Asia Pacific Management Review xxx (xxxx) xxx

H O S T E D BY Contents lists available at ScienceDirect

Asia Pacific Management Review

journal homepage: www.elsevier.com/locate/apmrv

Dynamic capital structure in Indonesia: Does the education and experience of

CEOs matter?
Meishan Chua a, b, *, Nazrul Hisyam Ab Razak b, Annuar Md Nassir c, Mohamed Hisham Yahya b
a
Universiti Teknologi Mara (UiTM, Puncak Alam), Faculty of Business and Management, 42300, Kuala Selangor, Malaysia
b
Universiti Putra Malaysia, Accounting and Finance Department, School of Business and Economics, 43400, Seri Kembangan, Selangor, Malaysia
c
Xiamen University Malaysia, School of Economics and Management, 43900, Sepang, Selangor, Malaysia

a r t i c l e i n f o a b s t r a c t

Article history: Based on the Upper Echelon Theory, this paper examined the relationship of CEO education and expe-
Received 14 July 2020 rience with the dynamic capital structure (DCS) using the target leverage and speed of adjustment (SOA)
Received in revised form models. This study applied the system generalised method of moments (SYS-GMM) to the target leverage
23 February 2021
model and Ordinary Least Squares bootstrapped standard errors to the speed of adjustment model. Using
Accepted 10 May 2021
Available online xxx
the 100 Indonesian firms, two notable findings were obtained. First, the target leverage model with the
inclusion of CEO characteristics yielded a 22% of the SOA towards target leverage. Both variables showed
a positive relationship with the target leverage. Second, the result revealed that the improvement of CEO
JEL classification:
G30
education and experience by one standard deviation led to an increase in the SOA by 3.37% and 0.17%.
G40 Thus, the results were consistent with the theory whereby the education and experience of the CEOs
were potential determinants the DCS.
Keywords: © 2021 The Authors. Published by Elsevier B.V. on behalf of College of Management, National Cheng Kung
Target capital structure University. This is an open access article under the CC BY license (http://creativecommons.org/licenses/
Speed of adjustment
by/4.0/).
CEO education
CEO experience and Indonesia

1. Introduction known as Speed of Adjustment (SOA)) as a function of maximising

In a modern corporation, the usage of leverage (also known as
capital structure) is one of the strategic decisions to maximise the
firm's value. This can be achieved via the optimal level between tax
benefits and cost of financial distress. However, the optimal
leverage might not hold due to the presence of adjustment costs
(Fischer et al., 1989). Fischer et al. (1989) argued that the existence
of information costs, bargaining costs, and monitoring costs in the
real world has prevented the instantaneous adjustment from actual
leverage to the optimal leverage. Consequently, the deviation
caused the fall in firm value. Therefore, in order to maximise the
firm value, the firms must remove the deviation as quickest as
possible.
To date, many studies used the Dynamic Trade-off Theory
(DTOT) to investigate the determinants of the deviation (commonly
* Corresponding author. Universiti Teknologi Mara (UiTM, Puncak Alam), Faculty
of Business and Management, 42300, Kuala Selangor, Malaysia.
E-mail address: meishan@uitm.edu.my (M. Chua).
Peer review under responsibility of College of Management, National Cheng
Kung University.
firm value. However, these studies were largely generated from a
neoclassical perspective with the assumptions that the managers or
CEOs' managing styles are indifferent to each other. In other words,
they are viewed as homogeneous and provide non-individualised
inputs to the production process that influence the firms' decision
(Bertrand & Schoar, 2003). However, the theoretical framework and
the past empirical evidences proved the uniqueness of the CEOs in
bringing value to the firms. Borrowing the Upper Echelon Theory
(UET) (Hambrick & Mason, 1984), our study aimed to investigate
the effects of the CEO's skills and ability, namely, CEO education and
CEO experience, on the firms' SOA.
Our study focuses to the non-neoclassical perspective because
the past empirical SOA studies were generally implicitly investi-
gated the impact of CEO characteristics. Although the CEO is the key
person that makes the strategic decisions, the CEO's action is
empirically tested as an unobservable variable that changing de-
pends on the disciplinary mechanism. This can be seen from
Morellec et al. (2012) that pinpointed the severity of agency conflict
as the major source of the leverage deviation. Buvanendra et al.
(2018) and Liao et al. (2015) proven that good corporate gover-
nance could improve the firms' SOA by using the conventional

https://doi.org/10.1016/j.apmrv.2021.05.003
1029-3132/© 2021 The Authors. Published by Elsevier B.V. on behalf of College of Management, National Cheng Kung University. This is an open access article under the CC BY
license (http://creativecommons.org/licenses/by/4.0/).

