The Determinants of Capital Structure: A Comparative Study between Sharia and Non-Sharia Manufacturing Companies in Indonesia Stock Exchange (IDX)

Abstract

Every company has a long-term goal to maximize the value of the company, which also means to maximize the prosperity of its shareholders. One of the ways to achieve this goal is to determine the optimal capital structure. The optimal capital structure allows the company to bear the low average cost of the capital. Therefore, the decision of capital structure is one of the most important decisions.Go public manufacturing companies in Indonesia Stock Exchange are divided into two groups; the sharia and non-sharia companies. Sharia companies, including the sharia manufacturing ones, have specific rule in the use of funds as the company capital. The rule states that the maximum use of usury-based debt is by 45%. At the same time, the theories about capital structure and research results support the use of debt as the main source of funds. This study used data obtained from the Indonesian Capital Market Directory and Summary of Company Performance for the period of 2011-2017. They were analyzed by using panel data for multiple regression analysis and difference tests. The results show significant differences between sharia and non-sharia manufacturing companies with a probability of 0,000. Moreover, almost all determinant factors such as Size, Tangibility, Profitability, and Gross Domestic Product have significant effects on Book Leverage as an indicator of Capital Structure for both groups of companies.

What explain capital structure determinants choices of Shariah firms?

“…Also, in terms of financial performance, Shariah firms manage to generate higher returns than non-Shariah firms. The outcomes obtained from Setiawan [25] are consistent with the former findings of Arif and Mai [26] who confirmed tangibility and profitability as significant capital structure determinants for Indonesian Shariah-tagged firms. Moreover, they explained that Shariah firms in Indonesia maintain low debt.…”

“…Therefore, they do not provide conclusive and holistic findings. Also, in different contexts, the outcomes obtained from former inquiries are not parallel and report variation in capital structure-preserving practices of Shariah firms (see [21,22,25,26]). Evidently, former inquiries used dissimilar measures of capital structure to recognize significant capital structure determinants for Shariah-tagged firms.…”

Industry, Firm, and Country Level Dynamics of Capital Structure: A Case of Pakistani Firms

“…, Booth et al (2001) and Deesomsak et al (2004) provided positive affiliation between GDP and leverage. Opposite association spotted by Arif and Mai (2020).…”