The role of debt in optimizing the capital structure of manufacturing firms in Indonesia

Type of the article: Research paperAbstractThis study aims to examine the underlying reasons why manufacturing firms in Indonesia utilize both short-term and long-term debt. Specifically, it investigates the roles of profitability, firm size, investment, asset tangibility, non-debt tax shields, and monitoring mechanisms in influencing corporate decisions regarding the use of short-term and long-term debt within their capital structure. The paper seeks to identify the most significant determinants of capital structure among Indonesian manufacturing firms. The study employs a sample of 58 manufacturing companies listed on the Indonesia Stock Exchange (IDX), covering a total of 580 firm-year observations over the period from 2011 to 2023. Structural equation modeling (SEM) using LISREL is applied as the primary analytical tool. The findings reveal that manufacturing firms investing in real sectors through fixed assets tend to rely on long-term debt financing. In contrast, those allocating capital to intangible or non-fixed assets prefer short-term debt instruments. Moreover, the study uncovers that the capital structure of Indonesian manufacturing firms is more heavily influenced by short-term debt, particularly in response to short-term working capital needs and market demand fluctuations. The study further suggests the necessity of exploring unrelated diversification as a potential indicator of managerial opportunism in the context of both short-term and long-term debt financing decisions.