Prague Economic Papers 2008, 17(2):143-156 | DOI: 10.18267/j.pep.326

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

Fauziah Md. Taib1, Anton Abdulbasah Kamil2, Augustinus Setiawan1
1 School of Management - University Sains Malaysia, 11800, USM, Penang, Malaysia.
2 School of Distance Education - University Sains Malaysia, 11800, USM, Penang, Malaysia (anton@usm.my).

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.

Keywords: moral hazard, debt-equity choice, asset substitution problem, Indonesian companies
JEL classification: C23, O53

Published: January 1, 2008  Show citation

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Taib, F.M., Kamil, A.A., & Setiawan, A. (2008). Non-linear dynamic panel data analysis for debt-equity choice and its impact on moral hazard problems. Prague Economic Papers, 17(2), 143-156. doi: 10.18267/j.pep.326
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