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Transcript of Facm01-Bank Loan and the Agency Costs of Debt in Indonesia_
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The1stAccountingConference
FacultyofEconomicsUniversitasIndonesia
Depok,79November2007
BANK LOAN AND THE AGENCY COSTS OF DEBT IN INDONESIA; FREE
CASH FLOWS AND MANAGERIAL PERKS PERSPECTIVE
RANDI MILZA
NIKI LUKVIARMAN
Universitas Andalas
Abstract
This research provides a survey to examine the recent conditions on the agency
costs of debt problems in the Indonesian listed firms. Researcher structure the
existing research around two perspectives: (1) What are the impact of bank loan to
the firms free cash flows? 2) Are the firms managers consumed perks from the
bank loan? The evidence constituted that the amount of free cash flows and perks
are increase significantly as the addition of the loans. This study assumed that firms
managers in Indonesia, up to now, are still having a tendency to do overinvestment
but do not rely on firms size to do it. It is different as what some literature stated.
The firms manager also consumed perks, but the consuming of perks itself does not
rely on the age, assets structure, and the size of the firms. Those findings indicated
the existence of agency costs of debt within firms, which bear all the costs to the
creditors (banks). With the lack monitoring function performed mostly by
Indonesian banks, make those findings also suggest that debt governance practices
adopted in Indonesia is still weak in nature.
Keywords:bank loan, agency costs of debt, free cash flows, and managerial perks
1. Introduction
At the year of 1988, the Indonesian government was established some
liberalisation and deregulation law in banking industry where the restriction to open
new bank was reduced significantly (Hall and Mustika, 2003). The effect of this
policy was the increased in the total amount of bank rapidly in the industry. But the
other side, this financial sector reforms was not accompanied by strict
implementation of rules and regulations (Nasution, 1999). According to Nasution
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(1999), the regulators and bank managers also did not have sufficient personnel to
supervise and examine the fast-growing number and expanding powers of financial
institutions. As such, the drawbacks of this policy was also harmfulBy early 1998 in Indonesia, it was beginning to become clear either that the
banking system was in much worse condition than originally thought, or it had
deteriorated much more than anticipated. Many banks were closed, and all of the
large private banks were taken over by the government (some maintaining a minority
shareholding on the part of the original owners). McLeod (2002) convinced that the
total cost to the government of reimbursing Bank Indonesia for its liquidity support,
covering the guarantee of banks liabilities, and restoring capital adequacy ratios to
8% was estimated at 15% of GDP. These banking problems come from the bad loans
and suggest that the governance role of debt doesnt function in Indonesia.
In the term of debt financing, bank may actually obtain private information
about the firms during the process of negotiating the lending arrangements. Because
of banks lend funds with the full expectation of being repaid by the debtors, a
significant loan commitment represents an implied audit of the firm about its
creditworthiness; hence, a banker serves as an external auditor, passing judgment on
the firm's present condition and future prospects for loan repayment. The more
exclusive lender-borrower relationship increases the bargaining power of the bank
(Diamond, 1984; James, 1987; Lummer and McConnel, 1989; Boot and Thakor,
2000).
The cases of bad governance on the bank loan in Indonesia then arising so
many question marks for several people. Financial intermediaries are supposed to
mitigate some deleterious effects of debt financing by monitoring their borrowers
(Lookman, 2005). However, Kurniawan and Indriantoro (2000) constituted that in
the Indonesian banking industry, for example, loans were channelled with little
consideration for creditworthiness, and later prove to be uncollectible. Some lending
was given to politically connected firms and many loans were secured with assets
that turned out to be worth much less than their originally assessed amounts and
many others were not secured at all.
Chiu and Joh (2004) convinced that there are three reasons for financial
institutions giving loans to financially troubled firms. Loans could be given because
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of crony lending (government protections), related lending (firms affiliations with the
bank), and because of poor governance of financial institutions itself. Previously,
Rajan and Zingales (1998) argue that much of the collapse of the Asian tigers in1997 and 1998 was due to connected lending where lenders continuing to extend
credit to distressed borrowers rather than cutting of bad credits early and forcing
restructuring before problems grew out of control. It might be that there are no
differences for those conditions in Indonesia.
Pattrick (2001) stressed that all growing companies in Indonesia, large and
small, listed and unlisted, private sector and state owned enterprises, borrow from
banks to the extent possible, arising the problem of bank monitoring function become
the important issue. These findings also suggest that the implementation of a sound
corporate governance practice is at least as important for state-owned enterprises and
private listed firms.
Much of the previous literature that investigates the effect of various
corporate governance mechanism focuses only on equity financing (McConnell and
Serves, 1990; Yermack 1996; Karpoff, Malatesta and Walkling, 1996; Gompers,
Ishii and Metrick, 2003). However, the debt financing is also have the same
interesting and challenges of problems to make a research. Fulghieri and Suominen
(2006) show that corporate governance problem in the equity market interacts in an
essential way with the moral hazard problem in the debt market.
This research is then developed on the basis of previous research by Tian
(2003) which study about the managerial agency cost of debt between banks and
firms in the context of dual government ownership in China. The present study
expand that research without limits its scope on the dual government ownership
context, but the governance of debt as a whole including private listed firms. With
the same method, and by using managerial perks and free cash flows as proxies to
measured the managerial agency cost of debt, the researcher test those findings in the
Indonesian evidence.
This research then continued with the questions, Is the condition of the
managerial agency costs of debt still exists within companies in Indonesia?