Please cite this article as: M. Chua, N.H. Ab Razak, A.M. Nassir et al., Dynamic capital structure in Indonesia: Does the education and experience
of CEOs matter?, Asia Pacific Management Review, https://doi.org/10.1016/j.apmrv.2021.05.003
M. Chua, N.H. Ab Razak, A.M. Nassir et al.
corporate governance variables such as board independence and
institutional shareholder. Recently, Dang et al. (2019) explored a
new dimension on the pressure from media coverages that assist in
information dissemination and act as monitoring channels that
reduce the cost of adjustment. Taken together, all these studies
indicate the importance of disciplinary mechanisms as an incentive
to improve the SOA as it helps to reduce the agency cost between
the CEO and shareholders. The theories and empirical evidences
advocate the existence of the relationship between CEO and SOA,
but their action is subject to the effectiveness of the disciplinary
mechanism. The indirect investigation as conducted in previous
studies revealed that existing literature is lacking of investigation
on a direct linkage between the relationship of CEO action and SOA.
Since the UET suggests the firms' strategic direction as a reflection
of the CEO characteristics - yet the SOA studies is lacking from this
perspective -, our study aims to fill this academic gap by investi-
gating the relationship between CEO education and experience and
SOA, in the context of an emerging economic - Indonesia.
In this study, Indonesia was chosen for four reasons. Firstly,
Indonesia is characterised as a country with inefficient capital
market and associated with high level of information asymmetry,
in which the two main contributors to a higher adjustment costs
(Haron, 2014). Empirically, the SOA evidence indicates a slower rate
at 45.7% compared to other ASEAN countries (i.e. Malaysia e 53.6%).
With such a slower rate, the firms might encountered with diffi-
culties in achieving optimal leverage (Dufour et al., 2017). Conse-
quently, the firms are unable to minimise the cost of capital and
maximise the firm value. The UET suggests CEO as the key person
who makes the strategic decision; conversely, a slower SOA might
indicates the incompetency of the CEO in managing the firms'
capital resources. The failure in managing the firms is likely to
contribute to a stagnant in economic growth. Having said so, the
future economic growth is more promising with a more skilful CEO.
Therefore, an investigation that linked the UET and DCS (specif-
ically, the Indonesian CEO's skill and SOA) is necessary because the
failure in managing the SOA towards optimal leverage will bring
negative implication, not only to the firm but, also to the economy.
Secondly, the corporate governance in Asia market (such as in
Indonesia) is not strong enough to relieve the agency issues
(Claessens & Fan, 2002). From one perspective, this environment
makes the investigation more meaningful because leverage is one
of the mechanisms that could discipline the CEOs from performing
action that unaligned with shareholders' interest (Berglo € f, 1990).
From another perspective, we should identify which types of
managers have more ability in managing the firm financial re-
sources for the purpose of maximising the shareholders wealth.
These propose the significance to investigate how the CEO generate
firms' value through the usage of capital structure in Indonesia
context. Thirdly, the collectivist cultures practised by the Indone-
sian in workplace is likely to provide a misconception of the sole
effect of the CEO in making firm decision. It was well-recognised
that in the collectivist cultures, the decisions was made by a
group of top management; however, Antonczyk and Salzmann
(2014) argued that CEO alone is powerful enough to drawn a wise
decision in the top management. Hence, a study that solely
examined the CEO in making the capital structure decision is
necessary to provide in-depth understanding as to how the indi-
vidual CEO will affect the Indonesia firms' strategic decisions.
Finally, the SOA empirical studies from Indonesia are limited with
the researchers focused mostly on the firms' specific characteristics
(Haron, 2016), macroeconomic factors (Soekarno et al., 2015), and
industry differences (Cahyono & Chawla, 2019). Therefore, a study
between CEO characteristic and SOA from Indonesia is likely to add
insightful findings to the literature from the Upper Echelon
perspective.
2
Asia Pacific Management Review xxx (xxxx) xxx
To investigate the influence of CEO education and experience to
the firms' SOA, our study divided the analyses into two stages.
Similar like past studies, we started the analysis with the investi-
gation of target leverage in an attempt to find the range of the SOA
in the first stage.1 However, unlike the past empirical model, our
study explicitly investigated the impact of CEO education and
experience to the firms' target leverage. In the second stage, we
investigated the influence of CEO education and experience to the
firms SOA. Based on the findings of the 100 non-financial Indone-
sian firms that listed in the Indonesia Stock Exchange market, be-
tween 2008 and 2017, our study added three main contributions to
the DCS studies. Firstly, unlike the study conducted by Matemilola
et al. (2018) that linked the CEO experience and capital structure
only at the first stage of DCS, this study incorporated the UET and
the dynamic trade-off framework to investigate the effects of CEO
behaviours at the second stage of the DCS. Our results show that
CEOs' education and experience exerted a positive influence not
only to the target leverage (first stage) but also to the SOA decisions
(second stage). These empirical findings provide insightful knowl-
edge to the SOA literature that is apparently limited from the
implication of CEO education and experience. Secondly, our study
was distinctively different from Liao et al. (2015), Buvanendra et al.
(2017) and Buvanendra et al. (2018) whose studies used corporate
governance to control the managerial action and influence the SOA.
Rather than assuming the managerial action as the fixed effect, we
explicitly investigated the direct impact of managerial action or
their ability on the SOA. The findings offer empirical evidence to
both the academician and practitioners on the importance of
separating the CEO skills from the DCS model, in order to examine
the impact of CEOs on the SOA. Thirdly, our findings made signifi-
cance different from Shan (2019) and Chua et al. (2020), who
empirically showed the direction of the CEO education and expe-
rience with SOA; however, our study was more superior compared
to them because we showed the exact magnitude of CEO education
and experience (with a speed of 3.45% and 0.19%, respectively)
moved towards the target leverage. All these contributions exhibit
the importance of an individual, namely, the CEO, as the key person
with greatest power to influences the firms’ strategic decisions (e.g.
SOA towards target leverage).
2. Theories and hypotheses
The Upper Echelon Theory (UET) (Hambrick & Mason, 1984)
emphasises that the CEOs' actions are based on the premise of
bounded rationality. Under this condition, firms' decisions would
be constrained by the available information and the ability of the
CEO to interpret the information. In other words, their decision-
making ability is affected by their cognitive foundation and the
values that they possess. These, in turn, can be influenced by their
demographic characteristics. Meanwhile, the resource-based the-
ory also recognised the importance of the CEO's competency as the
main source of the firms' efficiency and competitiveness (Wu et al.,
2017). Their competency depends on the knowledge and skills that
1
Past studies found a wide variety range of SOA that could be differed across
time, industry, and firms. For example, Flannery and Rangan (2006) found that the
SOA for US firms was around 34% from 1965 to 2001. Within similar context yet
different study period, Getzmann et al. (2015) found the SOA for US firms to be
varied between 39% and 60% from year 1995e2009. Concurrently, Getzmann et al.
(2015) reported a range of SOA between 25% to 45% and 41%e65% for Asia and
Europe respectively. Likewise, the empirical evidence from Southeast Asian also
generated a different set of SOA. For instance, Shan (2019) found the a range of SOA
with 31.53%e40.77% for ASEAN countries included Malaysia, Singapore, Indonesia
and Thailand. Meanwhile, SOA was 53.6% for Malaysia (Matemilola et al., 2018),
45.7% for Indonesia (Soekarno et al., 2016), and 28.0% for Thailand (Haron et al.,
2013a) when the researchers conducted the individual country study.
M. Chua, N.H. Ab Razak, A.M. Nassir et al.
they learn and accumulate over time. According to the UET, the
CEOs' ability can be reflected by the skills they own in which these
skills are commonly measured by their education and experience
(Hambrick & Mason, 1984). This echoes the old saying by Anton
Chekhov that goes “wisdom … comes not from age, but education and
learning.” Thus, our study aimed to examine the influence of edu-
cation and experience on the firm capital structure in a dynamic
way.
2.1. CEO education
According to the UET, the CEOs' education is an important hu-
man resource because it represents an individual knowledge and
skill base that they gain through the schooling period (Hambrick &
Mason, 1984). Hambrick and Mason (1984) argued that educational
attainment level produces a significant difference on the intellec-
tual ability, cognitive base and values of an individual. As a result,
these differences influence the CEOs’ judgement in making the
strategic decisions. In other words, their education attainment level
are translated in strategic outcomes (e.g. capital structure).
Empirically, CEOs with high education background were found
to have effective solutions for complex decision-making tasks
because they were regarded as having high cognitive ability, ca-
pacity for decision processing, high tolerance for ambiguity, and
propensity or receptivity to innovation (Amran et al., 2014). Other
studies found that the knowledge, ability, and intellectual capa-
bility of highly educated CEOs helped them to better understand
the technical and abstract concepts as well as making them more
persistent to solve any challenging issues (Bhagat et al., 2010). As a
result, they would ultimately improve operating performance.
Their educational background also provided them with a social
network or alumni network from their schooling periods. They
would be able to exchange and share valuable information with
their friends and peers in the network (Butler & Gurun, 2012; Chikh
& Filbien, 2011; Sitthipongpanich & Polsiri, 2015; Wang et al.,
2016). Based on all these reasons, highly educated CEOs are
considered as valuable resources for the growth of the companies.
In fact, high education level has been empirically tested and proven
to be the proxy of CEOs’ ability that improved various aspects of the
firms, including research and development (Barker & Mueller,
2002), capital expenditure, dividend pay-out (Bertrand & Schoar,
2003), environmental information disclosure (Lewis et al., 2013),
acquisition decisions, firm growth (Graham et al., 2013), diversifi-
cation, investment cash flow sensitivity (Mohamed et al., 2014), the
volatility of corporate earnings (Zhou & Wang, 2014), risk-taking
activities (Farag & Mallin, 2018), current performance (Gottesman
& Morey, 2010), and future performance (Wang et al., 2016).
Even though highly educated CEOs are deemed as a desirable
asset in firm management, they might sometimes inversely influ-
ence the firms' success. Zhou and Wang (2014) claimed that edu-
cation was an investment that the CEOs made for themselves. Thus,
they would expect a higher return corresponding to their education
level. As such, they tend to be more daring in terms of high-risk
financial strategies. Under such circumstances, highly-educated
CEOs could exhibit overconfidence behaviour and ended up tak-
ing too many unnecessary risks that can prove to be detrimental to
the overall performance of a firm (Sitthipongpanich & Polsiri,
2015). Additionally, this overconfidence behaviour led to different
preferences in choosing the firm's capital structure as outlined by
the Pecking Order Theory. Ting et al. (2015) mentioned that these
CEOs preferred internal funding compared to external funding
whereas Purhanudin and Zakaria (2015) found that they chose
short-term debt over long-term debt to reduce the associated
financial risks.
With regard to capital structure decisions, Bertrand and Schoar
3
Asia Pacific Management Review xxx (xxxx) xxx
(2003) reported that CEOs with MBA degree in the US firms un-
dertook more aggressive strategies by holding more debts. In
