Capital Structure or Debt Tax Shielding Ratio? An Empirical Investigation for Indonesia Firms

Abstract

So far research on capital Structure choice has yielded little support for the tradeoff theory of capital structure choice.Berens and Cunny (1995) argue that most of the existing research is not suited for investigating the relevance of this theory, as firms can avoid tax payments completely without being fully debt financed. It would therefore be more appropriate to consider the extent to whichfirms avoid taxes, their so-called debt tax shielding ratio, rather than their leverage. It could then also be argued that the theoretical determinants of capital structure choice should explain firms' debt tax shielding ratios. In this thesis writer investigate whether the tradeoff theory can explain the variance in debt tax shielding by Indonesian Firms. The results provide supports for the tradeoff theory than traditional research on the determinants of capital structure.