Researcher then studies the associations of leverage especially bank loan and its
impact on managerial agency costs of debt that proxies by managerial perks and free
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cash flows. Some previous literature proposed that this problem is highly related to
the agency costs theory between firms, which as the party who need financing, and
financial institution (bank) as the party who gives financing.The purposes of this research is to find out the recent conditions of the
agency costs of debt problems, whether still exists or not, in the firms managerial-
perks and free cash flows perspective. Researcher then defined this objective in the
scope of its debt governance. Thus this study then becomes a positive reference to
firms and banks in posing a judgment of a sound corporate governance practices
recently, especially on the bank loan cases in Indonesia.
The remainder of the paper is structured as follows. Section 2 lays out main
theories and hypothesis. Section 3 describes the sample and the variables used.
Section 4 describes the research results. Sections 5 report conclusion, implications,
also limitation and suggestion of this research.
2. Theories and Hypothesis
2.1 Corporate Governance on Financial Context
There has been reasonable consensus among practitioners and academicians
about the importance of a sound corporate governance concept in the economy. In
Indonesia, many people known that the concept for corporate governance is become
popular when economic crises hit the country in 1997/98. Some arguments to be
considered that the main reason of this crises was because of the bad governance in
many aspects on the nation-side. The reason is, many economic activity and policy
has offsetting the rule of conduct in their implementation compared to which it have
been settled before.
In Indonesia, bank loan has become the major sources of external financing
almost for all companies, although the development of stock and bond markets is
also a high long term priority (Pattrick, 2001). Accordingly, banks will be in a
position to play a significant corporate governance role by monitoring business client
performance and management behaviours.
Research conducted by Facio, Lang, and Young (2001), for European cases,
confirms that capital market institutions are effective, make the external suppliers of
capital (i) dominate decisions on leverage amongst tightly-affiliated corporations,
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and (ii) anticipate that debt will facilitate expropriation. Otherwise for Asia, they
confirms that capital market institutions are ineffective, so that controlling
shareholders (i) dominate decisions on leverage, amongst loosely-affiliatedcorporations, and (ii) exploit this to increase the leverage of corporations more
vulnerable to expropriation, presumably to acquire more resources to expropriate.
Shleifer and Vishny (1997) define corporate governance as the ways through
which suppliers of capital to corporations assure themselves of getting a return on
their investment. In a more investment related definition, corporate governance is to
a certain extent set of mechanism through which outside investor protect themselves
against expropriation by the insiders, which are both managers and shareholders (La
Porta et al., 2000).
2.2 Agency Costs of Debt
Previously, Jensen & Meckling (1976) define agency relationship and
identify the agency costs. Agency relationship is a contract under which one or
more persons (principal) engage another person (agent) to perform some service on
their behalf, which involves delegating some decision-making authority to the
agent. The principle then take the risk after delegating their authority to the agent
since some agents interests may not in conform to the principle. This agency costs
then include monitoring expenditures by the principal such as auditing, budgeting,
control and compensation systems, bonding expenditures by the agent and residual
loss due to divergence of interests between the principal and the agent.
Past research, including Grossman and Hart (1982), Jensen (1986), Stulz
(1990), Hart and Moore (1995), Rajan and Winton (1995), and Stulz (2000), has
suggested leverage and debt maturity structure as effective ways to mitigate the
agency problem between shareholders and managers. The intuition is that leverage,
and particularly short-term debt, can reduce discretionary funds and subject
managers to the scrutiny of the financial market and the threat of default, effectively
curbing self-serving behaviour by managers (Harford, Li, and Zhao 2006).
However, as the firms raise an external financing as a way to discipline their
managers, another type of problems arise. Insider of firms, that are managers and
shareholders, cannot convinced the outsiders, that is the creditors (debtholders)
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easily, since there also an information asymmetery exists between those parties. It is
because creditors do not know the exact and true conditions about the firm within
now and future. This problems then make the creditors doubt about the debtgovernance of their loans by the firms, thus moral hazard also arise.
In the firms internal perspective, managers are not the perfect agent for
shareholders because they may adopt a non-value-maximizing behaviour and engage
in self-serving activities such as empire building and perquisite consumption at the
expense of shareholders. Since they contribute through their human capital,
managers have a tendency to avoid less risky project which in turn would give a
higher return to the firm. Moreover, Facio, Lang, and Young (2001) also stated that
default on corporate debt might not affect the professional managers net worth, but
would certainly devastate his reputation and career. This would not be a concern for
the controlling shareholder of a corporate group, who employs himself as top
manager and can borrow through a group affiliate from a group bank. According to
Boubakri and Ghouma (2006), managers also favour to engage in short term projects
rather than projects that ensure a continuity of the firm in the long run. Thus from the
creditors point of view this type of conflict would probably lead to default of their
principle and interest payment, and that is another rationality encourages creditors to
charge larger yields (costs) for firms with less disciplined managers.
Beyond the managers opportunistic behaviour, creditors also need to worry
about being expropriated by the owner (shareholders). Still with Boubakri and
Ghouma (2006), stockholders, especially controlling shareholders, could be induced
to operate wealth transfers from debt holders in their favour, especially by
undertaking riskier projects that are rewarding to shareholders but costly to debt
holders. According to the option theory, shareholders possess a call option on the
assets of the firm. The riskier are these assets, the more valuable is their option.
Obviously, debt claimants will bear all the cost, while shareholders capture most of
the gain if the investment does well. Such situation cannot be completely tackled by
the contract provision, thus arising the term we known as agency cost of debt.
Based on the research conducted by Tian (2003) about the agency cost of
debt between banks and firms in China in the context of dual government ownership,
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this study expand that research without limits its scope on the dual government
context, but the governance of debt as a whole including private firms.
