The reciprocal relationship between profitability and capital structure and its impacts on the corporate values of manufacturing companies in Indonesia

2019 ◽  
Vol 69 (2) ◽  
pp. 236-251
Author(s):  
Sri Mangesti Rahayu ◽  
Suhadak ◽  
Muhammad Saifi
Keyword(s):  
Capital Structure ◽  
Stock Exchange ◽  
Reciprocal Relationship ◽  
Corporate Value ◽  
Manufacturing Companies ◽  
Corporate Values ◽  
Consistent Finding ◽  
Content Type ◽  
Corporate Capital ◽  
Corporate Capital Structure

Purpose The purpose of this paper is to investigate the reciprocal relationship between profitability and capital structure and its impacts on the corporate values of manufacturing companies in Indonesia. Design/methodology/approach This research is a quantitative research using the general structural component analysis as the analysis tool. This research involved a number of manufacturing companies registered in the Indonesia Stock Exchange in 2008‒2015 period. Findings Profitability has a negative significant influence on capital structure, indicating that profitability is a determining factor upon the corporate capital structure. This finding also implies that the improvement in profitability in the forms of return on investment, return on equity and net profit margin triggers decrease in the proportion of debt within the capital structures of manufacturing companies registered in BEI or Indonesia Stock Exchange. Originality/value Previous research only addressed the one-way correlation between profitability and capital structure, whereas this research measured the two-way correlation and reciprocal relationship at the same time. This research measured the influences of profitability and capital structure on the corporate value, in order to find a consistent finding that has not been yet obtained in previous research. This research also attempted to find out whether the use of the same variables within different time and setting (in Indonesia) leads to different results. The inconsistent findings also motivate the researcher to re-explore the reciprocal influence of corporate profitability on corporate capital structure and its effect toward the corporate value.

scholarly journals Relationship between Corporate Capital Structure and Stocks Liquidity: Empirical Evidence in Vietnam

2020 ◽  
Vol 10 (2) ◽  
pp. 151
Author(s):  
Van Thi Thuy Vu ◽  
Thoa Thi Tran ◽  
Xuan Thanh Ngo ◽  
Linh Nhat Nguyen
Keyword(s):  
Capital Structure ◽  
Inverse Relationship ◽  
Stock Exchange ◽  
Ho Chi Minh City ◽  
Corporate Value ◽  
Corporate Capital ◽  
Corporate Capital Structure ◽  
Business Size ◽  
The Impact ◽  
The Capital Structure

The paper examines the impact of capital structure on the liquidity of listed shares on the Ho Chi Minh City Stock Exchange, which includes 1078 observations during the period of 2011 – 2017. In addition to the capital structure, the study also looked at the impact of controlled variables including profitability (ROS), corporate value (Tobin’s Q) and size of the business (SIZE) on the liquidity of listed shares. The results show that the capital structure has inherently inverse relationship, while the controlled variables in the model have a positive relationship with stocks’ liquidity.

Equity market timing and capital structure: evidence on post-IPO firms in Indonesia

2019 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Dewi Ratih
Keyword(s):  
Capital Structure ◽  
Market Timing ◽  
Equity Market ◽  
Content Type ◽  
Corporate Capital ◽  
Corporate Capital Structure ◽  
Short Run ◽  
Practical Implications ◽  
Equity Market Timing

