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Archives of Business Research – Vol. 10, No. 5
Publication Date: May 25, 2022
DOI:10.14738/abr.105.12345. Murni, S., Sabijono, H., Trang, I., & Mangantar, M. (2022). Capital Structure and Firm Value Manufacturing at the Indonesian Stock
Exchange. Archives of Business Research, 10(05). 153-169.
Services for Science and Education – United Kingdom
Capital Structure and Firm Value Manufacturing at the
Indonesian Stock Exchange
Sri Murni
Sam Ratulangi University, Faculty of Economics and Business
Harijanto Sabijono
Sam Ratulangi University, Faculty of Economics and Business
Irvan Trang
Sam Ratulangi University, Faculty of Economics and Business
Maryam Mangantar
Sam Ratulangi University, Faculty of Economics and Business
ABSTRACT
This study aims to determine and analyze the factors that influence the capital
structure (asset structure, firm size, profitability) and its effect on firm value. The
analysis was conducted on 51 manufacturing companies listed on the Indonesia
Stock Exchange (IDX) using financial statement data from 2014 to 2019. The sample
was taken by purposive sampling of 51 companies for 6 years of observation, using
path analysis. The results show that the asset structure has a significant and
positive effect on capital structure, firm size has a negative and significant effect on
capital structure, and ROE has no significant effect on capital structure, also asset
structure has an insignificant and negative effect on firm value, firm size and ROE
have insignificant effect on firm value, and capital structure has no significant effect
on firm value.
Keywords: Asset Structure, Firm Size, Profitability, Capital Structure, Firm Value
INTRODUCTION
In meeting funding needs, companies must look for efficient funding alternatives that have an
optimal capital structure that can minimize the overall cost of using capital, so that it will
maximize the value of the company. (Hanafi, 2011). One of the important indicators for
investors in assessing the company's prospects in the future is to see how far the company's
profitability is growing.
Capital structure theory aims to provide a rationale for knowing the optimal capital structure
which is the key to improving company performance and productivity. The capital structure is
said to be optimal if with a certain level of risk it can provide maximum company value. The
size of the capital structure ratio shows the size of the amount of long-term loans rather than
own capital invested in fixed assets that are used to earn profits. The greater the capital
structure ratio means the greater the number of long-term loans, so the greater the portion of
the profit that becomes a fixed expense, and the more cash flow used to pay loan installments,
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Archives of Business Research (ABR) Vol. 10, Issue 5, May-2022
Services for Science and Education – United Kingdom
as a result, the less the net profit received by the company. This opinion is not in accordance
with the opinion of Modigliani-Miller who says that by using debt, the company can increase its
value (Husnan and Pujiastuti, 2015) in other words, if the purpose of company spending is to
increase the value of the company, the company needs to use debt.
This is due to the nature of the tax deductibility of interest payments, meaning that interest
payments are tax deductions. In an effort to realize an optimal capital structure, financial
managers must consider the things that influence it. Pantow et al, (2015) stated that DER had a
positive effect on firm value. Prasetyorini (2013) states that capital structure has a negative and
significant effect on firm value, Riyanto (2010), states that companies with large fixed assets
can use more debt because fixed assets can be used as good collateral for company loans.
Trisnawati (2016) shows that asset structure has a significant effect on capital structure, while
Indraswary et al. (2016) stated that asset structure has a significant negative effect on capital
structure. Husnan (2010) states that the size of a company affects the capital structure.
The size of the company can affect the capital structure because the larger a company will tend
to use greater debt. Tangiduk et al (2017) showed that company size had a significant effect on
capital structure, while Prasetiono (2015) stated that company size had no significant effect on
capital structure.
Profitability is very important for companies in order to maintain their business continuity for
the long term, this is because profitability shows whether the company has prospects in the
future or not. The level of profitability of a company is one of the factors considered in the
capital structure policy. Brigham and Gapenski in Agus, (2001) said that often companies with
high returns tend to use debt. But companies with low rates of return tend to use large debt to
finance company activities. Watung et al, (2016) stated that profitability has an effect on capital
structure, Purwasi et al, (2014) found that profitability has a negative effect on capital
structure.
The purpose of this study is to determine whether the Asset Structure, Firm Size, and
Profitability of Capital Structure, and their effect on Firm Value.
LITERATURE REVIEW
Firm Value
Firm value is the investor's perception of the company's level of success which is often
associated with stock prices. High stock prices make the value of the company also high, and
increase market confidence not only in the company's current performance but also in the
company's prospects in the future. Maximizing company value is very important for a company,
because maximizing company value means maximizing the company's main goal (Harjito and
Martono, 2012). Increasing the value of the company is an achievement that is in accordance
with the wishes of the owners, because with the increase in the value of the company, the
welfare of the owners will also increase. According to Sartono (2015), company value is the
selling value of a company as an operating business.
Capital Structure
Capital structure explains whether there is an effect of changes in capital structure on firm value
(Manuraung, 2012). In other words, if the company replaces some of its own capital with debt
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Murni, S., Sabijono, H., Trang, I., & Mangantar, M. (2022). Capital Structure and Firm Value Manufacturing at the Indonesian Stock Exchange. Archives
of Business Research, 10(05). 153-169.
URL: http://dx.doi.org/10.14738/abr.105.12345
(or vice versa) will the stock price change, if the company does not change other financial
decisions. In other words, if the change in capital structure does not change the value of the
company, it means that there is no best capital structure. If by changing the structure. If the
value of the company changes, then the best capital structure will be obtained. The capital
structure that can maximize the value of the company, or the stock price, is the optimal capital
structure. What is meant by company value is the price that prospective buyers are willing to
pay if the company is liquidated, Husnan (2015).
Measuring the capital structure of a company using the ratio of total loan capital repayable
more than one year against total asset value. According to Harris and Raviv in Suripto (2015)
there is a consensus that the company's capital structure is determined by the company's
specific characteristics, including:
Fixed Asset
Fixed assets will be important for companies to obtain funding from external, in connection
with the availability of collateral for the fixed assets. These fixed assets are expected to have a
positive relationship with Leverage
Size of Firm
Larger firms are more likely to have a larger market portfolio, and therefore have a lower
probability of bankruptcy. Company size will have a positive effect on debt levels.
Non-debt Tax shields
This tax protection will provide a strong incentive for debt, especially for companies that have
sufficient taxable income. The tax benefit of debt decreases when other tax deductions, such as
depreciation increase.
Profitability
An accordance with the packing order theory in funding selection, where the funding selection
is based on the cheapest cost. This means that the company prefers to meet its funding needs
with internal rather than external funding
Asset Structure
Weston and Brigham (2005), stated that the asset structure is "The balance or comparison
between fixed assets and total assets." Meanwhile, according to Sutrisno (2009) asset structure
is "Determination of how much the allocation of funds for each component of assets, both in
current assets and in fixed assets." From the above understanding it can be concluded that the
asset structure is a comparison between fixed assets and total assets which can determine the
amount of fund allocation for each asset component. The asset structure in this study is
projected by Fixed Asset (FA) , because companies that have large fixed assets will find it easier
to get capital from outside the company.
Company Size
Company size describes the size of a company which can be expressed by total assets or total
net sales. The greater the total assets and sales, the greater the size of a company. The greater
the assets, the greater the capital invested, while the more sales, the more the velocity of money
in the company. Thus, company size is the size or amount of assets owned by the company.