Trade-Off and Pecking Order Theory of Capital Structure in Indonesia: Systematic Literature Review

Abstract

This study aims to determine the optimal capital structure that increases firm value, which leads to trade-off theory and pecking order theory in Indonesia with a research period of 20 years.

Research Methodology, Systematic Literature Review. With inclusion restrictions obtained 140 articles, from data from Google Scholar 1,678 articles from 2000 to 2020. We received 114 studies focused on Trade-off Theory and Pecking Order Theory listed on the Indonesia Stock Exchange. We collect data from various national, international journal sites and those indexed by Sinta and Scopus. The data were re-selected for exclusion with notable exceptions, resulting in 12 relevant articles.

The study results indicate that there are differences in management in determining the capital structure in Indonesia. There are also differences in empirical studies of the two theories. It is also known that several factors influence the capital structure in determining the TOT or POT by financial managers in Indonesia.

The conclusion is obtained that a financial manager will choose the trade-off theory when considering the optimal capital structure. When a family manages, the company tends to select the pecking order theory. Recommendations for future researchers to focus on managerial ownership refer to more in-depth agency theory.