The 1998s monetary crises showed that there is no differences on reality inIndonesia, which is from State Owned Enterprises (SOE) or private listed firms, that
have the best governance on bank loan. The two of them showed the same lack of
governance on bank debt. Both of them was hit worsely by the crises, each have
received loans not only from government bank but also from private bank, each have
failed on their project investment, and each have great amount of liability to paid that
loan.
2.3 Hypothesis Development
Previously, Kim and Sorensen (1986) suggest that the agency cost of debt is
more significant for those firms whose managers own a small portion of equity than
for those firms whose managers own a significant portion of equity because the
former group is more likely to make suboptimal investment decisions than the latter
group. Largely apart from this shareholder-focused corporate governance literature,
several finance scholars have pursued another line of research exploring financial
intermediation and its externalities that might affect other financial claimants (see
Datta, Iskandar-Datta, and Patel 1999, and Klock, Mansi, and Maxwell 2005).
Durnev and Kim (2003) also provide another theoretical model, and
empirically test the relationship between the financial characteristics of a firm and
corporate governance. They show that firms with good investment opportunity,
higher sales growth rates and higher dependency on external financing would
maintain a better corporate governance not to lose those good investment
opportunities.
2.3.1 Free Cash Flows
There are three parties that have interest on free cash flows. The first party
are managers. According to Tian (2003), the way some managers to spend free cash
for their own benefit is through over expanding corporate operations or empire-
building, fits the interest of managers at the cost of shareholders. Not only
managers, the shareholders also have interest in this cash flow in term of dividend
paid. Shepherd, Tung, and Yoon (2007) confirms that bank is another party who
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have the same interest about free cash flow. The importance of free cash flows to
bank is in maintaining the sustainability payment of their interest and loan principle.
Since the main focus of this research is on firms managers, then this researchjust look at the impact of free cash flows on managerial agency costs cluster.
Previously, some literature including Tian (2003), found that an increase of bank
loans increases the size of free cash flows that will lead firms to overinvestment
problems because of managers expropriations.
Dittmar and Smith (2005) then studied how good governance improves the
value of cash reserves. They find that a well governed firm has its excess resources
better fenced in, and that firms with poor corporate governance dissipate excess
cash reserves more quickly on less profitable investments than those with good
governance.
Grossman and Hart (1980) also Cheng and Lin (2006) proposed that debt is a
disciplinary device that may be used to reduce the agency costs of free cash flow.
Sheperd, Tung, and Yoon (2007) found there are some ways for creditors (bank) in
monitoring the firms. First, mandatory regular interest and principal payments on the
loan reduce the amount of free cash. Second, bank loans often contain an excess cash
covenant, which explicitly limits the borrower firms cash on hand by requiring that
any excess be used to pay down the bank debt. Third, the lender typically requires
the borrower firm to maintain its deposit accounts with the lender. This enables the
lender to monitor continuously the firms cash levels and uses of cash.
We can conclude that the above condition will only operated significantly if
bank monitoring is acceptable, exactly the same as Sheperd, Tung, and Yoon (2007)
stated. However, since the bank monitoring is not so well in Indonesia (conclude
from Nasution, 1999), then the function of debt to reduces the agency costs of free
cash flows would not be the same.
H1= there is significant associations between leverage and free cash flows
2.3.2 The Perks
In the process of searching the literatures for this research, no many bases to
get supporting findings about managerial perks can be found. Many people observe
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perks, but very few of them observe the associations between leverages and
managerial perks.
From all of the view findings, this recent study agreed with Tian (2003), thatproposed perks will increase respectively in the firms if having more leverage by the
addition of the bank loan on the weak governance system.
Another supportive finding also suggest by Jensen and Meckling (1976) long
time ago, constitute that managers of growing firms that was financed from outside
are less careful with peoples money. Indirectly, it indicated the sensitivity of
associations between leverage (bank loan) and managerial perks.
Different perspective was given by some people. (Grossman and Hart, 1982)
constitute that the use of debt increases the probability of bankruptcy and job loss.
This additional risk may further motivate managers to decrease their consumption of
perks and increase their efficiency. Laura, Lin, and Shift(1993) also proposed that if
bank monitoring were effective then managerial perks could be reduce because debt
constraints the action of managers, instead the creditors itself do not play an active
role in the governance of the corporations.
H2= there is significant associations between bank loan and perks
3. Data and Summary Statistic
3.1 Data Collection Method
The data used in this research are secondary data, collected from several
sources included Indonesian Capital Market Directory (ICMD), Company Audited
Financial Report, and www.jsx.com. Since there are some data that can not be
collected because of some reasons, then the choice of firms selected was based on the
most efficient data available.
The method of data collection is done by using pooling data method and
research sample is done by purposive sampling method based on some given criteria.
The data then merged to construct my final sample, consists of operating income,
interest expense on bank loan, current tax, dividends, book value of firms assets,
administration costs, sales, long-term bank loan, short-term bank loan, and total
assets.
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3.2 Data Construction
The population of this research is all of the firms listed in Jakarta Stock
Exchange (JSX) in a period of 2003 to 2005, excluded firms operated in Banking,Credit Agencies Other Than Bank, and Security Insurances. Researcher assumes that
these type of firms are regulated and also because their levarage cannot be
interpreted in the same manner as for industrial firms.
