The Effect of Earnings Volatility on Borrowers' Cost of Debt: Evidence from Indonesia

This study aimed to examine the effect of earnings volatility on borrowers cost of debt. In addition, this study also analyzes the difference effect of earnings volatility on borrowers cost of debt for different industries. Samples were selected by using the purposive sampling method and obtained 1,100 observations from eight industries sector in Indonesia listed in Indonesian Stock Exchange based on the Jakarta Stock Industrial Classification from 2012-2016. Three control variables used in this study were profitability, liquidity and solvency. The result shows that earnings volatility has positive effect on the borrowers cost of debt. The profitability has a negative effect on borrowers cost of debt, nevertheless liquidity and solvency have no effect on borrowers cost of debt. Therefore, every company expected to maintain and stabilize their earnings with generates a good performance of profitability. Furthermore, the result also shows that there is a difference effect of earnings volatility on borrowers cost of debt in each industrial sector in Indonesia listed in Indonesia Stock Exchange. The industrial sector which have significant effects between earnings volatility and borrowers cost of debt were agriculture sector and miscellaneous sector

EFFECT OF EARNINGS VOLATILITY ON COST OF DEBT

The research empirically tests the relationship between earnings volatility and cost of debt. The population of this research consist of all industries listed in Indonesian Stock Exchange and ICMD from 2012-2016 year period. Sampling method chosen is purposive sampling and there are 1,100 samples obtained from eight industries sector in Indonesia. The researcher used multiple regressions analysis to test the hypothesis. The research results shows that EBIT and EBITDA as the proxies for measuring earnings volatility have positive effect on the cost of debt. Firms’ profitability, liquidity and solvency are the three control variable where profitability has a negative influence on cost of debt but liquidity and solvency have non-significant influence on cost of debt. Furthermore, the results of the study indicate that there is a difference in the effect of earnings volatility on cost of debt that occurs in each industrial sector in Indonesia based on the Jakarta Stock Industrial Classification (JASICA) classification. Based on the results, the industrial sector which has a significant effect between earnings volatility and cost of debt is agriculture and miscellaneous sector