The Determinant of the Debt Policy of the Firm

Sri Yuli Waryati

and Anggi Devita Sari

Faculty of Economics Janabadra University Yogyakarta

Keywords:

debt policy, free cash ﬂow, institutional ownership, leverage

Abstract:

This study aims to examine and analyze the effect of independent variables in the form of, institutional own-

ership, free cash ﬂow, and leverage on the dependent variable in the form of debt policy. The population in

this study are insurance companies listed on the Indonesia Stock Exchange for the period 2015 to 2017. Based

on the purposive sampling technique, a sample of 35 companies was obtained. The data analysis technique

used is descriptive statistics and hypothesis testing in the form of multiple linear regression analysis. The test

results show that the free cash ﬂow variable does not have a negative and insigniﬁcant effect on debt policy.

Institutional ownership variables do not have a positive and insigniﬁcant effect on debt policy. Leverage vari-

ables have a signiﬁcant negative effect on debt policy. Free cash ﬂow, institutional ownership and leverage are

able to inﬂuence debt policy together by 29.5%.

1 INTRODUCTION

YA ﬁrm is established to increase its values so it can

give the stockholders a welfare. Wahyudi and Par-

westri (2006) in (Nuraina, 2010) stated that in long

term objective is to optimize its value. The higher

the value, the more welfare the owner. The value re-

ﬂects the stock market price. One of the determinant

is the ﬁrm’s ownership structure. Some researchers

believed that the structure will be able to affect the

running of the ﬁrm which will affect its performance

in purpose of the goal, it is the value maximization.

This is caused by their control. The stock market is

expected to react positively if the ﬁrm is managed

by qualiﬁed competent management or it owned by

good credible image stockholders. The control that

owned by the owner will affect its performance. Free

Cash Flow describes the ﬁnancial ﬂexibility level of

the ﬁrm. Jensen (1986) in J(Lucyanda et al., 2012)

stated that a manager should have incentive to enlarge

the ﬁrm more than its optimum size, so they keep

doing their investment in spite of their negative net

present value. If the ﬁrm has free cash ﬂow, a bet-

ter ﬁrm should divide it in form of dividen to prevent

the waste of funds on not proﬁtable project. Accord-

ing to Mamduh and Hanaﬁ (2013) in (Geovana, 2015)

that a ﬁrm which implements ﬁxed cost in high pro-

portion must implement high operating leverage. In

other word, Degree of Operating Leverage (DOL) of

the company is high, if it has high DOL, thus high sale

level will generate high revenue, on the other side if

the sale decreased signiﬁcantly, the ﬁrm will experi-

ence loss.

2 RESEARCH METHOD

2.1 Samples Population and Selection

The population for this research is taken from all

2015-2017 Indonesia Exchange Stock registered in-

surance ﬁrm. The selection is determined by imple-

menting purposive sampling technique. The purpose

is to obtain representative samples. The process is as

following:

The company has annual ﬁnancial report which is-

published during researching period, and also it has

outlier data.

Based on that criteria, they obtained 35 samples

which consist of 10 ﬁrms within 2015, 13 companies

within 2016, and 12 ﬁrms within2017.

2.2 Data Normality Test

The result of this test with One-Sample Kolmogorov-

Smirnov Test showed “Asymp. Sig. (2-tailed)” is

0,056. It results more than α is 0,05, so sample data

distribute normally.

130

Waryati, S. and Sari, A.

The Determinant of the Debt Policy of the Firm.

DOI: 10.5220/0009879401300133

In Proceedings of the 2nd International Conference on Applied Science, Engineering and Social Sciences (ICASESS 2019), pages 130-133

ISBN: 978-989-758-452-7

2.3 Multi Collinearity Test

Each of Tolerance and Variance Inﬂation Factor (VIF)

variables shows all independent variable have Toler-

ance more than 0,1 while VIF less than 10 Thus, there

is no multi collinearity for this regression model.

2.4 Autocorrelation Test

The result of this test is 2,228 for D-W. Determined α

is 5% and all sample is 35 in D-W table, then obtain-

ing du is 1,6528 and dl is 1,2833. Based on Decision

Taking table whether there is autocorrelation or not,

D-W or d is between du and 4-du is 1,6528 ≤ 2,228

≤ 2,3472. Thus, there is no autocorrelation for this

regression model.

2.4.1 Heteroscedasticity Test

The Glejser test shows there is no signiﬁcant inde-

pendent variable (lesser than 0,05) which affects de-

pendent variable is absolute residual (abs res). This

can be seen from its each signiﬁcance (Sig) variable

is more than α is 0,05. Thus, there is no heteroscedas-

ticity for this regression model.

