GCG, Firm Value, and Debt Structure in Indonesian Basic Materials Firms

Abstract

This study examines how internal governance mechanisms shape corporate debt structure in a capital intensive and crisis exposed industry. It analyses 61 basic materials firms listed on the Indonesia Stock Exchange over 2019–2023 (305 firm year observations), a period covering pre pandemic conditions, the COVID 19 shock, post crisis recovery, and global monetary tightening. Debt structure is proxied by the debt to equity ratio (DER), which exhibits extreme volatility with values ranging from −23,124.66 to 4,950.11, indicating widespread negative equity and severe financial distress in part of the sample. The empirical model is a fixed effects panel regression with cluster robust standard errors. Board size, institutional ownership, and firm age show positive and statistically significant effects on leverage, while the proportion of independent commissioners has a strong negative effect; audit committee size and return on assets (ROA) are not significant. Firm value, measured by price to book value (PBV), has a large negative impact on DER and significantly moderates the effects of board size and independent commissioners on leverage. A PBV threshold at approximately 0.945 separates regimes where independent commissioners reduce leverage (distressed/undervalued firms) and where they facilitate higher leverage (fairly valued or overvalued firms). The findings validate a conditional multi theory framework that combines agency theory, resource dependence theory, and pecking order logic instead of relying on any single theory. They highlight that governance mechanisms are neither uniformly “good” nor “bad” for leverage but context dependent, with firm valuation and crisis conditions critically shaping their effects. The results provide implications for boards, regulators, creditors, and investors in emerging markets when designing governance structures and monitoring extreme leverage in capital intensive sectors.