This thesis provides analysis of the adjusting behavior for the firms listed in Indonesian stock exchange from 1992 to 2010 when the adjustment speed of capital structure affected bu macroeconomic condition. This thesis also differentiate the overlevered and underlevered firms on speed adjustment of capital structure and the impact of macroeconomic condition on overlevered and underlevered firms to their speed adjustment of capital structure.The paper uses leverage ratio as an independent variable. The leverage ratio is defined by the ratio of book value and market value respectively. The ratio of debt to book value is measured by the sum of the firm’s short-term and long-term book debt divided by net assets, and the ratio of debt to market value is measured by the sum of the firm’s short-term and long-term book divided by the number of common shares outstanding multiplied by the stock price per share. Dependent variables include firm’s determinant factors and macroeconomic conditions. The firm’s determinant factors include probability, tangibility, growth, size, net debt tax shields and selling expenses and macroeconomic conditions are defined by the inflation rate and GDP growth rate. Using OLS and controlling firms fixed effect approach, the thesis finds that Indonesian firms adjust their leverage faster in bad economic condition. The observed firms show that overlevered firms adjust faster than underlevered firms. However, by controlling the variable of macroeconomic condition, the overlevered and underlevered firms show insignificance effects against capital structure adjustment speed.
