Corporate financing behaviour and vulnerability in Indonesia

Abstract

The chapter examines the financing behaviour of listed companies in Indonesia, in order to understand the micro evidence of the economic vulnerability based upon firm-level data. The findings show that there is an indication of the gearing effect phenomenon in which debt-equity ratio decreases with profitability. In such a case, firm would have higher probability not only of failing to make a return to equity holders but also failing to meet interest cost obligations. In macro sense, the high probability of firm insolvency would lead economy to the financial fragility which could easily be ended in financial crisis. However, the findings also demonstrate that listed firms in Indonesia were trying to match their debt-maturity with their asset maturity. But this strategic action was taken by big firms. Small firms tend to have limited choices in their financing strategy.