Introduction

The definition optimal capital structure is raised from seminal Modigliani and Miller
(1958). Starting point of Modigliani and Miller (1958) is MM model without tax and
under perfect condition such as: cost of financial distress or agency cost, the combination
of financial sources includes debt and equity has irrelevant effect to firms value.
However, in reality, debt has twofold features. First, interest paid on debt will be tax
deduction. This is the good news for firm to increase the ratio of debt on capital structure
but the opposite fold is firms using more debt increases result in bankruptcy. Therefore,
by adding tax, according to Modigliani and Miller (1963), the value of firms will be
enhanced by tax shield. There are two main theories dominate the literature on capital
structure: trade off theory and pecking order theory.
According to trade off theory, the capital structure is determined by the trade-off of
benefit of debt and cost of debt or cost of bankruptcy (Myers; 1977). The pecking order
theory was developed by Myers (1984). In this theory, the author admits the exiting of
asymmetric information and cost of capital distress inside the company and investors
outside. In the outside investors point of view, debt is less risky than equity. However,
from inside of the firm, equity is the last source and retain earning is the first option for
capital structure. Therefore, Myers (1984) suggests that firm should use debt only when
retain earing is not efficient. With the same result, (DeAngelo and Masulis; 1980) posit
that the firms value will be maximized at the optimal capital structure.
Referring on these theories, a plenty of studies deeply research on the determinants of
capital structure and how the firm make capital structure decision to maximize the whole
firms value in the real economic and the imperfection of market. Rajan and Zingales
(1995) using the cross section data collected from G-7 countries, the author found out
that the firm leverage is same across these countries. Rajan and Zingales (1995) also find
the important determinants of capital structure include: tangibility asset, market-to-book,
firms size, profitability. After that, Booth et al (2001) has analyst and also suggest the

same result with these determinants. However, these studies do not explain clearly the
process of adjustment of capital structure.
Other studies fill the dynamic structure nature gap, Taggart (1977), Marsh (1982) using
the UK data to investigate the adjustment toward the optimal capital structure.
The determinants of capital structure
Refer on many previous studies, we examine the determinants of capital structure via
testing six main variables
Growth opportunities
Market-to-book ratio is considered as proxy of expected growth opportunity and growth
of firm. Therefore, firms with higher market-to-book ratio will have higher growth
opportunity. Moreover, Myers (1977), Jung et al (1996) find out that to reduce agency
problem and cost, firm should use equity to cover, whereas in case low growth, firm
should us debt Jensen (1986).
Rajan and Zingales (1995) find out the negative effect between market-to-book value or
growth opportunity with leverage by two main reason. First, firms expect higher growth
opportunity will face up with cost of financial distress. Second,