| In this paper we test the pecking order and trade-off hypotheses of corporate financing decisions using a cross-section of the largest Mining Companies In Indonesia. We build on Allen (1993) and Baskin (1989) to set up three models in which trade-off and pecking order theories give distinctively different predictions: (1) the determinants of leverage, (2) the relationship between leverage and dividends, and (3) the determinants of corporate investment. In model (1), we find a significant negative correlation between leverage and profitability; in model (2) we find a significant positive correlation between current leverage and past dividends. These results broadly support the pecking order hypothesis over trade-off theory. However, model (3) is inconclusive. Overall, the results provide tentative support for the pecking order hypothesis and demonstrate that a conventional model of corporate capital structure can explain the financing behaviour of mining companies in Indonesia. |