The sample of this research is all the firms listed continually from 2003 until
2005 in JSX, after excluded firms operated in Banking, Credit Agencies Other Than
Bank, and Security Insurances. The sample then selected based on some following
criteria: (i) Firms must be listed in JSX continually in a period of 2003 to 2005 with a
complete summary of financial report and published it in Indonesia Capital Market
Directory (ICMD), (ii) The firms must also published its annual report in a period of
2003 and 2005 which is audited by independent auditor, (iii) The firms audited
annual report must clearly defined interest expense on bank loan explicitely. In my
opinion, it is important to get this account clearly defined to avoid some biases since
the some lack of informations given in the annual report if the data are calculated
mannually (some of this account is totaled with other kinds of interest expenses in a
annual report with no clear information about each rate)
3.3. Research Model
The statistical analysis of this research is divided into two parts; classical
assumption testing and hyphotesis testing. Researcher then have to changes the
regression model into natural logarithm form to get proper sufficiency in classical
assumption tests but in reading the results researcher have to change the results into
exponential forms. This research is also conduct a test to make sure that there is no
correlation between the two dependent variable to prevent some statistical biases.
3.3.1 Dependent variable
3.3.1.1 Managerial Perks
There are some definitions of perks. Tian (2003) stated that managerial perks
are the hidden income of management team. Bebchuk and Jackson (2005) stated that
hidden compensation takes an inefficient form that management would not choose to
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pursue out of their own pockets if they were compensated directly with cash. Thus
the abuse of perks imposes costs on the firm and ultimately its owners.
Rajan and Wulf (2007) defined perks as form of non-monetary compensationoffered to selected employees and also pointed out that perks is not strictly necessary
for the accomplishment of the employees duties. The examples of perks are first-
class air travel, club membership, company car, executive dining room, home
security systems, physical examination, telephone and fax, also seminary tickets, and
many more.
In the company point of view, perks actually could be treated in a positive
and negative manner. Perks in the negative manners is proposed by Jansen and
Meckling (1976), Grossman and Hart (1980), and Jensen (1986). They stated that
there a way for manages to misappropriate the firms surplus that firms generated.
Managers can do so because perks are difficult to observe by investor and investor
itself are usually not in physical contact with management, so they cannot see the
extent of perks consumption for themselves.
While perks is generally term in the negative manners, there are also some
positive outcome of the given perks. Still with Rajan and Wulf (2007), perks in
someway help managers in performing their duties, indirectly they aid productivity
of the managers even not as a critical parts of jobs duty being done. For example,
firms will benefit in negotiation if their managers in fresh condition after travelling in
first-class air travel than arriving tired and jaded with the economic-class air travel.
In this research, following Tian (2003), I measured perks as;
Equation 1
Perks =Adm.cost
Sales
Most perquisites for managers are not explicitly reported in the annual
reports, but they inflate the accounting item of administration costs. Administration
costs records the administration expenditures in organizing and managing corporate
operation. It includes the expense of the management team and the costs that should
be born by the company as a whole, such as corporate cars, travelling expenses,
entertainment expenses and other services bills (concluded from Tian, 2003).
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3.3.1.2 Free Cash Flows
Free Cash Flows terms were firstly proposed by Jensen (1986). Free cash
flows is the cash flows that are at the disposal of managers after valuable/efficientinvestment. According to Jensen (1986), managers could maximize objectives which
are not common in the stakeholders interest; through increasing the firms size that
will boosts his status, pay, and power in the company. Later on, managers then may
still take on more investment projects at the expense of shareholders, increasing firm
size but at the cost of lower net present value. However, according to Tian (2003),
with the legal bidding of repayment of interest and loan principle, debt function will
force out free cash flows by imposing rules and restriction on management.
Consequently, this will explain why free cash flows and investment is highly related.
In some estimation, Shepherd, Tung, and Yoon (2007) also include a measure
of free cash flows as a proxy for managerial agency costs. Jensen (1986) asserts that
free cash flow is the best measure of the discretionary funds and thus the best proxy
for agency conflicts
In this research, following Shepherd, Tung, and Yoon (2007), the researcher
measured these free cash flows (FCF) as:
Equation 2
FCF = oprt. income-(interest exp. on bank loan+(income taxes-changes in deffered taxes)+dividends)
BV. of firms assets
3.3.2 Independent Variable
Financial leverage is the liabilities of the firm and indicated the probabiltity
of financial distress, which may influences the governance role of debt by the firms.
Since the purposes of this research is to find out about the condition of managerial
agency costs of debt, esepecially bank loan in Indonesia, then following the criteria
the formula of leverage used is the debt from bank loan.
Equation 3
Leverage =Total Bank Loan
Total Assets
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3.3.3 Control Variable
This study use three items defined as control variable, that is firms size, firms
age, and assets structure. These three items must be controlled to minimize its effecton statistical results between indepedent variable and dependent variable.
1. Firms SizeIn this concepts, firms will tend to increase their debt level since the rapid
growth of the firms press more sources of financing. Bigger firms will easy access
the capital market because they have flexibility and ability to get sources of financing
(in term of symmetric information). Bernanke et al. (1994) present strong empirical
evidence that the severity of the agency cost problem faced by firms depends on firm
size. Firm size is measured by taking the logarithm of total assets of each year. This
study tends to use total assets in order to reduces the multicolineriality from this ratio
with administration costs per sales (perks).
2. Firms AgeFirm age relates to changes caused by the firm life cycle changes (Smith,
Mitchel, and Summer, 1985). Berger and Udell (1995) argue that firm age is
associated with the degree of information asymmetry. The degree of information
asymmetry is likely to be more severe in younger firms since they have limited
financial records. Firm age is measured by the number of years between the
observation year and firms founding year.
3. Assets StructureThe assets structure or the assets tangibility influences firms growth and
corporate valuation (Vilasuso and Minkler, 2001). The scales of managerial agency
costs probably systematically vary with the structure of corporate assets. Rajan and
Zingales (1995), argue that fixed assets are easier to collateralize, and so reduce the
agency costs of debt. The assets tangibility is measured as total fixed assets divided
by total assets.
