspondence to: hrazali@iium.edu.my

IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia, Kuala Lumpur, Malaysia
