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Archives of Business Review – Vol. 9, No.1
Publication Date: January 25, 2021
DOI: 10.14738/abr.91.9649.
Lambey, R., Tewal, B., Sondakh, J. J., & Manganta, M. (2021). The Effect Of Profitability, Firm Size, Equity Ownership And Firm Age On
Firm Value (Leverage Basis): Evidence From The Indonesian Manufacturer Companies. Archives of Business Research, 9(1). 128-139.
The Effect Of Profitability, Firm Size, Equity Ownership And Firm
Age On Firm Value (Leverage Basis): Evidence From The Indonesian
Manufacturer Companies
Robert Lambey
Faculty of Business and Economics,
University of Sam Ratulangi, Manado, Indonesia
Bernard Tewal
Faculty of Business and Economics,
University of Sam Ratulangi, Manado, Indonesia
Jullie J. Sondakh
Faculty of Business and Economics,
University of Sam Ratulangi, Manado, Indonesia
Maryam Manganta
Faculty of Business and Economics,
University of Sam Ratulangi, Manado, Indonesia
ABSTRACT
This study examines the effect of profitability, firm size, equity
ownership and firm age on firm value. This is a quantitative research
study. Samples were taken from 65 manufacturing companies that go- public and listed at the Indonesian Stock Exchange from 2012 to 2019.
Data were analysed by Path Analysis with Amos SPSS 24. Findings
indicate that profitability and firm size influence firm value
significantly and positively. Whilst, firm value is affected by
profitability and firm size, it is not influenced significantly and
positively by firm age. On the other hand, owner’s equity provides a
negative effect to firm value.
Keywords: Profitability, Firm Size, Equity Ownership, Firm Age
INTRODUCTION
Manufacturers are those companies which process raw materials to be finished goods.
Manufacturing industry is considered to be one of the most developed industries and provides
the largest contribution to Gross Domestic Product (GDP) of Indonesia compared to other
industries (Rizqia & Sumiati, 2013). The good prospect of this industry has attracted investors to
invest their funds in the manufacturing industry to gain sufficient income and profit. Despite of
gaining such profit, however, manufacturing industry has also experienced challenges. Those
challenges are namely tax regulation and labour demonstration asking for the wage increases,
pollution and so forth.
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Archives of Business Research (ABR) Vol 9, Issue 1, January-2021
The justifications to choose manufacturer companies which go-public and listed at the Indonesian
Stock Exchange are because (a) this industry is the major industry to increase the investment and
export values to boost the economic growth (as mentioned by the Indonesian Ministry of
Industry, Airlangga Hartarto, during the press conference in Jakarta dated on 8 January 2019)
(The Indonesian Ministry of Industry, 2019), (b) most manufacturing products are much needed
by consumers, therefore the industry is more profitable and the probability to experience loss is
lower (Devi, 2016).
Research has undertaken to examine the effect of profitability, firm size, equity ownership and
firm age on firm value in various countries (Benson & Davidson III, 2009; Chen & Chen, 2011;
Kontesa, 2015; Martins & Lopes, 2016; López-Pérez, Melero & Javier Sese, 2017; Petruzzelli,
Ardito & Savino, 2018). Nevertheless, there is debate whether profitability, firm size, equity
ownership and firm age influence firm value significantly or insignificantly. Prior studies are still
inconsistent (Setiadharma & Machali, 2017). Therefore, this study provides such opportunity to
make such contribution. Furthermore, little is known of the phenomenon of profitability, firm
size, equity ownership and firm age on the Indonesian manufacturing companies. Additionally,
the Indonesian companies provide a different context. This study aims to examine the effect of
profitability, firm size, equity ownership and firm size on firm value of the Indonesian
manufacturing companies that listed at the Indonesian Stock Exchange. In lieu of this
phenomenon, this study is justified to be able to fill the gap.