contrast, a meta-analysis by Wang et al. (2016) reported that formal
education did not influence firm leverage. Barno (2017), a study
conducted in Kenya, found an insignificant relationship between
CEO education and capital structure. Zhou and Wang (2014) un-
dertook a similar study in China and found that highly-educated
CEOs in China used low leverage. Other than that,
Sitthipongpanich & Polsiri, 2012 reported that CEOs with a post-
graduate degree in Thai firms chose a higher level of financial
leverage. Likewise, Ting et al. (2015) also reported that CEOs in
Malaysia firms with a higher education preferred to hold on to
more debts. Nevertheless, these studies used a static trade-off
model that assumed the firms have optimal leverage regardless of
the possibility that certain firms might be unable to reach the op-
timum leverage as a result of an inefficient capital market, espe-
cially in the emerging market.
To the best of our knowledge, only a few studies relate the CEO
education and SOA as main investigation. For example, Frank and
Goyal (2007) investigated the impact of CEO education and SOA
towards target leverage. Based on the US firms, they found a pos-
itive relationship between CEOs with MBA education and firms'
target leverage, as well as an increased firms' adjustment towards
the target leverage by 9%. Although they provide interesting find-
ings, their results might be misleading due to the application of
fixed effect estimation method that was empirically tested to be
insufficient to generate robust estimators (Law, 2018). Subse-
quently, Shan (2019) made efforts to improve their estimation used
the SYS-GMM estimation method. With a more robust estimator,
the author found CEO education indeed is the determinant of the
SOA for four ASEAN countries (Malaysia, Singapore, Indonesia and
Thailand). Likewise, Chua et al. (2020) also found similar positive
relationship between CEO education and SOA of Malaysia firms.
Although these studies generate interesting findings, both studies
did not show the magnitude of the CEO education to the SOA of the
firms. Hence, our study is to improve Shan (2019) and Chua et al.’s
(2020) model by investigating the magnitude of the CEO education
and SOA. To contribute additional empirical evidence on this rela-
tionship, our study hypothesised that:
H1a. CEO education is positively related to the target leverage of
the firms.
H1b. CEO education is positively related to the SOA of the firms.
2.1.1. CEO experience
According to Hambrick and Mason (1984), the observable
characteristics such as experience influences the cognitive skills of
the CEOs. Specifically, they argued that more experience CEO is
more skilful and comes with wider perspective when making the
firms’ strategic decision. From their perspective, more experience
CEOs are more likely to evaluate the alternative strategies pru-
dently compare to less experience CEOs; hence, their decisions are
better in quality because they use their experience to formulate
effective strategies (Hambrick & Mason, 1984; Matemilola et al.,
2018).
In a recent study, Li and Patel (2019) showed that CEO with
diverse working experience is highly demanded in a rapidly-
changing environment to enhance the market value and financial
performance of the firm. Matemilola et al. (2018) explained that the
years of working experience with the current and previous firms
determined the skilfulness of the CEO and thus influenced the
firms' competitiveness. CEOs with sufficient internal working
experience or tenure were found to possess a richer range of
knowledge and skills. They also had more sense of psychological
M. Chua, N.H. Ab Razak, A.M. Nassir et al.
ownership with a longer period of tenure. Thus, they hold a bigger
responsibility towards the firms' outcomes and could provide a
more positive outlook towards the firms' wealth maximisation (Oh
et al., 2018). Apart from that, the risk perception of the CEOs could
also influence their preference in taking risky strategies. Wang et al.
(2016) explained about the unwillingness of newly-appointed CEOs
in making investment decisions and pursue new initiatives. This is
in contrast to seasoned CEOs with prior experience in previous
firms who could interpret the information at hand and evaluate the
available choices before making the best strategic decision. All
these suggested that the longer the working experience of the
CEOs, the more competent they would be in managing the firms. In
fact, the empirical studies showed that prior experience and tenure
of a CEO would improve many decisions made in the firm. For
example, Hu et al. (2019) reported that CEOs with early life expe-
rience improved the corporate cash holding of Chinese firms.
Likewise, Matemilola et al. (2018) found that CEOs with longer
working experience preferred to use more debt capital to support
the firms’ operating activities, in a Malaysian study.
Nevertheless, the empirical findings from the available studies
are mixed. This could be due to the accumulative effects exerted by
firm-specific experience and the CEO's stage of life. The firm-
specific experience, when accompanied by older age, reduced the
ability of CEOs in performing the strategic task. This could be due to
the shorter career horizon of the older CEOs that made them more
risk-averse towards any higher risk strategies (Cline & Yore, 2016).
For instance, Kuo et al. (2015) reported an inverse impact of CEOs'
firm-specific experience with the usage of leverage among Amer-
ican firms. Furthermore, a longer CEO experience could also result
in negative influence. This happened as they consolidate more
power overtime and managed to resist the pressure from the in-
ternal monitoring system such as the Board of Directors and other
stakeholders. As a result, problems could surface at a higher level of
the agency between the CEO and shareholders (Lee & Yeo, 2010, pp.
863e872; and; Wang et al., 2016). The more severe the conflict of
interest between a CEO and manager, the wider would be the de-
viation of the CEO's decision from the shareholders' decision. This
phenomenon was reported in several studies. Lee and Yeo (2010,
pp. 863e872) revealed a negative impact of CEO experience on
the company's debt in Asian countries including Hong Kong,
Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, and
Thailand. Likewise, Ting et al. (2015) showed that as the CEOs in
Malaysian firms became older, the experience they gained from
another firm cast negative impacts on the debt application. Another
study also found that the experience of CEO reduced the Australian
firm's performance (Nguyen et al., 2018).
Although the empirical findings of the influence of CEO expe-
rience on firms' strategic decisions abound in the literature, there is
still a lack of evidence on the linkage between CEO total working
experience and SOA. For instance, Frank and Goyal (2007) exam-
ined only the CEO firm-specific experience, number of companies
they previously worked with, and SOA by using the fixed effect
estimation model. Another study by Matemilola et al. (2018) only
studied the CEO experience in the first stage of DCS for Malaysia
firms. Interestingly, Shan (2019) extended the model to examine
the CEO experience and SOA relationship with greater sample
(Malaysia, Singapore, Indonesia and Thailand); however, Shan's
(2019) study is limited to explain the exact magnitude of how
CEO experience in influencing the SOA. Due to the scant literature
that clearly examine this relationship, our study makes the attempt
to fill the academic gap. To help our investigation, we predict a
direct relationship between CEO experience and DCS, thus we
hypothesised that:
H2a. CEO experience is positively related to the firms' target
4
Asia Pacific Management Review xxx (xxxx) xxx
leverage.
H2b. CEO experience is positively related to the firms' SOA.
3. Method
3.1. Data
This study used the data of the non-financial firms listed in the
Indonesia Stock Exchange (IDX). To examine the relationship be-
tween CEO characteristics and SOA, the study period started in
2008 and ended in 2017 to ensure the latest financial and CEO
characteristics data were available to observe the recent trends and
relationship of CEO education and experience in making the
adjustment to the optimal leverage. It was a period of 10 years
because our study sought to captures the impact of CEO education
and experience towards the SOA with different economic cycle
movement.2
This study considers both the CEO education and experience
because both were closely linked to CEOs' abilities that could
improve the firm's capital structure in a dynamic way. In addition,
both variables played a big role in the success of CEO careers
(Robinson & Sexton, 1994). A balanced panel data was applied as
this was a powerful method to reduce any noise from the hetero-
geneity that could produce biased results (Flannery & Hankins,
2013). The heterogeneity might arise from the CEO education,
CEO experience, and financial data of the ten consecutive years. To
perform the analysis, we determined a set of requirement for the
firms to be included as the sample of this study. First, the firm must
be a non-financial firm listed in the Indonesia Stock Exchange (IDX).
The financial firms such as finance, insurance and unit trust com-
panies were excluded from the analysis because the financial
statement of these firms differ from the non-financial firms. Sec-
ond, the firms must be locally incorporated. Third, a full set of CEO
education, CEO experience and financial data must be available
from year 2008e2017 for a balance panel. In this study, the CEO
education and experience data were manually collected from the
available annual report; meanwhile, the financial data such as
leverage and firms-specific variables were collected from Thomson
One Banker. A total of 565 firms were collected from the Thomson
One Banker and only 415 firms remained after the elimination of
finance, insurance and unit trust companies. However, only 100
non-financial firms were included in the final sample that matched
with the second and third requirements. These firms represented
70% of the total market capitalization as of December 31, 2017.
3.2. Estimation model
Two stages were involved in identifying the determinants of
SOA. We adopted Liao et al.'s (2015) model for both stages with
some differences. Unlike their model,3 our study explicitly inves-
tigated the CEO education and CEO experience as the main vari-
ables to influence the target leverage and SOA. In the first stage, the
target/optimal leverage is assumed as a function of CEO education,
2
Clement Juglar (1862) stated that an economic cycle or business cycle period is
around 7e11 years and consists of four different stages such as expansion, crisis,
recession and recovery.
3
Liao et al. (2015) studied the corporate governance as the main influence to the
firms' SOA; however, our study assumed that corporate governance factors as the
unobservable firm specific effects control by the SYSGMM. This model is superior
compared to Buvanendra et al. (2017), Buvanendra et al. (2018) and Shan (2019)
studies because it allows the researchers to measure the magnitude of the vari-
ables that influence the SOA instead of merely shows the direction of the CEO
characteristics and SOA. This model also was adopted in Devos et al. (2017) study
who investigated the influence of debt covenant and speed of adjustment.
M. Chua, N.H. Ab Razak, A.M. Nassir et al.
CEO experience, and the firms’ characteristics that were commonly
attributed to the target leverage. The estimation model of target
leverage was as follows:
X
L X
LEVit* ¼ lj Xjit þ uit (1)
j¼1
LEVit* was the optimal leverage that measured by book value
leverage (BVTD) and market value leverage (MVTD) and X repre-
sented the CEO characteristics, i.e. CEO education (CEOEDU), CEO
experience (CEOEXP), and firms' characteristics such as firms' size
(SIZE), profitability (PROF), asset tangibility (TANG), firms' growth
(GROWTH), and non-debt tax shield (NDTS).
In the presence of an efficient market, the actual leverage should
be identical to the target leverage (LEVit ¼ LEVit* Þ: This was because
firms could instantaneously respond with a complete adjustment
to the variations in the independent variables by varying its exist-
ing leverage ratio to equalise its optimal leverage (Haron et al.,
2013b). However, the firms were not free from the adjustment
costs. In reality, they needed some time to fully adjust from one
period to the subsequent period. Consequently, the actual leverage
was not equivalent to the target leverage: LEVit  LEVit1 s LEVit* 
LEVit1 . This deviation was represented by g. Hence, the standard
partial adjustment model was written as Equation (2).
 