Examining the relations between financial leverage and mangerial agency
costs of debt, the basic model to estimates is (Tian 2003):
Equation 4
Managerial Agency Costs of Debt = C+*Debt+ *Firms Characters +
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Figure 1. Model of Variable Definiton
Independent Variable
Dependent VariableLeverage
Control Variable
4. Results
The most important thing before conducting the statistical test for this
research is to convinces that there is no correlation between the two dependent
variables to prevent the statistical results bias.
Researcher then observed the relationship between free cash flows and perks
( Jensen and Meckling (1976) previously proposed that free cash flows caused
perks). From table 1, the Pearson Correlation value for free cash flows and perks
each is 0,30 which is > than (0,05). For that reason, this study assumed that there
is no correlation between the two dependent variables.
My findings was in line with Rajan and Wulf (2007), constituted that there is
no causal relationship between free cash flow and perks. In my opinion, supported
also by some previous literature, free cash flows is higly related with overinvestment
made by the managers, instead of with perks.
4.1 Results for Free Cash Fows
Some previous literature proposed that managers, shareholders, and creditors
have the same interest on the free cash flows. Shareholders want this free cash flow
in terms of dividend payment, managers could miss-use this free cash flow through
overinvestment to build their empire-building, and creditors want these free cash
flows to sustain the payment of interest and principle on their loans.
Grossman and Hart (1980) also Chen and Lin (2006) suggest that indirectly
in nature, more debt given by bank, will increase the total amount of free cash flows
that could be miss-used by the firms. However, Sheperd, Tung, and Yoon (2007)
Assets Structre
Firms Size
Firms Age
Perks
Free Cash Flows Managerial
Agency Costs ofDebt
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constituted that if banks can monitor continuously the firms cash level and uses of
cash, then the amount of free cash flows can be reduced. Reducing the amount of
free cash flows make the agency problems arising by it would not be a matter.Using statistical F-test, this research found a significant positive association
between leverage, tangibility, and firms age, if act as a group, to the free cash flows
amounts. From table 14, the F value is 7,784, and the Sig value is 0,000, which is <
(0,05). It means that the influence of independent variables (leverage, age,
tangibility, and LN assets), if act as a groups, is significant towards the dependent
variables (LN_Free Cash Flows).
Focusing more on leverage through statistical t-test, from table 16, after
analysing the result, statistical equation model that can be made is:
Equation 5
LN_FCF = -2,062 -1,761 Leverage 0,702 Tangibility + 0,018 Age +
Table 16 reports a positive influence between the leverage and free cash
flows after changing the results model into exponential forms.
A 0,1 increases in firms leverage increases the free cash flows amounts up to
0,172. Other things being equal (that are assets tangibility and firms age), a firm
which given more bank loan tends to have more free cash flows, thus increasing the
tendency to do overinvestment. This findings was in line with Jensen (1986),
Grossman and Hart (1980), Tian (2003), and also Chen and Lin (2006), suggesting
that more debt given by bank, will increase the total amount of fee cash flows that
could be misused by the firms.
The increased of free cash flows amount from debt financing also suggesting
a bad monitoring function performed by the banks in Indonesia, at least in the same
period of my sample. It is because; bank through their monitoring function in nature
should reduce the amount of free cash flows raised from their loans (Sheperd, Tung,
and Yoon, 2007). Again this condition doesnt happen in Indonesia.
Dittmar and Smith (2005) previously suggest that a good governance firms
better fenced their free cash flows compare to weak governance firms which have
more excess cash reserves. This research found that many Indonesian firms have
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more free cash flows if added more leverage through bank loan, thus based on
Dittmar and Smith (2005), suggesting the researcher to concludes, that many
Indonesian firms itself do not have proper governance on their debt.From table 1, this recent study also found that firms with sufficient period in
their operation (long age firms), still have amount of free cash flows increased by the
bank loan addition. Others thing being equal, an increases of 0,1 firms leverage
increases the total amount of free cash flows up to 0,498. This research then
assumed long age firms still tend to do overinvestment, indicating weak governance,
especially on bank loan. These findings suggest that firms in Indonesia, although
have a long period in their operation, can not reduce the managerial agency costs of
debt.
From table 1 also, researcher founds free cash flows are influenced positively
by the structure of the firms assets. Other things being equal, an increases 0,1 of
assets tangibility, make the firms free cash flows amount increases up to 1,018.
These findings indicated that firms with a large proportion of intangible assets also
tend to do overinvestment. But this research can not judge that the governance of
debt in this type of firms is weak or not. It is because my sample do not differentiated
certain business sector. For instances, the information technology sector, which have
more intangible assets, requires intensive investment, thus keeping more on their free
cash flows amount.
But my findings do not constituted any influence of firms size to the free
cash flows. No influence of firms size to free cash flows is an interesting finding.
Some previous literature including Jensen (1986), proposed that a manager, due to
the imperfect incentive alignment between shareholders and managers, managers
would seek private benefits proportional to the sizes of their firms, but share the
investment and operating costs with outside shareholders. Thus consequently, these
managers tend to over invest. My research indicated a different finding. The
association between firms size and free cash flows is insignificant in Indonesia. The
researcher can conclude, the amount of free cash flows do not influence by the firms
size in nature. It indicated the size of the firms is not a matter to the possibility of
debt governance in Indonesia. There is also no differentiation between bigger firm
and small firms in the implementation of debt governances make the overinvestment
problems do not rely on the size of that firms.
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4.2 Results of Perks
Some literature on perks proposed that perks could be in positive or negative
associations within the addition of leverage. The first point of view was proposed byJensen and Meckling (1976) and Tian (2003). Jensen and Meckling (1976) stated that
managers of firms that financed from outside will less careful about peoples money.