Purpose The purpose of this paper is to analyze and evaluate the impacts of equity market timing on corporate capital structure policies in Indonesia by apply Baker and Wurgler’s analytical approach to firms in Indonesia to see, first, if that approach applies to Indonesian firms and, second, if it can be generalized to other emerging markets. Design/methodology/approach This study will focus on capital structure policies based on Market Timing Theory in developing countries, which uses the panel data of companies listed in Indonesian Stock Exchange after IPO. The companies used as research object are 70 firms in the non-financial/non-banking sector with the observation period of 2000–2015. The period of measurement is five years after IPO. Using a past market value in which equity market timing is measured in two-time measurements, i.e. yearly timing and long-term timing to prove its persistence. Findings Consistent with equity market timing theory, the results suggest that firms tend to issue equities when their market valuations are relatively higher than their book values and their past market values are high. As a consequence, the firms become underleveraged or have their debts reduced in the short run. The results of long-term measurement on equity market timing do not appear to affect the firms’ capital structure decisions due to the firms’ relatively quick adjustments of optimal capital structures. The conclusion is that equity market timing is an important element in the short run but not in the long run. Research limitations/implications The results of this study describe how firms in Indonesia take advantage of temporary market share fluctuations through equity market timing in their capital structure policies before ultimately making adjustments to the directions they are targeting. Practical implications The use of equity market timing is more aimed at reducing the debt ratio and avoiding unfavorable conditions in the debt market, as well as taking advantage of the capital gains derived from the differences in their stock prices. This study also has practical implications on investment policies that need to consider the adaptation factor of the industrial environment when it comes to making capital structure decisions, including how the entity must take policy when uncertain economic conditions. Social implications Through the research behavior of capital structure more in-depth decision is expected to provide an overview for investors widely in determining investment policy. Thus, the investment strategy is more planned and can also anticipate unexpected conditions. Originality/value This research is the first study to analyze and to evaluate the impacts of equity market timing on corporate capital structure policies on post-IPO firms in Indonesia. This research is an empirical study that investigates the relevance of equity market timing considerations in the determination of debt-equity choices in the capital structure, included in the conditions of the global financial crisis.

scholarly journals How Does Firm Size and Capital Structure Affect Firm Value?

2021 ◽  
Vol 1 (2) ◽  
Author(s):  
Radhika Putri Nursetya ◽  
Lina Nur Hidayati
Keyword(s):  
Capital Structure ◽  
Firm Size ◽  
Firm Value ◽  
Stock Exchange ◽  
Data Gathering ◽  
Value Added ◽  
Company Size ◽  
Corporate Value ◽  
Manufacturing Companies ◽  
Corporate Valuation

Objective: This paper explores whether the firm size and capital structure have an impact on corporate valuation. Then it will raise profitability as an intervening variable on the effect of company size and capital structure on corporate valuation. Research Design & Methods: Data gathering method is finalized by using the documentation method. In this study, data were obtained from published financial reports. Samples from this study were 30 manufacturing companies listed on the Indonesia Stock Exchange. Findings: The results exhibited that firm size affected profitability and firm value. In the meantime, the capital structure has a big influence on performance and does not affect the company's valuation. Profitability has a positive effect on corporate value. This study also concludes that profitability can mediate firm size to firm value. Conversely, profitability cannot mediate capital structure on corporate value.   Implications & Recommendations: This study offers empirical evidence that profitability can be an intervening variable in firm size's effect on firm value. In further research, other variables can be added, which are considered to mediate company size and capital structure on corporate value.  Contribution & Value Added: This study's results contribute to the financial literature, especially those related to public corporations' value in Indonesia. As a practical contribution, stockholders can use this study's outcomes as additional information in investment decisions.

The influence of religion on the determinants of capital structure: the case of Saudi Arabia

2020 ◽  
Vol 11 (2) ◽  
pp. 472-497
Author(s):  
Somaiyah Alalmai ◽  
Abdullah M. Al-Awadhi ◽  
M. Kabir Hassan ◽  
Arja Turunen-Red
Keyword(s):  
Saudi Arabia ◽  
Capital Structure ◽  
Corporate Financing ◽  
Content Type ◽  
Explanatory Variables ◽  
Corporate Capital ◽  
Corporate Capital Structure ◽  
Internal Funds ◽  
Islamic Society ◽  
Potential Challenge

Purpose This study aims to investigate whether a religious environment affects a firm capital structure. Design/methodology/approach The authors use data from Saudi Arabia with a highly Islamic religious environment. The authors use an extreme bounds analysis (EBA), which provides a reliable analysis of the determinants of capital structure and aids the process of selecting explanatory variables when there is model uncertainty. Findings The authors find that firms in such an Islamic environment are relatively less leveraged compared to firms in a non-Islamic environment. The authors also find that firms located in an Islamic environment have different determinants of capital structure than firms located in a non-Islamic environment. Specifically, the Islamic society creates decision makers who are more risk averse, thus leading to a preference for corporate financing using internal funds. Practical implications The results imply a potential challenge for growth-seeking firms located in religious Islamic societies. Originality/value This study is one of the first to examine the determinants of corporate capital structure in Saudi Arabia using EBA.