LEVit  LEVit1 ¼ git LEVit*  LEVit1 (2)
git was the SOA towards target leverage, where its value depended
on the restriction | g|< 1, a condition in which LEVit1 tended to be
LEVit* as t / ∞ (Mukherjee & Mahakud, 2010). The value of gwas
equal to 1 (g ¼ 1) if the adjustment from current leverage to target
leverage was complete, meaning the entire adjustment was made
within one period and the firm at time, t was at its target leverage
level. If the value of g was less than 1 (g < 1), then the current
leverage of firms at time, t was below the optimal target level.
However, when the value of g was greater than 1 (g > 1), the
adjustment was more than the target level. The rearrangement of
equation (2) together with substitution of equation (1) produced a
standard partial adjustment model as outlined in the Flannery and
Rangan (2006) study:
X
L variable ‘1’ to indicate the specific education level of a CEO.
LEVit* ¼ l0 LEVit1 þ lj Xjit þ uit (3)
j¼1
where, l0 ¼ speed of adjustment ¼ 1  git .
In a scenario of lagged dependent variables such as our model,
the application of panel system Generalised Method of Moments
(SYS-GMM) was more appropriate because it was able to control
short panel bias and unobserved heterogeneity across firms
(Flannery & Hankins, 2013). The SYS-GMM could mitigate the
limitation of the traditional Ordinary Least Squares (OLS) that
would generate biased and inconsistent estimators due to igno-
rance of time-invariant unobserved individual effect ( hi Þ and the
endogeneity of LEVit1 . Additionally, it also fixed the limitation of
the Fixed Effect Model (FEM) that produced inconsistent parame-
ters if T was fixed, regardless of the size of N. This was because FEM
did not deal with the endogeneity of LEVit1 , even though it helped
to eliminate the hi .
As the SOA varied across firms, industries, and countries
(Fitzgerald & Ryan, 2018), it was vital to identify the determinants
of the SOA. Slower SOA led to a large divergence between the actual
leverage and target leverage, which was a detrimental factor to the
firm value. In the second stage, we hypothesised that the education
5
Asia Pacific Management Review xxx (xxxx) xxx
and experience of CEOs could influence the firms’ SOA. To examine
the impact of these characteristics on SOA, we formulated the
following equation:
0 1
L
DLEVit ¼ @w0 þ wt Ζ it A Devit þ εit (4)
J¼1
where, DLEVit represented the change in leverage, LEVit  LEVit1 ,
Devit represented leverage deviation, LEVit*  LEVit1 , Ζ it repre-
sented the CEO education, experience, and also a set of control
variables such as absolute deviation (INITIAL DEVIATION), size,
tangibility, profitability, firms growth, and non-debt tax shield. wt
represented the coefficient for CEO characteristics and control
variables. The relationship between SOA and the explanatory var-
iables was based on the interaction between Devit and Ζ it , specif-
ically Devit X CEOEDU and Devit X CEOEXP. In estimating the
coefficients of explanatory variables, we used bootstrapped stan-
dard errors to estimate the regression because Devit was calculated
based on the target leverage estimated from the first stage (Pagan,
1984).
3.3. Variables
For analysis purposes, this paper used the book value leverage as
the dependent variable. Book value was preferred over the market
value because it was not affected by the external factors outside the
firms’ direct control such as stock price fluctuations (Fama &
French, 2002). Thus, it was a better value to reflect the manage-
ment decision (Thies & Klock, 1992). Other than that, book value
was also more precise in estimating the SOA (Yin & Ritter, 2019),
the main consideration in the second stage of the study. Since our
study aimed to examine the influence of the CEO behaviours on the
leverage, the book value was more appropriate. The book value
leverage was measured by the book value of total debt divided by
the total assets. For the robustness check, the book value long-term
leverage was applied and it was measured by book value of long-
term debt divided by total assets.
One of the independent variables in this study was CEO edu-
cation. CEO education refers to the history of the educational
background of a CEO (Fujianti, 2018). Bertrand and Schoar (2003),
Bhagat et al. (2010) and Farag and Mallin (2018) used the dummy
Meanwhile, researchers such as Barker and Mueller (2002) and
Zhou and Wang (2014) applied the scale concept by given higher
scores to higher levels of education and vice versa. To avoid the
dummy trap, our study adopted the scale concept. A score of 1 was
given for diploma level and anything lower, 2 for bachelor degree, 3
for professional qualifications, 4 for master degree, and 5 for
doctorate. We used this measurement because it was more reflec-
tive of the current CEO educational background in Indonesia.
Another independent variable in our study was the CEO expe-
rience. According to Hambrick and Mason (1984), the CEO experi-
ence represents the skills of the CEO in managing the firms'
operations. Wang et al. (2016) classified the CEOs' prior experience
into three categories, namely (1) functional experience (back-
ground in primary business disciplines and operational areas that
are common across firms), (2) experience in strategic action
(whether they have worked in foreign operations), and (3) general
career experience (the number of years in the industry before
becoming a CEO or the period in an executive-level position at
other firms before becoming the CEO in the current firm). Li and
Patel (2019) measured the working experience as the number of
different industries and the number of different firms the CEO had
worked in. Lee and Yeo (2010, pp. 863e872) used the CEO tenure to
M. Chua, N.H. Ab Razak, A.M. Nassir et al.
measure the CEO working experience. Our study adopted
Matemilola et al.'s (2018) definition of working experience which
took into account both the internal and external experiences of the
CEOs in terms of years. In addition, we extended their model to a
second stage of examining the impact of CEO experience on the
SOA.
In addition, the firm's characteristics such as firm size, profit-
ability, asset tangibility, firms' growth, and non-debt tax shield
were all included in the regression model as control variables. Ac-
cording to the trade-off theory, these variables had a direct influ-
ence on the firm's capital structure decisions. Firm size was the
natural logarithm of sales that represents firms' default risks. This
was because the portion of the fixed direct bankruptcy costs
decreased as firm size increased. Our study predicted that larger
firms had more priority access to the public debt market. Hence,
this was positively related to the target leverage. Profitability was
the ratio of earnings before interest and taxes to the book value of
total assets. The trade-off theory hypothesised a positive relation-
ship between profitability and firm leverage because profitable
firms had a higher tax burden. Thus, they needed more interest
shields from debts to reduce the burden (Nor et al., 2011). More-
over, the pecking order theory also supported this inverse rela-
tionship because profitable firms tend to have more internal funds
that can support the firms' operations without having to borrow
from an external source of funding.
Asset tangibility was measured by the fixed assets divided with
the book value of total assets. The Trade-off Theory (TOT) suggested
that firms with more tangible assets are associated with lower
financial costs because these assets could be reclaimed in case of
liquidation. In contrast, the Agency Theory advocated for a negative
relationship between debt and tangibility because fixed assets were
the physically available resources that could be potentially abused
by the managers for their benefits. Based on the TOT, our study
predicted a positive relationship because secured debt had a lower
interest rate that induced the usage of debt.
In this study, firm growth was the market value of equity to the
book value of the total asset ratio. According to the Agency Theory,
higher firm growth was associated with lower agency costs because
these firms had a lower amount of free cash flow that could be
manipulated by the managers. Meanwhile, the Pecking Order
Theory indicated that when firms had lesser internally-generated
funds, they would need to obtain external funds to support their
growth opportunities.
A non-debt tax shield was the depreciation to the total asset
ratio. It was reported as having a negative relationship with the
firm debt level. Apart from the interest paid on debt that lowered
the tax payment, non-debt tax shields such as depreciation,
amortisation, and deferred taxes are also transactions that could
reduce the tax payment. Due to the trade-off between these
transactions, our paper argued that the non-debt tax shield had a
negative relationship with debt.
The time effect and industry effect were also included as control
variables in our study. Time effect was specifically included to
control the macroeconomic variables such as bond market devel-
opment that could influence the usage of debt. For example, the
stage of the bond market can positively increase the employment of
debt because there were more alternative sources of funding in the
market. Other factors including the changes of interest rate were
also controlled via the time-effect dummy. Additionally, the
different adjustment costs showcased by different industries as
documented by other researchers also showed that such differ-
ences might have been controlled by the industry effect. The
measurements of the dependent, independent and control vari-
ables are exhibited in Table 1.
6
Asia Pacific Management Review xxx (xxxx) xxx
4. Empirical results
Table 2 reports the descriptive statistics for the variables used in
this study. In this study, the multicollinearity issue of the variables
was checked using the Pearson's correlation and variance inflation
factor (VIF) test. Multicollinearity issue is detected when the cor-
relation coefficient is greater than 0.60 (Gujarati, 2004) and VIF
value is greater than 10 (Law, 2018). As reported in Table 3, the
correlation coefficients between independent variables used in this
study are not greater than 0.6 and the VIF value is 1.36 (<10)
indicate a low risk of multicollinearity issues between the inde-
pendent and dependent variables; hence, both results confirm that
there is no collinearity issue.
4.1. Factors influencing target leverage ratio
Table 4 shows the results of the SYS-GMM result of Equation (3).
To identify the potential omitted variable bias, our study used a
stepwise estimation procedure by consecutively added the control
variables. Model (1) reports the result with no control variables and
Model 4 reports the results with full set of control variables. To
generate a consistent regressor based on SYS-GMM, our target
leverage model were tested with three common diagnostic tests
(Wald-test, Sargan-test, and second order autocorrelation test) for
the validity of the instrument variables. Wald-test (p-value <0.05)
result indicates that the explanatory variables in our study are
appropriate in explaining the target and market book total debts.
The Sargan-test results also suggest that the instruments applied
were valid. Moreover, the regression models are free from auto-
correlation issues as the AR (2) p-value is more than 0.5. These
findings indicate a robust estimator that applied in our model.
Furthermore, our study employed the book value long-term debt as
another dependent variable for robustness results.
From Table 4, the coefficient of lag leverage obtained are
consistently significant at 1% from Model (1) to (4). The main result
in Model (4) shows a lag leverage of 0.7780, indicating an average
SOA of 0.2220 for Indonesian firms. Our result appear to be slower
compared to Flannery and Rangan (2006) who reported the SOA of
American firms to be 34%. In the meantime, it is also slower than
the 53.6% SOA in Malaysian firms reported by Matemilola et al.
(2018). Likewise, our result is also slower compared to similar
studies that focused on Indonesian firms. For example, Shan (2019),
Haron (2016), and Soekarno et al. (2015) reported an SOA of 36.75%,
62.74% and 46.65%, respectively. Nonetheless, our result was within
the range of SOA (1.31%e76.60%) reported by Cahyono and Chawla
(2019) who captured the industry differences. The differences SOA
obtained in this study compared to previous study demontstrates
that the SOA is indeed different according to time, firms and in-
dustry. The robustness results in Model (5) also document similar
significant findings of SOA; hence, our study conjectures that
Indonesia firms adjusted towards the target leverage was sup-
ported by DTOT with the firm which is constantly adjusted towards
the target capital structure overtime. The main result in Model (4)
shows that CEO education is positively related to the target book
total debts. The increases in CEO education, the target leverage
increases. This result is consistent with our prediction and it is
supported by Upper Echelon Theory with the arguments that CEOs
value and cognitive base of education background influence the
firms' strategic decision. Our results show highly-educated CEOs
are more skilful in making ideal strategic decisions and predict the
firm performance. The plausible reason for this relationship is that
highly-educated CEOs have higher confidence and tolerance with
ambiguity, thus reducing the risk-averse attitude towards taking up
more debt. Our result is consistent with past empirical studies such
as Bertrand and Schoar (2003) and Frank and Goyal (2007) who
M. Chua, N.H. Ab Razak, A.M. Nassir et al. Asia Pacific Management Review xxx (xxxx) xxx