2.4.2 Multiple Linear Regression Analysis

Table 1: Multiple Linear Regression Analysis.

Mod

Unstandar

dized

Coefﬁ-

cients

Stan

dard

ized

Coef

ﬁcie

nts

t Sig. Colline

arity

Statis-

tics

B Std.

Er-

ror

Beta Toler

ance

VIF

Cons

tant

1,3

,341 -

3,8

,001

FCF -

,038

,039 -

,086

,971

,339 ,970 1,0

INS

,007 ,046 ,014 ,161 ,873 ,955 1,0

LEV 5,2

,535 ,875 9,9

,000 ,981 1,0

Data processed Based on the result, it obtained

this regression equation as shown below:

DER = −1, 309–0, 038FCF + 0, 007INST +

5, 298LEV + ε (1)

The determination coefﬁcient test result shows

0,74, it means that free variables such as FCF, INST,

and LEF affect debt policy variable up to 74% while

the rest is 26% that affected by other factors which is

not studied in this research.

2.5 F Test (Uji Goodness of Fit Test)

The result of goodness of ﬁt model reveals free cash

ﬂow inﬂuence, institutional policy, and leverage si-

multaneously toward debt policy. Counted F is 33,182

while the signiﬁcance is 0,000 so it is lesser than

0,05.Therefore, this model is recommended to pre-

dict free cash ﬂow inﬂuence, institutional policy, and

leverage simultaneously affect debt policy (DER) on

insurance company listed in Bursa Efek Indonesia

during period 2015- 2017.

2.6 T-test (Partial Test)

Based on the test, it obtained the constant is nega-

tive 1,309 which is signiﬁcant due to the signiﬁcance

is 0,001 lesser than 0,05, FCF affects negative 0,038

insigniﬁcant against company value which is 0,339

more than 0,05. INST affects positive 0,007 insigniﬁ-

cant against company value which is 0,873 more than

0.05. LEV affects positive 5.298 signiﬁcant toward

company value which is 0,000 lesser than 0,05.

3 DISCUSSION

3.1 Free Cash Flow Effect toward Debt

Policy

First Hypotesis states that the indication of negative

effect between fee cash ﬂow and debt policy. This

hypotesis is unsupported by the research result. The

free cash ﬂow (FCF) test obtained negative and in-

signiﬁcant effect toward debt policy. The coefﬁcient

is negative 0,038 with signiﬁcant is 0,339 more than

0,05. Thus, free cash ﬂow hypothesis with negative

and signiﬁcant effect is unsupported statistically.

However, the result of this research is accordance

with Faisal (2004). The result shows that ﬁrm with

high free cash ﬂow will be capable to pay off high

debt. So sufﬁcient free cash ﬂow is expected to affect

the debt policy. Provided free cash ﬂow reﬂects the

ability of the ﬁrm to pay its debt. The ﬁrm pays the

debt by using free cash ﬂow so if a ﬁrm expects high

debt, it should provide sufﬁcient free cash ﬂow for

debt payment. The more free cash ﬂow provided, the

The Determinant of the Debt Policy of the Firm

131

more a ﬁrm is able to pay it, so a ﬁrm is expected to

use high debt.

What made the acceptance of the ﬁrst hypothesis

in this research is its free cash ﬂow probability which

is shown that the ﬁrm is less survived, which means

that the ﬁrm is less active in applying free cash ﬂow

maximally, or it is less aggressive in searching for

proﬁtable projects so the debt is used minimally.

3.2 Institutional Ownership Effect

toward Debt Policy

The second hypothesis states that the ownership in-

stitutional has negative effect toward debt policy. It

is supported by the research result. The institutional

policy (INST) test indicated insigniﬁcant positive ef-

fect toward debt policy with coefﬁcient positive 0,007

and signiﬁcant 0,873 more than 0,05. Thus, signif-

icant negative institutional ownership is unsupported

statistically. This result is reconﬁrmed by (KARTI-

NAH, 2006) that despite positive institutional owner-

ship toward debt policy, it is still insigniﬁcant. This

research result is research by Jensen and Meckling

(1976) in (Nabela, 2012) states that the ownership is

more higher, causes stronger external control of the

ﬁrm, so it can diminish agency costs. The higher the

ownership, the lower the operational debt. It is caused

by supervision of other institutions on ﬁrm perfor-

mance such as bank and insurance company. If the

ﬁrm spends big amount debt for failure possibility

high risk project, the stockholders will sell out their

stocks.

3.3 Leverage Effect toward Debt Policy

Third hypothesis states that leverage negative effects

toward debt policy. This hypothesis is unsupported

by the research result. Leverage (LEV) test is sig-

niﬁcant positive effect proof toward debt policy. The

coefﬁcient is positive 9,903 with signiﬁcance is 0,000

lesser than 0,05. Thus, hypothesis on signiﬁcant neg-

ative effect leverage is unsupported statistically.

