Journal of Economic, Finance Research and Review (JEFRR)

When Internal Funds Meet Debt: The Role of Profitability in the Free Cash Flow–Debt Policy Relationship

Reskia, Meysa, Tan, Andreas, Oktari, Vera

9 October 2026 · Vol. 2, Issue 10, pp. 685-692

DOI: 10.65150/EP-jefrr/V2E10/2026-01

Abstract

This study examines the effect of free cash flow on debt policy and the extent to which profitability changes this relationship in infrastructure firms listed on the Indonesia Stock Exchange. The study covers 51 firms during 2021–2023, providing 153 firm-year observations. The analysis uses a Fixed Effects Model with cross-sectional robust standard errors. The results show that free cash flow is positively and significantly associated with debt policy (β = 0.0219; p < 0.001). The interaction between free cash flow and profitability is positive and significant (β = 0.1625; p = 0.0028), while the moderated model explains 96.52% of the variation in debt policy (Adjusted R² = 0.9652). The positive interaction indicates that profitability strengthens, rather than weakens, the relationship between free cash flow and debt policy. Thus, Hypothesis 2 is not supported. The findings suggest that infrastructure firms may use internal funds and debt as complementary sources of financing, reflecting the sector’s substantial investment requirements. These findings provide evidence that financing decisions in capital-intensive firms may not be fully explained by the financing hierarchy proposed by the Pecking Order Theory. The results also suggest that managers and creditors should consider profitability and internal cash availability jointly when evaluating financing decisions.

Keywords: Free Cash Flow, Debt Policy, Profitability, Pecking Order Theory, Infrastructure Sector

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Reskia, Meysa, Tan, Andreas, Oktari, & Vera (2026). When Internal Funds Meet Debt: The Role of Profitability in the Free Cash Flow–Debt Policy Relationship. Journal of Economic, Finance Research and Review, 2(10), 685-692. https://doi.org/10.65150/EP-jefrr/V2E10/2026-01

@article{Reskia2026,
  title   = {When Internal Funds Meet Debt: The Role of Profitability in the Free Cash Flow–Debt Policy Relationship},
  author  = {Reskia and Meysa and Tan and Andreas and Oktari and Vera},
  journal = {Journal of Economic, Finance Research and Review},
  year    = {2026},
  volume  = {2},
  number  = {10},
  pages   = {685-692},
  doi     = {10.65150/EP-jefrr/V2E10/2026-01},
  url     = {https://doi.org/10.65150/EP-jefrr/V2E10/2026-01}
}

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