Table 1
Variable measurements.

Variable and abbreviation Measurement

Book value of total debt The ratio of book value of total debt divided by the total assets
(BVTD)
Book value of long-term debt The ratio of book value of long-term debt divided by the total assets
(BVLTD)
CEO education (CEOEDU) Measured by five-point scale. A score of 1 was given for diploma level and anything lower, 2 for bachelor degree, 3 for professional
qualifications, 4 for master degree, and 5 for doctorate.
CEO experience (CEOEXP) Total number of working experience in years include the internal and external experiences of the CEOs
Firm Size (SIZE) Natural logarithm of sales
Profitability (PROF) The ratio of earnings before interest and taxes to the book value of total assets
Asset Tangibility (TANG) The ratio of fixed assets divided with the book value of total assets
Firm growth (GROWTH) The ratio of market value of equity to the book value of the total asset
Non-debt tax shield (NDTS) The ratio of depreciation to the total asset
Time-effect Dummy variable of 1 for a specific year and 0 otherwise
Industry-effect Dummy variable of 1 for a specific industry and zero otherwise. The classification of industries was based on the Industry Classification
Benchmark (ICB). This included oil and gas, basic materials, industrial, consumer goods, health care, consumer services,
telecommunications, utilities, and technology.

Table 2
Descriptive statistics of variables. Similarly, the result in Model (4) also show that CEO experience
is positively related to target book total debts. It is supported by the
Mean Min Max SD
UET that assumed the working experience influenced the mana-
BVTD 0.2277 0 1.5235 0.2065 gerial interpretation of the information and the perception of a
BVLTD 0.1299 0 1.4580 0.1606
certain situation in determining the firms’ strategic decision. Our
CEOEDU 2.7809 1 5 1.1084
CEOEXP 26.6218 1 82 14.556 results suggest that the richer the CEO experience, the more in-
SIZE 12.7249 5.9727 16.7699 1.659 clined would they be in accommodating the risk-taking activities.
TANG 0.3744 0.0005 0.964 0.2219 This propensity of risk-taking action is consistent with Matemilola
PROF 0.1292 0.8312 1.2589 0.1467
et al. (2018) who reported a positive relationship between CEO
NDTS 0.0359 0.0002 0.1768 0.054
GROWTH 3.9155 41.08 246.46 10.5329
experience and debt for Malaysian firms. Similarly, Hu et al. (2019)
also documented a positive influence of the experience of the CEO
Note: This table shows descriptive statistics for book value total debt, book value
on firm liquidity decisions. However, our results are inconsistent
long-term debt, CEO characteristics and firm-specific characteristics variables for
1000 nonfinancial Indonesia firm-year observation in this study sample during with Kuo et al. (2015) that showed an increase in firm-specific
2008e2017. The variables are defined in Table 1. experience led to a decrease in debt usage in the firms in the
United States. Our findings suggest that highly experienced CEOs
are less risk-averse in taking risk-related strategies. The finding is
found American CEOs with an MBA degree would take up more robust with book value long-term debt as reported in Model 5 and
aggressive strategies by increasing the debt usage, even though the the positive relationship between CEO experience and target
use of debt would increase the firms' business risk. Likewise, our leverage also portray in Model (1) to Model (3); therefore, H1b is
findings are in aligned with Sitthipongpanich & Polsiri, 2012 and accepted.
Ting et al. (2015) that reported higher employment of debt when With regard to the control variables, firm size and asset tangi-
the education level of CEO was higher for firms in Thailand and bility have a positive relationship with firm debt. These were
Malaysia, respectively. On the contrary, our finding was the oppo- consistent with TOT and indicated that larger firms and firms with
site of Zhou and Wang (2014) who reported an inverse impact of more tangible assets had a higher target debt. Firm growth also
CEO education on firms’ debt in China. Nevertheless, the robustness showed a negative relationship with firm debt. This showed that
check result in Model (5) and Model (1) to (3) show the similar firms with more growth opportunities had lower target leverage.
significant result as reported in main result (Model (4)); thus, H1a Non-debt tax shield and market-to-book ratio resulted in mixed
hypothesis is proven in which there is a positive relationship be- findings.
tween CEO education and target leverage.

Table 3
Correlation coefficient.

BVTD BVLTD CEOEDU CEOEXP SIZE TANG PROF NDTS GROWTH VIF

BVTD 1.00
BVLTD 0.8204a 1.00
CEOEDU 0.0071 0.0182 1.00 1.18
CEOEXP 0.1079 0.0974a 0.2745a 1.00 1.70
SIZE 0.1056a 0.0836a 0.1682 0.0220 1.00 1.14
TANG 0.2296a 0.3054a 0.0872a 0.0226 0.0923a 1.00 1.38
PROF 0.3658a 0.2566a 0.1134a 0.1048a 0.2235a 0.1530a 1.00 1.23
NDTS 0.1560a 0.2089a 0.1061a 0.0616b 0.1432a 0.4604a 0.0483 1.00 1.37
GROWTH 0.0710b 0.0547 0.0701b 0.0926a 0.0029 0.0497 0.3233a 0.0998a 1.00 1.15
Mean VIF 1.36
a & b
Note: This table shows the correlation coefficient between independent variable based on Pearson correlation and VIF values. indicate significance at 1% and 5%,
respectively.

7
M. Chua, N.H. Ab Razak, A.M. Nassir et al. Asia Pacific Management Review xxx (xxxx) xxx

Table 4
CEO characteristics and target leverage.

