The Role of Institutional Ownership in Debt Policy

Oct 13, 2025 by magicalceylontours.com 124 views

The Influence of Institutional Ownership, Managerial Ownership, and Free Cash Flow on Debt Policy on Textile and Garment Industry Companies Listed on the Indonesia Stock Exchange

The textile and garment industry is one of the largest sectors in the Indonesian economy, employing millions of people and contributing significantly to the country's GDP. However, the industry is also known for its high debt levels, which can be a major risk factor for companies operating in this sector. In this study, we aim to analyze the effect of institutional ownership, managerial ownership, and free cash flow on debt policy in textile and garment industry companies listed on the Indonesia Stock Exchange during the period 2008 to 2010.

Institutional ownership, managerial ownership, and free cash flow are three key variables that can influence a company's debt policy. Institutional ownership refers to the share ownership by financial institutions, which can provide stability in a company's financial policy. Managerial ownership, on the other hand, refers to the share ownership by company management, which can influence their decision-making process. Free cash flow, as a cash surplus owned by the company after meeting the needs of capital expenditure, can be a signal for management in determining the amount of debt.

This research is categorized as a causal research that replicated previous research. The research population consists of textile and garment industry companies listed on the Indonesia Stock Exchange in the specified time span. By using the purposive sampling method, 16 of the 21 companies were chosen as samples for further analysis. The data used in this study is secondary data, which is then analyzed using a dual linear regression method with classic assumption testing.

Based on the results of the analysis, it is known that institutional ownership, managerial ownership, and free cash flow do not have a partial significant influence on debt policy. However, when viewed simultaneously, the three variables have a significant effect on debt policy. This can be seen from the value of F count which is greater than F table (12,378> 3,195056) and a significance value of less than 0.05 (0,000 <0.05).

Institutional and managerial ownership is often considered an important factor in making financial decisions. Institutional ownership, which refers to share ownership by financial institutions, has the potential to provide stability in the company's financial policy. However, although institutional and managerial ownership does not show a partial significant effect, the fact that they have simultaneous influences show complex interactions between these three variables in the context of debt policy.

Free cash flow, as a cash surplus owned by the company after meeting the needs of capital expenditure, can be a signal for management in determining the amount of debt. Management that has share ownership tends to be more careful in using debt, because they also have greater personal risks. On the other hand, institutional ownership can encourage management to make more aggressive decisions if they believe that companies have good growth prospects.

The Role of Institutional Ownership in Debt Policy

Institutional ownership can play a significant role in debt policy by providing stability in a company's financial policy. Institutional investors, such as pension funds and mutual funds, can provide a steady stream of capital to companies, which can help to reduce their debt levels. Additionally, institutional investors can also provide a level of expertise and guidance to companies, which can help to improve their financial management.

The Role of Managerial Ownership in Debt Policy

Managerial ownership can also play a significant role in debt policy by influencing the decision-making process of company management. Managers who have share ownership tend to be more careful in using debt, because they also have greater personal risks. This can lead to a more conservative approach to debt, which can help to reduce the risk of default.

The Role of Free Cash Flow in Debt Policy

Free cash flow can also play a significant role in debt policy by providing a signal for management in determining the amount of debt. Companies with high free cash flow levels tend to have more flexibility in their debt policy, which can lead to a more aggressive approach to debt. On the other hand, companies with low free cash flow levels tend to have less flexibility in their debt policy, which can lead to a more conservative approach to debt.

This study provides new insights on how institutional ownership, managerial ownership, and free cash flow can affect debt policy in textile and garment industry companies listed on the Indonesia Stock Exchange. Although these three variables do not have a partial significant influence, simultaneous influence shows that the interaction between these factors is important to consider in the analysis of company financial policies. Further research can expand this scope by considering other variables that may also play a role in making decisions regarding debt policy.

Based on the findings of this study, we recommend that companies in the textile and garment industry should consider the following:

Institutional ownership can provide stability in a company's financial policy, and companies should consider attracting institutional investors to reduce their debt levels.
Managerial ownership can influence the decision-making process of company management, and managers should be careful in using debt, because they also have greater personal risks.
Free cash flow can provide a signal for management in determining the amount of debt, and companies should consider their free cash flow levels when making decisions regarding debt policy.

By considering these factors, companies in the textile and garment industry can make more informed decisions regarding their debt policy, which can help to reduce their risk of default and improve their financial performance.
Frequently Asked Questions (FAQs) on the Influence of Institutional Ownership, Managerial Ownership, and Free Cash Flow on Debt Policy

A: This study aims to analyze the effect of institutional ownership, managerial ownership, and free cash flow on debt policy in textile and garment industry companies listed on the Indonesia Stock Exchange during the period 2008 to 2010. The findings of this study can provide new insights on how these variables interact and influence company funding decisions.

A: The key variables that influence debt policy in this study are institutional ownership, managerial ownership, and free cash flow. Institutional ownership refers to the share ownership by financial institutions, managerial ownership refers to the share ownership by company management, and free cash flow refers to the cash surplus owned by the company after meeting the needs of capital expenditure.

A: Institutional ownership can play a significant role in debt policy by providing stability in a company's financial policy. Institutional investors, such as pension funds and mutual funds, can provide a steady stream of capital to companies, which can help to reduce their debt levels.

A: Managerial ownership can also play a significant role in debt policy by influencing the decision-making process of company management. Managers who have share ownership tend to be more careful in using debt, because they also have greater personal risks.

A: Free cash flow can also play a significant role in debt policy by providing a signal for management in determining the amount of debt. Companies with high free cash flow levels tend to have more flexibility in their debt policy, which can lead to a more aggressive approach to debt.

A: The findings of this study can provide new insights on how institutional ownership, managerial ownership, and free cash flow can affect debt policy in textile and garment industry companies listed on the Indonesia Stock Exchange. Companies in this industry should consider the following:

Institutional ownership can provide stability in a company's financial policy, and companies should consider attracting institutional investors to reduce their debt levels.
Managerial ownership can influence the decision-making process of company management, and managers should be careful in using debt, because they also have greater personal risks.
Free cash flow can provide a signal for management in determining the amount of debt, and companies should consider their free cash flow levels when making decisions regarding debt policy.

A: This study has several limitations, including:

The study only analyzed the effect of institutional ownership, managerial ownership, and free cash flow on debt policy in textile and garment industry companies listed on the Indonesia Stock Exchange during the period 2008 to 2010.
The study did not consider other variables that may also play a role in making decisions regarding debt policy.
The study only analyzed the effect of these variables on debt policy, and did not consider other aspects of company financial policy.

A: Future research can expand this scope by considering other variables that may also play a role in making decisions regarding debt policy. Some potential research directions include:

Analyzing the effect of other variables, such as market conditions and industry trends, on debt policy.
Examining the effect of institutional ownership, managerial ownership, and free cash flow on debt policy in other industries.
Investigating the impact of debt policy on company financial performance and risk management.