Non-linear dynamic panel data analysis for debt-equity choice and its impact on moral hazard problems

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Taib F. M., KAMIL A. A., Setiawan A.

Prague Economic Papers, no.2, pp.143-156, 2008 (Scopus) identifier

  • Publication Type: Article / Article
  • Publication Date: 2008
  • Doi Number: 10.18267/j.pep.326
  • Journal Name: Prague Economic Papers
  • Journal Indexes: Scopus
  • Page Numbers: pp.143-156
  • Keywords: Asset substitution problem, Debt-equity choice, Indonesian companies, Moral hazard
  • Istanbul Gelisim University Affiliated: No

Abstract

Moral hazard agency problems take place when risky debt is issued. The dominant shareholders have opportunities to make decisions which effect wealth transfer. In several recent theories, debt-equity choice, which deals with agency problems assumes that financing and investment decisions are separable. These studies have been criticized due to the fact that both decisions are interdependent. The purpose of the presented paper is to test empirically the moral hazard problem of debt-equity choice in Indonesia. This study provides evidence that the level of debt is not secured by the sufficient collateral and is also not supported by growth opportunities. It seems that Indonesian companies use debt also to finance operations and not only for real investment.