Dependant variables BVTD BVLTD

Model (1) Model (2) Model (3) Model (4) (Main result) Model (5) (Robust)

SOA 0.2019 0.2395 0.2341 0.2220 0.4913

BVTDt-1 0.7981a (81.52) 0.7605a (82.76) 0.7659a (64.51) 0.7780a (57.43)
BVLTDt-1 0.5087a (54.18)
CEOEDU 0.0105a (3.08) 0.0094a (3.40) 0.0145a (4.10) 0.0175a (4.09) 0.0073b (2.00)
CEOEXP 0.0006b (2.19) 0.0005b (2.34) 0.0008a (2.98) 0.0020a (5.54) 0.0006b (2.45)
Half-life [ln(0.5)/ln (l)] 3.07 2.53 2.59 2.76 1.03
SIZE 0.0076a (3.35) 0.0243a (4.82) 0.0210a (5.16) 0.0400a (10.15)
TANG 0.0337 (1.52) 0.0105 (0.39) 0.1037a (2.89) 0.0396 (1.79)
PROF 0.2808a (22.00) 0.2989a (20.63) 0.2212a (11.68) 0.0041 (0.34)
NDTS 0.2752a (2.60) 0.3455a (4.16) 0.4211a (3.27) 0.4967a (3.64)
GROWTH 0.00002 (0.55) 0.0000 (0.21) 0.00001 (0.28) 0.0008a (41.59)
Year-fixed effect No No Yes Yes Yes
Industry effect No No No Yes Yes
AR (2) [p-value] 0.0843 0.1493 0.1529 0.1407 0.2221
Sargan-test [p-value] 0.2855 0.3765 0.3514 0.3996 0.3744
Number of observations 1000 1000 1000 1000 1000

Note: This table reports the SYS-GMM result of the relationship between CEO characteristic and target leverage used Equation (3). The BVTD and BVLTD are the dependent
variables, BVTDt-1 and BVLTDt-1 are the lag BVTD and BVLTD, respectively, SOA is the Speed of Adjustment towards target leverage, Half-life is measured by [ln(0.5)/ln (l)],
CEOedu and CEOexp are the main independent variables, and the firm characteristic such as SIZE, TANG, PROF, NDTS and GROWTH as well as year fixed effect, and industry
effect are the control variables. The independent and firms characteristics variables are view as predetermine variables and their lags are use as instruments. Model (1) uses
only CEO education and experience as the independent variable. Model (2) includes the firm characteristics such as size, tangibility, profitability, non-debt tax shield and
growth as the control variables. Model (3) controls the year fixed effect as another set of control variables. Model (4) reports the main result with a full set of control variable.
Model (5) shows the robustness check of main result with BVLTD as dependent variable. Figures in brackets are t-statistics. a and b indicate significance at 1% and 5% level,
respectively.

4.2. Factors influencing the speed of adjustment towards target
leverage
Table 5 reports the relationship between CEO characteristics and
SOA. For the relationship, our main focus is on the interaction be-
tween leverage deviation and CEO characteristics as stated in the
Equation (4); specifically the Devit x CEOEDU and Devit x CEOEXP.
Following the stepwise regression with slowly added the control
variables, our result (from Model 6 to 9) demonstrates the positive
relationship between CEO characteristics and the SOA for Indone-
sian firms. As reported in Model (9), the coefficient of Devit x
CEOEDU is found to be positive, in which it indicates an increase of
CEO education by one standard deviation with an increase in the
SOA by 3.37%. At an average SOA with 22% as reported in Model (4),
the effect of CEO education was economically large. Our result is
corroborated by the UET (Hambrick & Mason, 1984) with its
theoretical arguments that educational background represented
the cognitive preferences and risk propensity of a person. The
positive coefficient indicates that CEOs with an above-average ed-
ucation level such as those with postgraduate degrees would tend
to take riskier decision. Other than that, the positive results also
suggest that highly-educated CEOs are less entrenched towards

Table 5
CEO characteristics and speed of adjustment (SOA) towards target leverage.

Dependent variables: SOA towards

BVTD BVLTD

Model (6) Model (7) Model (8) Model (9) (Main results) Model (10)
(Robust)

Devit x CEOEDU 0.0324a (9.42) 0.0345a (8.44) 0.0345a (6.85) 0.0337a (5.63) 0.0503a (7.35)
Devit x CEOEXP 0.0014a (8.39) 0.0019a (4.19) 0.0019a (4.07) 0.0017a (3.51) 0.0042a (6.13)
Control Variables:
Devit 0.9716a (38.07) 0.9744a (36.10) 0.9806a (37.73) 0.9550a (43.04)
Devit x INITIAL DEVIATION 0.1151a (2.92) 0.7293b (2.32) 0.5833 (1.75) 0.0796 (0.61)
Devit x SIZE 0.0561a (28.5) 0.0562a (28.26) 0.0558a (31.18) 0.0533a (22.97)
Devit x PROF 0.0010 (0.02) 0.0012 (0.02) 0.0213 (0.6) 0.0057 (0.15)
Devit x TANG 0.1896a (6.81) 0.1865a (6.12) 0.2095a (6.55) 0.2563a (5.90)
Devit x NDTS 0.9455a (3.82) 0.9320a (3.88) - 0.6973b (2.43) 1.2112a (3.59)
Devit x GROWTH 0.0003 (0.20) 0.0003 (0.39) 0.0002 (0.32) 0.0001 (0.61)
Year-fixed effect No No Yes Yes Yes
Industry effect No No No Yes Yes
Adjusted R2 0.0725 0.8612 0.8616 0.8641 0.9806
Observations 1000 1000 1000 1000 1000

Note: This table reports the Ordinary Least Squares with bootstrap result for the relationship between CEO characteristics and SOA towards target leverage used Equation (4).
The SOA towards BVTD and BVLTD are the dependent variables, Devit is measured by leverage deviation, LEVit*  LEVit1 , INITIAL DEVIATION is the absolute deviation, Devit x
CEOEDU and Devit x CEOEXP are the main independent variables. The Devit , Devit x INITIAL DEVIATION, Devit x SIZE, Devit x PROF, Devit x TANG, Devit x NDTS, Devit x GROWTH,
year-fixed effect and industry effect are the control variables. Model (6) uses only Devit x CEOEDU and Devit x CEOEXP as the independent variable. Model (7) includes the Devit ,
Devit x INITIAL DEVIATION, Devit x SIZE, Devit x PROF, Devit x TANG, Devit x NDTS, Devit x GROWTH, year-fixed effect and industry effect as the control variables. Model (8)
controls the year fixed effect as another set of control variables. Model (9) reports the main result with a full set of control variables. Model (10) shows the robustness check of
the main result with SOA towards BVLTD as the dependant variable. Figures in brackets are t-statistics. a&b indicates significance at 1% and 5% level, respectively.

