The effect of capital structure on profitability and stock returns

Abstract

PurposeThe purpose of this study is to examine the factors that influence capital structure, profitability and stock returns and the relationship between capital structure, profitability and stock returns. The endogenous variables in this study are capital structure, profitability and stock returns, whereas the exogenous variables are firm size, growth opportunity, tangibility, liquidity, volatility and uniqueness.Design/methodology/approachThe population used is a company that is listed on the compass index 100 period of August 2016. A total of 64 companies are sampled in this study. The unit of analysis is 448 data. The data analysis technique used is path analysis with the help of AMOS.FindingsThe results obtained show only profitability variables that affect stock returns. Variable capital structure, firm size, growth opportunity, tangibility and liquidity have no significant effect. Variables that influence capital structure are only influenced by growth opportunity, whereas other variables are not significant and variables that affect profitability are firm size, growth opportunity, uniqueness and volatility.Originality/valuePath analysis is a model similar to the multiple regression analysis, factor analysis, canonical correlation analysis, discriminant analysis and more general multivariate analysis groups. This research discusses that capital structure is useful for increasing the value of the company in the sense that the more debt that is used, a tax deduction will be obtained because of interest costs. So that the company’s profits will increase and eventually will increase the value of the company. This opinion remains a controversy among financial experts. Until now, there is no agreement that can explain the capital structure in all conditions of the company. There are two important theories concerning capital structure, trade-off theory and pecking order theory.

What Determines The Capital Structure of Property, Real Estate and Building Construction Companies? Evidence from Indonesian Listed Companies

“…The results of this study prove that the company will increase the proportion of debt in capital structure decisions when the size of the company is getting bigger as well. The results of this study are consistent with the research conducted by Widodo (2014); Gomez et al (2014); Chandra et al (2019), who concluded that firm size has a positive and significant influence on the decision to use corporate debt in the capital structure. The positive and significant effect in this study explains that firm size is a factor that is considered related to the level of debt proportion in capital structure decisions.…”

“…A large company size will find it easier to get funding from outside parties than a small company considering the ability and level of risk (Sofat & Singh, 2017). Research Dewi and Ramli (2016); Chandra et al (2019) state that company size has a positive effect on capital structure. In contrast to the research results of Indriani and Widyarti (2013); Alipour, et al (2015); Sofat and Singh (2017) stated that company size has a negative effect on capital structure.…”

The Financial Performance of Manufacturing Companies in Idx and Some Factors That Influence

“…The findings of this study are in line with research by Niar (2019), which states that investment decisions do not influence profitability in manufacturing companies in Indonesia. And in line with the research by Chandra et al (2019) on company data on Kompas 100, they conclude that investment decisions do not affect company profitability. These findings indicate that the return on investment obtained by investors is not in the short term but the long term and is full of high levels of uncertainty.…”

Faaliyet Kaldıracının Finansal Performans Üzerindeki Etkisini Belirlemede Satış Büyümesinin Rolü: Türkiye Örneği

“…Prior studies have implemented several ratios to measure firm's profitability, for example, return on assets (Doğan, 2013;Vătavu, 2015;Karadeniz and Kaplan, 2016;Chandra et al, 2019), return on equity (Salim and Yadav, 2012;Vătavu, 2015;Le and Phan, 2017) and the ratio of operating profitability to total assets (Kebewar, 2013;Karadeniz and Kaplan, 2016;Detthamrong et al 2017). This study uses the aforementioned ratios to proxy for profitability.…”