The impact of leverage on the cost of capital and market value

Abstract

Purpose This paper aims to investigate the impact of leverage on the cost of capital and market value in the Indonesia Stock Exchange (IDX), where there are Sharīʿah and non-Sharīʿah compliant firms. Design/methodology/approach This study uses a mixed methods sequential exploratory design and is based on an empirical analysis undertaken with a sample of firms listed on the IDX. In particular, a qualitative analysis was conducted to identify the Sharīʿah-compliant firms and the qualitative study was designed to compare some financial elements in Sharīʿah and non-Sharīʿah compliant listed companies. The correlations among the main elements observed are considered and a principal component analysis describes the framework. Findings First, the results of the analysis show that for the Sharīʿah-compliant companies, identified as those that apply Islamic principles, the lower level of leverage that it is typical of these type of firms implies a higher cost of capital [cost of equity and weighted average cost of capital (WACC)] than non-Sharīʿah ones. Secondly, for the Sharīʿah-compliant companies, the lower level of leverage entails a higher market value measured by the multiples method (price/earning and enterprise value/operating profit) than for non-Sharīʿah ones. Originality/value This paper sheds new light on how leverage can affect the cost of capital and market value in the case of Sharīʿah and non-Sharīʿah compliant listed companies in the IDX. In particular, this research highlights the fact that Sharīʿah-compliant firms, despite having a higher WACC, create more market value compared to non-Sharīʿah compliant ones.

Institutional investors and cost of capital: The moderating effect of ownership structure

“…(4) Control variables. In our analyses, we control of other determinants that have been proven to effectively identify the effect of institutional investors on a firm's cost of capital [10,15,63,64]. These determinants are divided into two categories: financial variables and governance variables.…”

“…Therefore, to a certain degree, the lower cost of capital reflects the higher quality of corporate governance. As the cost of capital plays a core role in corporate governance [ 15 ], it is critically important to clarify the influence of institutional investors on the cost of capital, in order to define the governance role of institutional investors. Furthermore, all else being equal, firms with different ownership structures have different cost of capital.…”

Liability, Market Cap Terhadap WACC

“…WACC yang rendah dianggap baik karena tidak berisiko tinggi, sedangkan WACC yang tinggi dianggap kurang baik karena mencerminkan risiko perusahaan yang cukup tinggi. Pengukuran WACC penelitian ini diambil dari penelitian sebelumnya yaitu Battisti et al (2020)…”

“…Perbedaan penelitian ini dengan penelitian sebelumnya adalah penelitian menggunakan lokasi di Indonesia sektor perbankan, dengan perbedaan dari penelitian sebelumnya di Indonesia oleh Sulistiyo, H. (2017) Battisti et al (2020). Berdasarkan hal-hal diatas penelitian ini menganalisis Liability, Market Cap terhadap Weighted Cost Of Capital (WACC) berdasarkan pendekatan sektor perbankan secara kuantatif selama 5 tahun, variabel dependen adalah WACC, variabel independen adalah liability dan market cap.…”

“…Perhitungan berdasarkanBattisti et al (2020), LN_LIAB = ln (liability) dari laporan keuangan pertahun, MAR: Market Cap dari data Thomson Reuters Eikon, LOG= Common Stock dari Laporan Keuangan pertahun.…”