In his research, Tian (2003) also found that perks is highly associated with leverage
(bank loan) in China evidence. More leverage (bank loan) will make managerial
perks more increase.
In the other side, the negative associations findings were proposed by
Grossman and Hart, (1982) and Laura Lin, Shift (1993). Grossman and Hart
constitute that, since the use of debt increase the possibility of bankruptcy and job
loss, then managers will motivated to decrease their consumption as perks and
increase efficiency. Laura, Lin, and Shift (1993) also proposed that if bank
monitoring were effective then managerial perks could be reduce because debt
constraints the action of managers, instead the creditors itself did not play an active
role in the governance of the corporations.
Using statistical F Test, this research found a significant positive association
between leverage, tangibility, and firms age, if act as a group, to the perks amounts
From table 15, the F value is 1,951, and the Sig value is 0,104, which is > (0,05). It
means that the influence of independent variables (leverage, age, tangibility, and LN
assets), if act as a groups, is insignificant towards the dependent variables
(LN_Perks).
Focusing more on perks through statistical t-test, from table 17, after
analysing the result, statistical equation model that can be made is:
Equation 6
LN_Perks = -3,079 0,437 Leverage +
Table 16 reports a positive influence between the leverage and free cash
flows after changing the results model into exponential forms.
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Based on statistical t-test, my finding in Indonesian evidence is the same as
Jensen and Meckling (1976) and Tian (2003), proposed that leverage is have
significant positive associations with managerial perks. From table 2, if other thingsbeing equal, researcher founds a 0,1 increases in the firms leverage make an
increases in managerial perks up to 0,646. The changes of 0,1 to 0,646 actually is an
interesting finding since it was a significant changes actually. It can assume that the
firms spend a huge portion on administration costs in every unit of sales with
increasing borrowings from the banks. That is, bank lending increase the firms
resources under the management control and bring about high administration
expenditure. With ineffective bank monitoring in Indonesia (Nasution, 1999), it
proposed a failed in the function of debt, as suggested by (Harford, Li, and Zhao,
2006).
My research also founds that the tendency of managerial perks on bank loan
given, didnt belong to the size of the firms, the structure of firms assets, and the
period of firms since it was established. It indicated, in consuming perks, managers
of these types of firms are in the same manners as the others firms. Perhaps it will
answer the questions why big firms, long age firms, and firms with better assets
structure in Indonesia were also failed in the implementation of corporate governance
practices, especially at the crises hit the country.
This research then concluded, in the weak of bank monitoring function in
Indonesia (Nasution, 1999), an increase of bank loans increase the amount of free
cash flows and managerial perks of the firms. The addition of bank loans, make firms
with sufficient assets structure and have long period in the operation, tend to miss-
used free cash flows in term of overinvestment projects. But in Indonesia, different
from Jensen (1986) findings, the firms managers do not rely on firms size to do
overinvestment. Firms managers in Indonesia also spend huge amount of this bank
loans to the administration expense, so, indirectly this firms managers have control
all the resources, thus increasing the consuming those debt as perks. However, perks
consuming do not rely on the size of the firms, its age, and its assets structure.
Based on these findings, my research then concluded that, up to now, the condition
of managerial agency costs of debt still exists within companies in Indonesia, and
suggesting a failed in the bank monitoring function.
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5.1 Conclusion, Implications, and Limitations and Suggestion
5.1 Conclusion
Through a statistical test, this research regressed the bank loan to get itsimpact on free cash flows and managerial perks of the firms. In the results, the
researcher founds that; (1) bank loan have a positive significant influence towards
the firms free cash flows, increasing the tendency of overinvestment by the firms
managers, (2) bank loans have a positive influence to managerial perks, but the
consuming of perks itself do not rely on the age, assets structure, and the size of the
firms.
From that findings and relying it on previous literature, this study can
assumed in Indonesian evidence the managerial agency costs of debt is still exists
within the company in Indonesia. It suggests that many improvement that have been
made by the regulator on the implementation of debt governance had not earned
significant results. It indicates that both the firms, as the party who needs financing,
and financial institution (bank), as the party who give financing, have not implement
a sound corporate governance practices.
5.2 Implications
The weak of debt governance practices in Indonesia suggests that a good
monitoring function performed by domestic bank should be increased indefinitely. It
is because bank monitoring is an essentials factors in implementing a sound debt
governance. Thus this can become a positive reference, especially for regulators, in
posing a judgment about points that should be considered in debt governance
practices within companies in Indonesia.
5.3 Limitations and Suggestions
There are some limitations, if encourage, will increase the acceptability of
this study. The research limitations are;
Only two proxies used to described the managerial agency costs of debt inIndonesian evidence. In fact, there are many proxies to described the
managerial agency costs of debt. We can observed it on many aspects
actually.
The used of administration costs to compute the managerial perks, may notdecribed the perks definitly since not directly to the real value of perks
samples.
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Appendixes
Table 1
Code Industry Name
AIMS wholesale PT. Akbar Indo Makmur Stimec Tbk.
AISA manufacture PT. Tiga Pilar Sejahtera Food Tbk.
AKRA wholesale PT. Aneka Kimia Raya
ALFA wholesale PT. Alfa Retailindo Tbk.
ALKA holding PT. Alakasa Industrindo
ALMI logam PT. Alumindo Light Metal Industry Tbk.
ANTA hotel PT. Anta Express Tour & Travel Service Tbk.
AQUA manufacture PT. Aqua Golden Mississippi Tbk.
BATA apparel PT. Sepatu Bata Tbk.