The research result is opposite to the third hypoth-

esis that a company with low operating leverage is

able to enlarge ﬁnancial leverage. Due to both inter-

action can affect net proﬁt, so if it is in low operating

leverage, it will increase the debt, on the other hand

if it is in high level, debt is unnecessary. It relates to

pecking order theory that in company internal ﬁnance

is a priority if the operational proﬁt can cover its op-

erational activity.

Factor that the third hypothesis is not supported is

shown by high operating leverage that will describe

high sensitivity of operational proﬁt against sale ﬂuc-

tuation. The higher operating leverage, the more

proﬁt the more sensitive proﬁt against the ﬂuctuation,

so in purpose of gaining high proﬁt, the company will

expand the sale in all way. This causes they will spend

external source of funds instead of debt policy as their

investment ﬁnance source.

4 CONCLUSIONS, RESEARCH

LIMITATION, SUGGESTION

4.1 Conclusion

Cash ﬂow, institutional ownership and leverage are

able to affect debt policy up to 74%. It is reﬂected

from adjusted R2 up to 0,740 while the rest is 26%

affected by other factors which are not studied in this

research.

Free cash ﬂow, institutional ownership and lever-

age have signiﬁcant effect toward debt policysimul-

taneously. It is shown that counted equals to 33,182

with signiﬁcance 0,000 lesser than α equals to 0,05.

Free cash ﬂow (FCF) has no negative effect and

no signiﬁcance toward debt policy on insurance com-

pany in BEI (Indonesia Stock Exchange) during pe-

riod 2015–2017. It is shown that counted t equals to

–0,971 with signiﬁcance 0,339 more than 0,05.

Institutional Ownership (INST) has no positive ef-

fect and no signiﬁcance toward debt policy on insur-

ance company in BEI (Indonesia Stock Exchange)

during period 2015–2017. It is shown by counted t

equals to 0,161 with 0,873 more than 0,05.

Leverage (LEV) has positive signiﬁcance toward

debt policy on insurance company in BEI during pe-

riod 2015- 2017. It is shown that counted t equals to

9,903 with signiﬁcance 0,000 lesser than 0,05.

Based on the analysed result, the most dominant

effect variable toward debt policy is leverage com-

pared to the other two variables. Due to leverage

has counted t equals to positive 9,903 at most. Thus,

leverage is the most affecting factor on debt policy.

4.2 Limitations of Research

This research has limitations such as : three years

relatively short observation period only by researcher

during 2015-2017, so it less reﬂects long term condi-

tion. They implemented three independent variables

only, which actually there are still many variables can

affect debt policy.

ICASESS 2019 - International Conference on Applied Science, Engineering and Social Science

132

4.3 Suggestion

An investor needs to notice the amount of debt policy

and some affecting factors such as free cash ﬂow, in-

stitutional ownership and leverage before making de-

cision for investing. A manager should consider some

factors which are affecting debt policy in determin-

ing the amount of fund, both from the debt and own

money. Hopefully, the funding is able to cost opera-

tional activity and company investment, also creating

an optimum debt policy. To following researchers:

hopefully, there will be more variables which possibly

affect the debt policy since in this research, indepen-

dent variable has only explained the dependent one up

to 74%.

REFERENCES

Geovana, R. S. (2015). Statistika induktif untuk ekonomi

dan bisnis.

KARTINAH, Prof.Dr. Eduardus Tandelilin, M. (2006).

Simultanitas antara kepemilikan insider, kebijakan

utang, kebijakan dividen, dan kepemilikan institu-

sional, serta efek bisnis keluarga dalam masalah

agensi.

Lucyanda, J. et al. (2012). Pengaruh free cash ﬂow dan

struktur kempemilikan terhadap dividend payout ra-

tio. Jurnal dinamika akuntansi, 4(2).

Nabela, Y. (2012). Pengaruh Kepemilikan Institusional,

Kebijakan Dividen dan Proﬁtabilitas Terhadap Kebi-

jakan Hutang pada Perusahaan Properti dan Real Es-

tate di Bursa Efek Indonesia. PhD thesis, Universitas

Negeri Padang.

Nuraina, E. (2010). Pengaruh kepemilikan institusional dan

ukuran perusahaan terhadap kebijakan hutang dan

nilai perusahaan (Studi Pada Perusahaan Manufak-

tur yang Tercatat di BEI). PhD thesis, UNS (Sebelas

Maret University).

The Determinant of the Debt Policy of the Firm

133