LITERATURE REVIEWS
Leverage
According to Fahmi (2012), the leverage ratio is a ratio that describes the relationship between
company debt to capital and assets. Financial leverage can be defined as the use of assets and
sources of funds by companies that have fixed costs with the intention of increasing the potential
profits of shareholders (Ali & Hilmi, 2008). The high debt to equity ratio reflects the high financial
risk of the company. This high risk indicates the possibility that the company will not be able to
pay off its obligations or debts in the form of principal or interest, so the management tends to
delay the submission of financial reports containing bad news. The leverage ratio used is Debt to
Equity ratio (DER) in the solvency or leverage ratio. According to Sutrisno (2012), Debt to equity
ratio is a balance between debt owned by a company and its own capital. Debt to equity ratio is a
description of a company's ability to meet its obligations, and is the ratio between the company's
total debt and the company's total capital (equity). The higher the ratio, the less the used capital
is compared to the debt. For companies, the amount of debt should not exceed their own capital
so that the fixed burden is not too high.
Relationship of Profitability and Firm Value
Profitability is the ratio to measure the capability of the firm to gain profit by selling its assets and
to contribute to the owner’s equity (Putra & Thohiri, 2013). The ability of firm to generate and
maximize profit are the main concern of investors in the capital market. Profitability can attract
investors to buy the firm’s shares, therefore the management must meet the enquiries. In other
words, profitability ratio is to measure the effectiveness of a firm's management to generate
income from its sales and investment (Safitri, 2014).
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URL: http://dx.doi.org/10.14738/abr.91.9649. 130
Lambey, R., Tewal, B., Sondakh, J. J., & Manganta, M. (2021). The Effect Of Profitability, Firm Size, Equity Ownership And Firm Age On Firm Value
(Leverage Basis): Evidence From The Indonesian Manufacturer Companies. Archives of Business Research, 9(1). 128-139.
The investors expect dividend from their investment. Dividend is the profit contribution from the
firm to its investors. It can increase the wealth of the investors. Experienced dividend investors
will invest largely in stocks which can pay high dividends in order to make money. Agency cost
implies that shareholders or investors prefer to receive dividends than profit, and firm value will
increase when the firm pays dividend generously (Budagaga, 2017). The higher the profitability,
the higher the firm value (Rizqia & Sumiati, 2013).
Hypothesis 1- Profitability influences firm value significantly and positively
Relationship of Firm Size and Firm Value
Firm value shows the content of information within the company including the management
awareness on the importance of information provided to external and internal parties. Ali and
Hilmi (2008) indicated that firms that have large sources of information, it means that they have
more accounting staff, more advanced information system, much stronger internal control
system, existence of investor’s control, regulators and public spotlight. These companies tend to
produce more comprehensive and accurate financial statements.
Or in other words, firms which have large total assets indicate that they have attained the stage of
maturity. Maturity stage is shown by the positive cash flows and the longevity of good prospects.
The firms are considered to be relatively more stable and more capable in generating profit
compared to other firms with a lower total asset (Bandanuji & Khoiruddin, 2020). A big firm
means a good growth of the firm and shows a higher chance to gain profit in future. This
phenomenon will give a positive signal to investors and the firm’s stock increase can increase and
so does the firm value (Setiadharma & Machali, 2017).
Hypothesis 2- Firm size influences firm value significantly and positively
Relationship of Equity Ownership and Firm Value
Ownership in firms can be classified into 2 aspects: internal and external ownership. In the
agency theory, the owners of the firm (principal) hire managers (agents) to do the work, or to
perform a task the principal is unable or unwilling to do. Managers are hired to perform tasks
which are delegated by the principal, mainly to increase the firm value. In return, managers are
getting paid with salaries, bonus and other entitlements. The willingness to perform those tasks
(as delegated by principals) may provide a positive effect on stock price.
Signalling theory discusses problems of information asymmetry in markets. The theory explains
how this asymmetry can be minimised by the party with more information signal it to others
(Morris, 1987). Signalling theory said that external owners (public) expect their investments are
safe and profitable. They expect immediate information on performance management. Hence,
managers need to provide positive signals on company’s performance to the investors, which can
be a positive effect to firm value. On the other hand, the increase of managerial ownership will
also have a positive effect towards firm value. It is because that the increase of stock ownership
by management will allow the increase of management control, thus activities and decisions in
the company can be maximised (Damayanti & Suartana, 2014).