BLTA transportasi PT. Berlian Laju Tanker Tbk.
BMSR real estate PT. Bintang Mitra Semestaraya Tbk
BRNA plastic PT. Berlina Tbk.
BTON logam PT. Betonjaya Manunggal
BUDI kimia PT. Budi Acid Jaya Tbk.
CENT komputer PT. Centrin Online Tbk.
CKRA real estate PT. Ciptojaya Kontrindoreksa Tbk.
DAVO manufacture PT. Davomas Abadi Tbk.
EKAD kimia PT. Ekadharma Tape Industry Tbk.
ELTY real estate PT. Bakrieland Development Tbk.
EPMT wholesale PT. Enseval Putera Megatrading Tbk.
FMII real estate PT. Fortune Mate Indonesia Tbk.
FPNI plastic PT. Fatrapolindo Nusa Industri Tbk.
HEXA wholesale PT. Hexindo Adiperkasa Tbk.
HMSP manufacture PT. Hanjaya Mandala Sampoerna Tbk.
IKBI kabel PT. Sumi Indo Kabel Tbk.
INAF manufacture PT. Indofarma (Persero) Tbk.
INAI logam PT. Indal Alumunium Industry
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Code Industry Name
INCO mining PT. International Nickel Ind.
INDX tekstil PT. Indoexchange Dotcom
INTA wholesale PT. Intraco Penta Tbk.
INTD wholesale PT. INTER DELTA TBK.
JPFA pakan ternak PT. Japfa Comfeed Indonesia Tbk.
KAEF manufacture PT. Kimia Farma (Persero) Tbk.
KICI manufacture PT. Kedaung Indah Can Tbk.
KLBF manufacture PT. Kalbe Farma
KONI wholesale PT. Perdana Bangun Pusaka
KPIG keramik PT. Kridaperdana Indahgraha
LION logam PT. Lion Metal Works Tbk.
LMSH logam PT. Lionmesh Prima Tbk
LPLI others PT. Lippo E-Net
LSIP agro PT. PP London Sumatra Indonesia Tbk.
MDLN real estate PT. Modernland Realty Tbk.
MERK manufacture PT. Merck Tbk.
MLBI manufacture PT. Multi Bintang Indonesia Tbk.
MLIA keramik PT. Mulia Industrindo
MLND real estate PT. Mulialand
MTDL komputer PT. Metrodata Electronics Tbk.
MYOR manufacture PT. Mayora Indah Tbk.
MYTX tekstil PT. Apac Citra Centertex Tbk.
NIPS otomotif PT. Nipress Tbk.
PLAS holding PT. Palm Asia Corpora, Tbk
PTRO others PT. Petrosea Tbk.
RALS wholesale PT. Ramayana Lestari Sentosa Tbk.
RIGS transportasi PT. Rig Tenders Indonesia Tbk.
RIMO wholesale PT. Rimo Catur Lestari Tbk.
SAFE transportasi PT. Steady Safe Tbk.
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Code Industry Name
SDPC wholesale PT. Millenium Pharmacon International Tbk.
SHDA manufacture PT. Sari Husada
SIMA plastic PT Siwani Makmur
SMAR manufacture PT. SMART Corporation Tbk.
SMPL plastic PT. Summitplast Tbk.
SMRA real estate PT. Summarecon Agung Tbk.
SMSM otomotif PT. Selamat Sempurna Tbk.
SONA wholesale PT. Sona Topas Tourism Industry Tbk.
SSIA konstruksi PT. SURYA SEMESTA INTERNUSA Tbk.
STTP manufacture PT. Siantar Top Tbk.
SUBA manufacture PT. Suba Indah
TBLA manufacture PT. Tunas Baru Lampung Tbk.
TBMS manufacture PT. Tembaga Mulia Semanan
TCID manufacture PT. Mandom Indonesia Tbk.
TEJA tekstil PT. Texmaco Jaya
TGKA wholesale PT. Tigaraksa Satria Tbk.
TMPO media PT. Tempo Inti Media
ULTJ manufacture PT. Ultrajaya Milk Industry & Trading Company Tbk.
UNTR wholesale PT. United Tractors
UNVR manufacture PT. Unilever Indonesia
WICO wholesale PT. Wicaksana Overseas International Tbk.
Table 2
The effect of increasing + 0,1 independent variables to dependent variables
Variable If LN_FCF FCF
Leverage + 0,1 - 1,761 + 0,172
Tangibility + 0,1 - 0,702 + 0,496
Age + 0,1 + 0,018 + 1,018
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Table 3
The effect of increasing + 0,1 independent variables to dependent variables
Variable If LN_Perks Perks
Leverage + 0,1 - 0,437 + 0,646
Pearson Correlation for Dependent Variable
Table 4
Correlations
CASHFLOW PERKS
CASHFLOW Pearson Correlation 1 -.030
Sig. (2-tailed) . .656
N 231 230
PERKS Pearson Correlation -.030 1
Sig. (2-tailed) .656 .
N 230 230
Classical Assumptions Testing
1. Normality Testsa. Normality Test for Original Data
Table 5
Tests of Normality
Kolmogorov-Smirnov
Statistic df Sig.
CASHFLOW .321 230 .000
PERKS .466 230 .000
b. Normality Tests for Free Cash FlowsTable 6
Tests of Normality
Kolmogorov-Smirnov
Statistic df Sig.
LN_CF .067 155 .084
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Figure
Normal P-P Plot of Regression Stand
Dependent Variable: LN_CF
Observed Cum Prob
1.00.75.50.250.00ExpectedCumProb
1.00
.75
.50
.25
0.00
2
c. Normality Tests for Perks ModelTable 7
Tests of Normality
Kolmogorov-Smirnov
Statistic df Sig.