The impact of co-structure of capital, profitability and corporate growth opportunities on stock exchange in Indonesia

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Teddy Chandra ◽  
Achmad Tavip Junaedi ◽  
Evelyn Wijaya ◽  
Martha Ng
Keyword(s):  
Capital Structure ◽  
Structural Equation ◽  
Stock Exchange ◽  
Reciprocal Relationship ◽  
Growth Opportunities ◽  
Content Type ◽  
Reciprocal Influence ◽  
Growth Opportunity ◽  
The Impact ◽  
The Capital Structure

PurposeThe purpose of this paper is (1) to determine the factors that significantly influence the capital structure, (2) to determine the factors that significantly influence profitability, (3) to find the factors that significantly influence growth opportunities, (4) to find reciprocal influence between capital structure and profitability and (5) to find reciprocal influence between capital structure and growth opportunity.Design/methodology/approachThe population of this research is a manufacturing company listed on the Indonesia Stock Exchange during the period of 2010–2016. The number registered in the manufacturing sector is 144 companies. The sampling technique applied is purposive sampling. The fulfillment criteria are companies that have been approved before 2010. Another criterion is that the company is not delisting during the observation period. From that total of population, companies that meet the requirements are 117 companies. This observation was conducted for seven years since 2010–2016, so the center of the analysis of this research was a total of 819. The inferential statistics method used to analyze the research data is generalized structural component analysis (GSCA).FindingsThe results of this study indicate that (1) the factors that influence the capital structure include effective tax rate, financial flexibility, growth, uniqueness, asset Utilization, firm size and tangibility; (2) factors that affect profitability include liquidity, growth, firm age, uniqueness, tangibility, volatility, advertising and asset turnover; (3) growth opportunity have a negative and significant influence on capital structure. This means an increase in growth opportunity can be defined as an increase in depreciation that will not be used as collateral for managers to increase debt. This increase in debt will have an impact on reducing growth opportunities; (4) profitability and capital structure have a two-way causality relationship, which means they influence each other and (5) capital structure and growth opportunities have a negative reciprocal relationship.Originality/valueThe authenticity of the study is implied in the following explanation: The authors try to examine the reciprocal effect of capital structure on profitability and capital structure on growth opportunities and the factors that influence these two endogenous variables that have never been done by previous researchers. This research is motivated by research conducted by (Chathoth and Olsen, 2007; Jian-Shen Chen et al., 2009; Yang et al., 2010) using the structural equation model (SEM). However, this study uses GSCA as a method of research analysis.

scholarly journals Macroeconomic uncertainty, corporate governance and corporate capital structure

2018 ◽  
Vol 14 (3) ◽  
pp. 301-321 ◽  
Author(s):  
Yee Peng Chow ◽  
Junaina Muhammad ◽  
A.N. Bany-Ariffin ◽  
Fan Fah Cheng
Keyword(s):  
Corporate Governance ◽  
Capital Structure ◽  
Good Governance ◽  
Policy Makers ◽  
Content Type ◽  
Corporate Capital ◽  
Macroeconomic Uncertainty ◽  
Corporate Capital Structure ◽  
Governance Quality ◽  
The Relationship

PurposeThe purpose of this paper is to examine how corporate governance moderates the relationship between macroeconomic uncertainty and corporate capital structure.Design/methodology/approachThis paper employs the two-step system generalized method of moments regression, considering a sample of 907 listed non-financial firms from seven Asia Pacific countries during the period 2004-2014.FindingsThis study finds that macroeconomic uncertainty has a significant negative impact on the capital structure decisions of firms. The results also reveal that the overall effect of macroeconomic uncertainty on capital structure among firms with better governance quality is significantly negative. The evidence suggests that corporate governance acts as an effective mechanism to curb the usage of leverage during times of high volatility. Further analysis shows that board independence, the separation between the roles of CEO and chairman of the board and blockholders’ ownership are effective governance mechanisms, whereas similar observations do not hold for board size and institutional ownership.Research limitations/implicationsThe findings of this study may be useful to policy makers to formulate appropriate policies to mitigate the adverse effects caused by macroeconomic uncertainty. This is important because macroeconomic uncertainty may have potential destabilizing effects on a country’s or region’s development by jeopardizing the firms’ ability to formulate sound investment, production and financing decisions. Additionally, the results suggest that good governance quality can act as a check and balance to ensure that firms use less leverage when they are facing volatility in the macroeconomic environment. These findings could help to reinforce the importance of good governance among policy makers of a country as well as managers of firms.Originality/valueThe authors make the first attempt to examine the moderating effect of corporate governance on the relationship between macroeconomic uncertainty and corporate capital structure.

