The purpose of this research is to test the Trade-Off Theory of capital structure in public listed Indonesian
companies by using Partial Adjustment Model. The model is applied to a specific balance panel data from 228
companies by using different regression techniques; Pooled Least Square (PLS), Fixed Effect Model (FEM),
and Generalized Method of Moments (GMM). Findings of the research are Indonesian companies adjust their
capital structures towards an unobservable target at the speed of 43.79% a year. It means that Indonesian
companies need around 2 years and 3 months to adjust their existing capital structure toward a target. This
finding supports the advantages of Trade-Off Theory over the Pecking Order Theory. This paper also highlights
the long term parameter of dynamic model of capital structure and the determinants of capital structure.
Keywords: Dynamic Capital Structure, Target Capital Structure, Partial Adjustment Model, Trade-Off Theory,
JEL Classification: G32: Corporate finance and governance; capital structure.
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