8
M. Chua, N.H. Ab Razak, A.M. Nassir et al.
achieving optimal leverage. This result is in align with the Agency
Theory in which the severity of agency conflict impeded the SOA
(Morellec et al., 2012). Since our result is robust with book value
long-term debt as dependent variables (as reported in Model (10)),
we conjectured a positive impact of CEO education and SOA; hence,
H2a is accepted.
Next, the coefficient of Devit x CEOEXP that reported in Model
(9) was also positive. This result shows that the richer the experi-
ence possessed by the CEOs, the speedier they moved to the target
leverage. Specifically, an increase of one standard deviation of CEO
experience improve the SOA by 0.17%. The significant result is
supported by the UET (Hambrick & Mason, 1984) with experience
determines the CEO's skills in making strategic decision. This result
exhibits that firm-specific experience combined with the experi-
ence gained by the CEOs from other companies enabled them to
improve the firm SOA. From the Agency Theory perspective, the
working experience the CEOs owned give a sense of possessiveness
towards their companies; thus, it reduces the likelihood to perform
unaligned interest decision to shareholders' goal. As a result, higher
experience CEOs will move quicker to close the deviation gap.
However, this result is in contrast with Frank and Goyal (2007) who
reported an insignificant relationship between the CEOs' tenure
and SOA among the American firms. Nevertheless, it was consistent
with Shan's (2019) study that showed more experience CEO will
improve the SOA of Malaysia, Singapore and Indonesia firms. Since,
the stepwise regression portrayed a consistent significant co-
efficients (Model (6)e(8)) and our result is robust as presented in
Model (10), we conjecture a positive relationship between CEO
experience and SOA; therefore, H2b is accepted.
As for the control variables, the interaction between leverage
deviation and initial deviation is found to be a positive relationship.
This indicated that a larger initial deviation was related to greater
benefits of adjustment. The result is consistent with Liao et al.
(2015). In addition, three out of five of the firms' specific charac-
teristics were found to have a significant relationship with SOA. A
positive coefficient of the firm size indicates that larger firms have
more tendency to close the deviation quicker compared to smaller
firms. This result is consistent with Buvanendra et al. (2017).
Likewise, the non-debt tax shield is also negatively correlated with
the SOA. Both of these results are consistent with Buvanendra et al.
(2017) finding for Sri Lankan and Indian firms. However, the firms’
growth and asset tangibility do not show any significant relation-
ship with the SOA.
5. Discussions
Based on our findings on the 100 non-financial Indonesian firms
listed in the Indonesia Stock Exchange between 2008 and 2017, we
showed that Indonesian firms would need 2.76 years to halve the
target leverage (refer to Model (4)). Consistent with the Dynamic
Capital Structure theory, the presence of adjustment costs with the
introduction of CEO education and experience in Indonesia firms
prevent the instantaneous adjustment towards target leverage.
Another notable finding of this study is that the SOA model showed
highly educated and CEOs with more experience are able to move
quicker to the target leverage. The findings are consistent with our
study prediction that CEO characteristics have a direct linkage to
the target leverage and SOA, in which the findings show that highly
educated and more experience CEO are more skilful in managing
the firms' strategic performance through the usage of optimal
capital structure. Taken together, assumptions of homogenous and
bring non-individualised inputs of CEOs may contribute to unob-
served heterogeneous nature of the CEOs to the firms' leverage
decision. These results are corroborated by the Upper Echelon
Theory with the arguments that firms’ strategic decisions are the
9
Asia Pacific Management Review xxx (xxxx) xxx
reflection of the CEO value and cognitive base that can be differed
according to their demographic characteristics.
There are several implications from this study. Firstly, inte-
grating the UET and DCS to identify the target leverage and SOA
advocated the importance to include two factors, namely, the CEO
education and experience when studying the firms' capital struc-
ture. This suggests the overlooked of the Upper Echelon in the past
SOA studies are likely to generate incomplete result of target
leverage and SOA of the firms. Secondly, the significant and positive
results of CEO characteristics signify that CEOs with higher edu-
cation and more experience are less likely to conduct misaligned
harmful action to the shareholders' wealth. Assuming that the
controlling mechanism is fixed, they are capable to minimise the
adjustment costs and closed the deviation gap quicker compared to
their counterpart. This poses a challenge to the previous studies
that assumed the severity conflict between CEO and shareholder as
a factor to a slower deviation towards target leverage, in which, the
conflict between CEO and shareholder can be minimised when the
CEO acquired more skill. Thirdly, the findings may practically assist
the management in hiring the CEOs who are capable to bring value
to the firms; specifically, the CEOs with higher education and more
experience have proven to have a tendency towards maximising
the shareholders’ wealth through optimizing the financial leverage.
This is consistent with the Upper Echelon Theory arguments that
emphasised the importance of human capital in generating more
returns to the firms.
Despite the novel findings, this study has some limitations.
Firstly, it was argued that the low number of firms in the sample
size could affect the generalisability of the results. This might be
applicable to our study as well; however, the sample size used in
the study have accounted for 70% of the total market capitalization
of the Indonesian firms, indicating that our sample is representa-
tive to the Indonesian non-financing firms. Furthermore, there are
other CEO characteristics that could influence the firms’ strategic
decision, as suggested/stated in UET. Since, our study only took into
account the perspectives of CEO education and CEO experience,
other CEO characteristics could also explain the target leverage and
SOA. Future researchers can work on these limitations to provide
new insight into the capital structure study.
6. Conclusion
Consistent with the UET, our study showed that SOA varied
across a non-neoclassical perspective. The result generally
confirmed the direct link between CEO ability and the incomplete
capital structure adjustment. The results were robust with alter-
native proxies and estimation methods.
Declaration of competing interest
None declared.
References
Amran, N. A., Yusof, M., Atef, M., Ishak, R., & Aripin, N. (2014). Do characteristics of
CEO and chairman influence government- linked companies performance?
Procedia - Social and Behavioral Sciences, 109, 799e803. https://doi.org/10.1016/
j.sbspro.2013.12.546
Antonczyk, R. C., & Salzmann, A. J. (2014). Overconfidence and optimism: The effect
of national culture on capital structure. Research in International Business and
Finance, 31, 132e151. https://doi.org/10.1016/j.ribaf.2013.06.005
Barker, V. L., & Mueller, G. C. (2002). CEO characteristics and firm R&D spending.
Management Science, 48(6), 782e801. https://doi.org/10.1287/
mnsc.48.6.782.187
Barno, L. J. (2017). Impact of managers' characteristics on capital structure among
firms listed in nairobi securities exchange, Kenya. International Journal of Eco-
nomics, Commerce and Management, 5(7), 487e503.
Berglo€f, E. (1990). Capital structure as a mechanism of control: A comparison of
M. Chua, N.H. Ab Razak, A.M. Nassir et al.
financial systems.
Bertrand, M., & Schoar, A. (2003). Managing with style: The effect of managers on
firm policies. Quarterly Journal of Economics, 118(4), 1169e1208. https://doi.org/
10.1162/003355303322552775
Bhagat, S., Bolton, B. J., & Subramanian, A. (2010). CEO education, CEO turnover, and
firm performance. SSRN Electronic Journal, 1e48. https://doi.org/10.2139/
ssrn.1670219
Butler, A. W., & Gurun, U. G. (2012). Educational networks, mutual fund voting
patterns, and CEO compensation. Review of Financial Studies, 25(8), 2533e2562.
https://doi.org/10.1093/rfs/hhs067
Buvanendra, S., Sridharan, P., & Thiyagarajan, S. (2017). Firm characteristics,
corporate governance and capital structure adjustments: A comparative study
of listed firms in Sri Lanka and India. IIMB Management Review, 29(4), 245e258.
https://doi.org/10.1016/j.iimb.2017.10.002
Buvanendra, S., Sridharan, P., & Thiyagarajan, S. (2018). Determinants of speed of
adjustment (SOA) toward optimum capital structure: Evidence from listed firms
in Sri Lanka. Journal of Asia-Pacific Business, 19(2), 46e71. https://doi.org/
10.1080/10599231.2018.1453742
Cahyono, S., & Chawla, A. (2019). Dynamic capital structure in Indonesian case: Do
industry-specific variables affect adjustment speeds? Investment Management
and Financial Innovations, 16(2), 218e235. https://doi.org/10.21511/
imfi.16(2).2019.19
Chikh, S., & Filbien, J. Y. (2011). Acquisitions and CEO power: Evidence from French
networks. Journal of Corporate Finance, 17(5), 1221e1236. https://doi.org/
10.1016/j.jcorpfin.2011.06.007
Chua, M., Razak, N. H. A., Nassir, A., & Yahya, M. H. (2020). Does CEO education
influence the target leverage and speed of adjustment? Journal of Critical Re-
views, 7(12), 59e68. https://doi.org/10.31838/jcr.07.12.10
Claessens, S., & Fan, J. P. H. (2002). Corporate governance in Asia: A survey. Inter-
national Review of Finance, 3(2), 71e103. https://doi.org/10.1111/1468-
2443.00034
Cline, B. N., & Yore, A. S. (2016). Silverback CEOs: Age, experience, and firm value.
Journal of Empirical Finance, 35, 169e188. https://doi.org/10.1016/
j.jempfin.2015.11.002
Dang, T. L., Dang, V. A., Moshirian, F., Nguyen, L., & Zhang, B. (2019). News media
coverage and corporate leverage adjustments. Journal of Banking & Finance, 109.
https://doi.org/10.1016/j.jbankfin.2019.105666
Devos, E., Rahman, S., & Tsang, D. (2017). Debt covenants and the speed of capital
structure adjustment. Journal of Corporate Finance, 45, 1e18. https://doi.org/
10.1016/j.jcorpfin.2017.04.008
Dufour, D., Luu, P., & Teller, P. (2017). The influence of cash flow on the speed of
adjustment to the optimal capital structure. Research in International Business
and Finance, 45, 62e71. https://doi.org/10.1016/j.ribaf.2017.07.132
Fama, E. F., & French, K. R. (2002). Testing trade-off and pecking order predictions
about dividends and debt. Review of Financial Studies, 15(1), 1e33.
Farag, H., & Mallin, C. (2018). The influence of CEO demographic characteristics on
corporate risk-taking: Evidence from Chinese IPOs. The European Journal of
Finance, 24(16), 1528e1551. https://doi.org/10.1080/1351847X.2016.1151454
Fischer, E. O., Heinkel, R., & Zechner, J. (1989). Dynamic capital structure Choice :
Theory and tests. The Journal of Finance, 44(1), 19e40. https://doi.org/10.2307/
2328273
Fitzgerald, J., & Ryan, J. (2018). The impact of firm characteristics on speed of
adjustment to target leverage: A UK study. Applied Economics, 51(3), 1e13.
https://doi.org/10.1080/00036846.2018.1495822
Flannery, M. J., & Hankins, K. W. (2013). Estimating dynamic panel models in
corporate finance. Journal of Corporate Finance, 19(1), 1e19. https://doi.org/
10.1016/j.jcorpfin.2012.09.004
Flannery, M. J., & Rangan, K. P. (2006). Partial adjustment toward target capital
structures. Journal of Financial Economics, 79(3), 469e506. https://doi.org/
10.1016/j.jfineco.2005.03.004
Frank, M. Z., & Goyal, V. K. (2007). Corporate leverage: How much do managers really
matter. Available at SSRN, 971082.ISO 690.
Fujianti, L. (2018). Top management characteristics and company performance: An
empirical analysis on public companies listed in the Indonesian stock exchange.
European Research Studies Journal, 21(2), 62e76.
Getzmann, A., Lang, S., & Spremann, K. (2015). Target capital structure determinants
and speed of adjustment analysis to address the keynes-hayek debate. Journal
of Reviews on Global Economics, 4, 225e241. https://doi.org/10.6000/1929-
7092.2015.04.23
Gottesman, A. A., & Morey, M. R. (2010). CEO educational background and firm
financial performance. Journal of Applied Finance, 20(2), 70e82.
Graham, J. R., Harvey, C. R., & Puri, M. (2013). Managerial attitudes and corporate
actions. Journal of Financial Economics, 109, 103e121. https://doi.org/10.1016/
j.jfineco.2013.01.010
Gujarati, D. N. (2004). Basic Econometrics (4th Edition). McGraw-Hill Companies.
Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a
reflection of its top managers. Academy of Management Review, 9(2), 193e206.
https://doi.org/10.2307/258434
Haron, R. (2014). Capital structure inconclusiveness: Evidence from Malaysia,
Thailand and Singapore. International Journal of Managerial Finance, 10(1),
23e38. https://doi.org/10.1108/IJMF-03-2012-0025
Haron, R. (2016). Do Indonesian firms practice target capital structure? A dynamic
approach. Journal of Asia Business Studies, 10(3), 318e334. https://doi.org/
10.1108/JABS-07-2015-0100
Haron, R., Ibrahim, K., Nor, F. M., & Ibrahim, I. (2013a). Dynamic adjustment towards
10
Asia Pacific Management Review xxx (xxxx) xxx
target capital structure: Thailand evidence. Jurnal Pengurusan, 39, 73e82.
Haron, R., Ibrahim, K., Nor, F. M., & Ibrahim, I. (2013b). Factors affecting speed of
adjustment to target leverage: Malaysia evidence. Global Business Review, 14(2),
243e262. https://doi.org/10.1177/0972150913477469
Hu, J., Li, A., & Luo, Y. (2019). CEO early life experiences and cash holding: Evidence
from China's great famine. Pacific-Basin Finance Journal, 57(July), 101184.
https://doi.org/10.1016/j.pacfin.2019.101184
Juglar, C. (1862). Des Crises Commerciales et de leur retour p eriodique en France, an