LN_PERKS .057 190 .200
This is a lower bound of the true significanceFigure 3
Normal P-P Plot of Regression Stand
Dependent Variable: LN_PERKS
Observed Cum Prob
1.00.75.50.250.00ExpectedCumProb
1.00
.75
.50
.25
0.00
2. Multicollineriality Testsa. Multicolineriality Tests for Free Cash Flows
Table 8
Coefficients
Collinearity Statistics
Tolerance VIF
(Constant)
LEVERAGE .950 1.053
LN_ASSET .909 1.101
TANGBLTY .956 1.046
AGE .972 1.028a Dependent Variable: LN_CF
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b. Multicolineriality for PerksTable 9
CoefficientsCollinearity Statistics
Tolerance VIF
(Constant)
LEVERAGE .980 1.020
LN_ASSET .908 1.102
TANGBLTY .955 1.047
AGE .948 1.055a Dependent Variable: LN_PERKS
3. Heteroskedasticitya. Heteroskedasticity Tests for Free Cash Flows
Figure 4
Scatterplot
Dependent Variable: LN_CF
Regression Standardized Predicted Value
3210-1-2-3-4-5RegressionStandardizedR
esidual
3
2
1
0
-1
-2
-3
b. Heteroskedasticity Tests for PerksFigure 5
Scatterplot
Dependent Variable: LN_PERKS
Regression Standardized Predicted Value
20-2-4-6-8RegressionStandardizedResidual
3
2
1
0
-1
-2
-3
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4. Autocorrelationsa. Autocorrelations for Free Cash Flows
Table 10Model Summary
R R Square Durbin-Watson
.415 .172 2.150
a Predictors: (Constant), AGE, TANGBLTY, LEVERAGE, LN_ASSET
b Dependent Variable: LN_CF
b.
Autocorrelations for PerksTable 11
Model Summary
R R Square Adjusted R Square Std. Error of the EstimateDurbin-
Watson
.201 .040 .020 .7026956 1,995
a Predictors: (Constant), AGE, TANGBLTY, LEVERAGE, LN_ASSET
b Dependent Variable: LN_PERKS
R Square Tests
a. R Square Test for Free Cash Flows
Table 12
Model Summary
Change Statistics
R R SquareAdjusted
R Square
Std. Error
of the
Estimate
R Square
ChangeF Change df1 df2
Sig. F
Change
.415 .172 .1501.167884
8.172 7.784 4 150 .000
a Predictors: (Constant), AGE, TANGBLTY, LEVERAGE, LN_ASSET
b Dependent Variable: LN_CF
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The1stAccountingConference
FacultyofEconomicsUniversitasIndonesia
Depok,79November2007
b. R Square Tests for Perks
Table 13
Model SummaryChange Statistics
R R SquareAdjusted
R Square
Std. Error
of the
Estimate
R Square
ChangeF Change df1 df2
Sig. F
Change
.201 .040 .020 .7026956 .040 1.951 4 185 .104
a Predictors: (Constant), AGE, TANGBLTY, LEVERAGE, LN_ASSET
b Dependent Variable: LN_PERKS
Statistical F-Testsa. Statistical F-Tests for Free Cash Flows
Table 14
ANOVA
Sum of
Squaresdf
Mean
SquareF Sig.
Regression 42.471 4 10.618 7.784 .000
Residual 204.593 150 1.364
Total 247.064 154
a Predictors: (Constant), AGE, TANGBLTY, LEVERAGE, LN_ASSET
b Dependent Variable: LN_CF
a. Statistical F-Tests for Perks
Table 15
ANOVA
Sum of
Squaresdf
Mean
SquareF Sig.
Regression 3.852 4 .963 1.951 .104
Residual 91.350 185 .494
Total 95.202 189
a Predictors: (Constant), AGE, TANGBLTY, LEVERAGE, LN_ASSET
b Dependent Variable: LN_PERKS
BridgingtheGapbetweenTheory,Research,andPractice 30
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8/2/2019 Facm01-Bank Loan and the Agency Costs of Debt in Indonesia_
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The1stAccountingConference
FacultyofEconomicsUniversitasIndonesia
Depok,79November2007
Statistical T-Test
a. Statistical T-Test for Free Cash Flows Model
Table 16Coefficients
Unstandardized
Coefficients
Standardized
Coefficientst Sig.
95% Confidence
Interval for B
BStd.
ErrorBeta
Lower
Bound
Upper
Bound
(Constant) -2.062 .785 -2.626 .010 -3.614 -.511
LEVERAGE -1.761 .614 -.219 -2.870 .005 -2.974 -.548
LN_ASSET 2.450E-02 .059 .032 .414 .680 -.093 .142
TANGBLTY -.702 .181 -.295 -3.877 .000 -1.060 -.344
AGE 1.788E-02 .007 .188 2.501 .013 .004 .032
a Dependent Variable: LN_CF
b. Statistical T-Test for Perks Model
Table 17
Coefficients
Unstandardized
Coefficients
Standardized
Coefficientst Sig.
95% Confidence
Interval for B
BStd.
ErrorBeta
Lower
Bound
Upper
Bound
(Constant) -3.079 .436 -7.060 .000 -3.939 -2.218
LEVERAG
E-.437 .173 -.183 -2.521 .013 -.779 -.095
LN_ASSET 2.696E-02 .033 .062 .815 .416 -.038 .092
TANGBLT
Y-3.255E-02 .107 -.022 -.303 .762 -.244 .179
AGE 2.220E-03 .004 .044 .589 .557 -.005 .010
a Dependent Variable: LN_PERKS