Family ownership, control and corporate capital structure

2016 ◽  
Vol 6 (2) ◽  
pp. 169-185 ◽  
Author(s):  
Hyungkee Young Baek ◽  
David D. Cho ◽  
Philip L Fazio
Keyword(s):  
Capital Structure ◽  
Family Firm ◽  
Management Control ◽  
Family Ownership ◽  
Content Type ◽  
Family Control ◽  
Book Value ◽  
Corporate Capital ◽  
Control Factors ◽  
Corporate Capital Structure

Purpose – The purpose of this paper is to explain how family firm ownership and management control affect corporate capital structure strategy after controlling for other significant variables. The authors argue that, although family ownership has a positive effect on a firm’s leverage, family control through the CEO position and equity performance moderate its impact. Design/methodology/approach – Using a stratified random sample of 200 US public firms in the S & P Small-Cap 600 index from 1999 to 2007, this study uses random effect panel regressions to test the impact of family ownership on market value and book value debt ratios and the moderating effects of family control and equity performance after controlling for firm, industry, and macroeconomic variables. Findings – The initial panel regression suggests that family ownership is not related to debt ratios. However, further examination with controls for family CEO and equity performance shows that family ownership is positively related to market and book value debt ratios, but its effect is offset by family control through the CEO position and equity performance. Research limitations/implications – This study’s methodology can be extended to examine how family firm governance factors affect other firm behaviors such as investment, risk management, and CEO compensation. Practical implications – Practitioners should consider family ownership and management control factors when establishing financing strategy. The Small Business Administration and other government agencies should make similar considerations when setting policies. Originality/value – This paper separates ownership and management control factors to explain why family firms use more or less leverage. This study, thus, reconciles the mixed results of prior studies, which do not differentiate between these two governance factors.

Does bank affiliation affect firm capital structure? Evidence from a financial crisis

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Qamar Uz Zaman ◽  
Waheed Akhter ◽  
Mariani Abdul-Majid ◽  
S. Iftikhar Ul Hassan ◽  
Muhammad Fahad Anwar
Keyword(s):  
Financial Crisis ◽  
Capital Structure ◽  
Financial Institutions ◽  
Global Financial Crisis ◽  
Corporate Debt ◽  
Content Type ◽  
Corporate Capital ◽  
Playing Field ◽  
Corporate Capital Structure ◽  
The Global Financial Crisis

PurposeThis study aims to assess the determinants of corporate debt with a particular focus on bank-affiliated and non-bank-affiliated firms during the global financial crisis.Design/methodology/approachThe authors analyse the data of 395 listed manufacturing firms from Pakistan with 2,370 firm-year observations. The sample is divided into subsamples, namely bank-affiliated, non-bank-affiliated and stand-alone firms. Fixed and panel effect regression models are applied to determine the during, pre-crisis and post-crisis effects on corporate capital structure.FindingsThe robust results of the study reveal that non-bank-affiliated firms have different leverage determinant behaviours with a greater reliance on size, tangibility and profitability. However, bank-affiliated firms seemed to show greater immunity from a crisis compared to other firms. Simultaneously, the stand-alone firms remained at a disadvantage subject to internal financial ties of group-affiliated firms and form a base of market imperfection.Practical implicationsThis study's findings imply that financial managers should contain better ties with financial institutions to enhance financial immunity in worse time of financial crisis or COVID-19 global calamity. On the regulation front, these findings call for critical policy regulations to govern the internal ties with financial institutions to create a level playing field for the corporate sector.Originality/valueTo the best of the authors’ knowledge, this study is the first to investigate determinants of corporate debt with a particular focus on bank-affiliated and non-bank-affiliated firms. This work is also novel to explore corporate debt of bank-affiliated and non-bank-affiliated firms during the financial crisis.

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