Angleterre et aux Etats-Unis. https://doi.org/10.4000/books.enseditions.1396
Kuo, H.-C., Wang, L.-H., & Lin, D. (2015). CEO traits, corporate performance, and
financial leverage. International Journal of Economics and Finance, 7(1), 68e86.
https://doi.org/10.5539/ijef.v7n1p68
Law, S. H. (2018). Applied panel data analysis short panels (first). Universiti Putra
Malaysia Press.
Lee, K. W., & Yeo, G. H. H. (2010). Capital Structure in Asia and CEO Entrenchment. In
Handbook of Quantitative Finance and Risk Management (pp. 863e872). Boston,
MA: Springer.
Lewis, B. W., Walls, J. L., & Dowell, G. W. S. (2013). Difference in degrees: CEO
characteristics and firm environmental disclosure. Strategic Management Jour-
nal, 35(5), 712e722. https://doi.org/10.1002/smj.2127
Liao, L.-K., Mukherjee, T., & Wang, W. (2015). Corporate governance and capital
structure dynamics: An empirical study. Journal of Financial Research, 38(2),
169e191. https://doi.org/10.1111/jfir.12057
Li, M., & Patel, P. C. (2019). Jack of all, master of all? CEO generalist experience and
firm performance. The Leadership Quarterly, 30(3), 320e334. https://doi.org/
10.1016/j.leaqua.2018.08.006
Matemilola, B. T., Bany-Ariffin, A. N., Azman-Saini, W. N. W., & Nassir, A. M. (2018).
Does top managers' experience affect firms' capital structure? Research in In-
ternational Business and Finance, 45, 488e498. https://doi.org/10.1016/
j.ribaf.2017.07.184
Mohamed, E. B.en, Souissi, M. N., Baccar, A., & Bouri, A. (2014). CEO's personal
characteristics, ownership and investment cash flow sensitivity: Evidence from
NYSE panel data firms. Journal of Economics, Finance and Administrative Science,
19(37), 98e103. https://doi.org/10.1016/j.jefas.2014.10.002
Morellec, E., Nikolov, B., & Schurhoff, N. (2012). Corporate governance and capital
structure dynamics. The Journal of Finance, 67(3), 803e848. https://doi.org/
10.1111/j.1540-6261.2012.01735.x
Mukherjee, S., & Mahakud, J. (2010). Dynamic adjustment towards target capital
structure: Evidence from Indian companies. Journal of Advances in Management
Research, 7(2), 250e266. https://doi.org/10.1108/09727981011085020
Nguyen, P., Rahman, N., & Zhao, R. (2018). CEO characteristics and firm valuation: A
quantile regression analysis. Journal of Management & Governance, 22(1),
133e151. https://doi.org/10.1007/s10997-017-9383-7
Nor, F. M., Haron, R., Ibrahim, K., Ibrahim, I., & Alias, N. (2011). Determinants of
target capital structure: Evidence on South east Asia countries. Journal of
Business and Policy Research, 6(3), 39e61.
Oh, W., Kyun, Y., & Jung, R. (2018). Experience-based human capital or fi xed
paradigm problem ? CEO tenure , contextual in fl uences , and corporate social (
ir ) responsibility. Journal of Business Research, 90(February 2017), 325e333.
https://doi.org/10.1016/j.jbusres.2018.05.034
Pagan, A. (1984). Econometric issues in the analysis of regressions with generated
regressors. International Economic Review, 25(1), 221e247. https://doi.org/
10.2307/2648877
Purhanudin, N., & Zakaria, Z. (2015). Managerial overconfidence and debt maturity
structure of Malaysian construction and material companies. Review of
Contemporary Business Research, 4(1), 32e39. https://doi.org/10.15640/
rcbr.v4n1a4
Robinson, P. B., & Sexton, E. A. (1994). The effect of education and experience on
self-employment success. Journal of Business Venturing, 9(2), 141e156. https://
doi.org/10.1016/0883-9026(94)90006-X
Shan, C. M. (2019). Relationship between CEO characteristics, ownership concentration
and speed of adjustment on leverage in selected asian countries [Unpublished
doctoral dissertation] (Universiti Putra Malaysia). Retrieved from http://psasir.
upm.edu.my/id/eprint/83307/.
Sitthipongpanich, T., & Polsiri, P. (2012). CEO characteristics and corporate financing
in Thailand. International Research Journal of Finance and Economics, 102, 52e69.
Sitthipongpanich, T., & Polsiri, P. (2015). Do CEO and board characteristics matter? A
study of Thai family firms. Journal of Family Business Strategy, 6(2), 119e129.
https://doi.org/10.1016/j.jfbs.2015.01.002
Soekarno, S., Kitri, M. L., & Utomo, S. (2015). The speed of adjustment to capital
structure target before and after financial crisis: Evidence from Indonesian state
owned enterprises. International Journal of Applied Business and Economic
Research, 13(7), 5375e5387.
Soekarno, S., Kitri, M. L., & Utomo, S. (2016). Capital structure determinants and the
speed of adjustment towards capital structure target: Evidence from Indone-
sian state-owned enterprises. International Journal of Monetary Economics and
Finance, 9(4), 388e400. https://doi.org/10.1504/IJMEF.2016.080081
Thies, C., & Klock, M. (1992). Determinants of capital structure. Review of Financial
Economics, 1(2), 40e52.
Ting, I. W. K., Azizan, N. A. binti, & Kweh, Q. L. (2015). Upper Echelon theory
Revisited : The relationship between CEO personal characteristics and financial
leverage decision. Procedia - Social and Behavioral Sciences, 195, 686e694.
https://doi.org/10.1016/j.sbspro.2015.06.276
Wang, G., Holmes, R. M., Oh, I.-S., & Zhu, W. (2016). Do CEOs matter to firm strategic
actions and firm performance? A meta-analytic investigation based on upper
M. Chua, N.H. Ab Razak, A.M. Nassir et al.
echelons theory. Personnel Psychology, 69(4), 775e862. https://doi.org/10.1111/
peps.12140
Wu, T., Wu, Y., Tsai, H., & Li, Y. (2017). Top management teams' characteristics and
strategic decision-making: A mediation of risk perceptions and mental models.
Sustainability, 9(12), 2265. https://doi.org/10.3390/su9122265
Yin, Q. E., & Ritter, J. R. (2019). The speed of adjustment to the target market value
11
Asia Pacific Management Review xxx (xxxx) xxx
leverage is slower than you think. Journal of Financial and Quantitative Analysis,
1e66. https://doi.org/10.1017/S0022109019000516
Zhou, W., & Wang, Y. (2014). An empirical study for corporate risk index: CEO
characteristics affecting corproate risk-taking. Journal of Applied Sciences, 14(24),
3520e3525. https://doi.org/10.3923/jas.2014.3520.3525