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How financial liberalization in Indonesia affected firms'capital structure and investment decisions

Author

Listed:
  • Harris, John R.
  • Schiantarelli, Fabio
  • Siregar, Miranda G.
Abstract
How did financial liberalization affect Indonesian firms? The authors analyzed real and financial indicators for the establishments in their panel of Indonesian manufacturing establishments for 1981-88. Their sample was not representative, but their evidence shows that economic reform had favorable effect on the performance of smaller firms. Liberalization helped reallocate domestic credit toward smaller firms to a level roughly proportionate to their contribution to value-added. Moreover, other firms were successful in replacing expensive domestic credit with cheaper foreign credit, releasing some domestic credit to establishments that lacked access to it. Nominal and real interest rates rose to very high levels, but real returns to capital assets remain high and have increased substantially for small and medium-size exporting establishments. For all groups, higher rates of financial leverage gave rise to extremely high returns on owned equity. Medium-size firms - both conglomerate and non-conglomerate - have had the highest rates of return to capital, financial leverage, and returns to equity. Financial reform has had a significant impact on firm's real and financial choices. Shifting from administrative allocations of credit to market-based allocations has increased borrowing costs, particularly for smaller firms, but it has also widened access to finance. The net effect appears to have been a decrease in the degree of market segmentation and a relaxation of financial constraints to the benefit of investment activity.

Suggested Citation

  • Harris, John R. & Schiantarelli, Fabio & Siregar, Miranda G., 1992. "How financial liberalization in Indonesia affected firms'capital structure and investment decisions," Policy Research Working Paper Series 997, The World Bank.
    • Handle: RePEc:wbk:wbrwps:997
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    References listed on IDEAS

    as
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    Cited by:

    1. Agustinus Prasetyantoko, 2006. "Debt Composition and Balance Sheet Effect of Currency Crisis in Indonesia," Post-Print halshs-00134223, HAL.
    2. Agustinus, Prasetyantoko, 2007. "Debt Composition and Balance Sheet Effect of Currency Crisis in Indonesia," MPRA Paper 6501, University Library of Munich, Germany.

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