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Capital structure behaviour among Indonesian property developers during different business cycles

Imanda Luzari Indomo (Department of Management, Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia)
Arief Wibisono Lubis (Department of Management, Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia)

Journal of Financial Management of Property and Construction

ISSN: 1366-4387

Article publication date: 28 March 2022

Issue publication date: 7 March 2023

496

Abstract

Purpose

The issue of capital structure among property developers in Indonesia becomes interesting as the government speeds up housing development. Examining which theory prevails (trade-off versus pecking order) can be done by looking at several determinants of capital structure. This study aims to argue that examining determinants of capital structure in this context should also incorporate business cycles, as the activities of property developers are cyclical.

Design/methodology/approach

Using a total of 183 observations of listed property developers from 2010 to 2019, this study uses the ordinary least squares regression technique. The focus is on determinants of capital structure, which are profitability, tangibility, firm size, ownership and potential growth. The observations are divided into different business cycles (expansion, peak, trough and decline) based on economic growth rates.

Findings

The results show that the natures of relationships between capital structure (leverage) and its determinants are different during distinct business cycles. For example, profitability has a significant and positive effect on leverage during peak, but the signs are negative during trough and decline. Trade-off theory provides a better explanation of property developers’ capital structure behaviour during peak while pecking order theory is more relevant during trough. It is more difficult to conclude which of these theories is superior in expansion and sideways.

Originality/value

There have been limited studies that focus on corporate finance issues of property developers in Indonesia, and no particular attention has been given to the role of business cycles.

Keywords

Acknowledgements

The research was made possible with the support of PUTI Grant by Universitas Indonesia No. NKB-2036/UN2.RST/HKP.05.00/2020. The authors thank two anonymous referees for the comments to the previous version of this article. All remaining errors are theirs.

Citation

Indomo, I.L. and Lubis, A.W. (2023), "Capital structure behaviour among Indonesian property developers during different business cycles", Journal of Financial Management of Property and Construction, Vol. 28 No. 1, pp. 91-106. https://doi.org/10.1108/JFMPC-07-2021-0050

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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