The Effect of Related and Unrelated Diversification of Capital Structure Policy: Empirical Evidence on Indonesian Companies

Title : The Effect of Related and Unrelated Diversification of Capital Structure Policy: Empirical Evidence on Indonesian Companies

Authors : Ratna Wardhani (Program Ilmu Akuntansi Fakultas Ekonomi Universitas Indonesia) & Ade Sobrina Hasibuan (Fakultas Ekonomi Universitas Indonesia)


The objective of this research is to analyze the role of related and unrelated diversification of listed firms in Indonesia on capital structure decision, by using 78 Indonesia companies listed in the Indonesia Stock Exchange for 2002-2007 and panel data methodology. The result shows that in general diversification positively affect firms leverage. This result also apply to unrelated diversification strategy, where firms with unrelated diversification strategy inclined to increasing level of firm leverage; in other words, unrelated diversification has a positive effect on debt as source of finance. Therefore, capital structure decisions of unrelated diversified firms seem to be strictly aimed at reaching their target optimal debt level and consistent with the static trade off hypothesis. However the relation between related diversification strategy with firm’s capital structure cannot be prove in this study due to the possibility that such strategy will require less cost of investment so that the company can still use internal financing.

Jurnal Akuntansi Lainnya:  Pengaruh Tenur Kantor Akuntan Publik (KAP) dan Reputasi KAP terhadap Kualitas Audit : Kasus Rotasi Wajib Auditor di Indonesia

Keywords: diversification strategy, capital structure, source of finance


H1 : Diversification strategy ini general will affect on firm leverage.
H2 : Related diversification strategy will negatively affect on firm leverage.
H3 : Unrelated diversification strategy will positively affect on firm leverage.


This study proves that in general, a diversified company that will tend to increase the ratio of corporate leverage. However, the results of this study indicate that there is no significant evidence about the influence of related diversification strategies to level of leverage. This due to the small cost of investment for this kind of diversification and the company can still use internal financing. This is because they already have relevant resources and using similar asset in expanding the business into related segment. The companies that apply unrelated diversification, the results of this study indicate that there is a significant relationship between un related diversification strategy to the determination of the company’s capital structure policy. The results of this study indicate that companies with unrelated diversification will tend to increase the company’s leverage ratio. In other words, when the company apply unrelated diversification strategy companies will tend to use debt financing to meet the needs of the company in conducting its business activities. Meanwhile, several other variables such as profitability, firm size, growth opportunities, as well as Non-Debt Tax Shield also proved to have influence on the determination of capital structure policy.


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