Page 65 - SUSTAINABILITY ISSUES & COVID-19

07 The Effect of Corporate Strategies on

Capital Structure in ASEAN 5:

The Role of CEO Overconfidence

Fia Nuralfiani, Ancella Anitawati Hermawan

ABSTRACT: This study aims to examine the association between three corporate strategy alternatives, i.e. vertical
integration, diversification, and internationalization, with the firms’ capital structure in five ASEAN countries. Investing
and financing decisions are the results of risk preference in management’s decision making. Firms with higher risk
tolerance tend to have a higher leverage. Overconfidence leads the CEO to tend to have a higher risk preference since
there is bias perception related to the risk and benefit of the chosen corporate strategy. Therefore further analysis
conducted on the role of CEO overconfidence strengthens or weakens the association between a firm’s strategies and
its capital structure. Hypothesis testing is conducted using panel data regression analysis, the sample consisted of
1.038 listed non financial firms in five ASEAN countries i.e. Indonesia, Malaysia, the Philippines, Singapore, and Thailand
during 2014-2018. The result of this study shows that there is no association between firms’ strategies and their capital
structure decision. In the additional test for each country, it shows that vertical integration strategy has a negative effect
and diversification strategy has a positive effect on firms’ leverage only in the Philippines. The internalization strategy
has a positive effect on leverage in Malaysia and the Phillippines. CEO overconfidence has no effect on the association
between corporate strategies and leverage. Additional test results show that in the Philippines, CEO overconfidence
weakens the effect of the vertical integration strategy on firms’ leverage. But CEO overconfidence strengthens the
effect of the internationalization strategy on firms’ leverage in Indonesia, Malaysia, and Philippines. CEO overconfidence
strengthens the influence of the diversification strategy on firms’ leverage in Indonesia and Philippines.

Keywords
ASEAN; capital structure; CEO overconfidence; vertical integration; diversification; internalization.

1. INTRODUCTION

Introduction Despite the deleveraging trend in so many emerging countries around the world for the last three years
(Damodaran, 2019), the corporate debt in ASEAN countries keeps increasing at a significant level (McKinsey Global
Institute, 2019). The highest increase in debt occurred in the Philippines, Malaysia, and Thailand. Malaysia is the country
with the highest bond growth in the Asian region, while Indonesia is one of the countries with the highest corporate
debt in foreign currencies compared to emerging market countries around the world. However, economic growth in
2018 remains broadly robust at 5.1%, driven by strong domestic demand and investments. The steady growth of the
economy reflects a conducive business climate, and it brings the given opportunities for the corporates to expand
their business. The corporates in ASEAN have been actively implementing expansion strategies i.e vertical integration,
diversification, and internalization. Based on S&P Global data (2019), companies in ASEAN are quite active in conducting
mergers and acquisitions with the value of transactions that have doubled in the last two years. M&A conducted
by companies in Singapore, Malaysia, and Thailand are more diversified in various industrial sectors. Whereas M&A
conducted in other countries is more focused on business integration to increase competitive advantage. The data
also shows that over the past decade the level of investment made by conglomerates in ASEAN has doubled. More
investment is being made in the new industrial sector and the geographical area. Besides, ASEAN is the fourth largest
exporter in the world and contributes up to 7% of total world exports (ASEAN Investment Report, 2019).

According to Barton & Gordon 1987 the business strategy could determine the financing decision since both of
them are the result of management’s decision-making process and reflect their risk preference. Quite different from
the standard financial theorem that highlighting the rationality based on cost and benefit analysis in the financing
decision process. Referring to study conducted by Barton & Gordonh (1988) this study aims to give a more realistic
assumption that financing decision is not solely determined by the concern of cost and benefit, but also psychological
concern like a preference could play a significant roles. The firms with higher risk preferences tend to implement the
risk-seeking business strategy like unrelated diversification and internationalization. The firms are also more likely to
use debt for external financing due to the high tolerance for financial risk. The firms with lower risk preferences tend to

64 International Conference on Sustainability
(5 Sustainability Practitioner Conference)
Th