THE DETERMINANTS ON COST OF DEBT IN THE MANUFACTURING INDUSTRY

Abstract

The manufacturing industry is the biggest contributor to the gross domestic product of Indonesia. The cost of debt is one of the factors for manufacturing companies in carrying out their operations. Lowering the cost of debt could attract manufacturing companies to raise funds through debt that will help the companies generate profit. The purpose of this research is to figure out the impact of factors that may affect the cost of debt in the Indonesian manufacturing industry. This study is a quantitative research that uses multiple regression as statistical analysis to test the hypotheses by using E-views 10 as a tool. The data population is manufacturing firms in Indonesia and samples are manufacturing firms listed on Indonesia Stock Exchange for 2015-2019. The results show that institutional ownership, debt to equity ratio, and interest coverage ratio impact the cost of debt. The implication is the institutional owners hold the majority of ownership thus the policy of the company is mostly decided by institutional ownership. This also explains that the creditors consider the direct aspects related to debt, in this study are a debt to equity ratio and interest coverage ratio. While managerial ownership, firm size, and return on assets do not impact the cost of debt. The small proportion of managerial ownership makes the most of the company’s decisions are not based on the managerial owners. Then, the profitable company chooses the retained earnings instead of borrowing the debt to minimize the expense in serving the interest. Thus, profitability does not impact the cost of debt.