Factors in Capital Structure and Its Influence On Total Debt Ratio of Automotive Indutry
Factors in Capital Structure and Its Influence On Total Debt Ratio of Automotive Indutry
Factors in Capital Structure and Its Influence On Total Debt Ratio of Automotive Indutry
Vol. 21, No. 1a-2, Nov 2019, Hlm. 203-210 E-ISSN: 2656 – 9124
Akreditasi Sinta3 SK No. 23/E/KPT/2019 http://jurnaltsm.id/index.php/JBA
Trisakti School of Management, Jl. Kyai Tapa No. 20 Jakarta 11440, Indonesia
nindianif@gmail.com
Abstract: The purpose of this study is to get the empirical results about determinant factors in capital structure
and its influence on total debt ratio. Liquidity, growth opportunities, firm size, profitability, and firm age is used as
the independent variables. Data of 8 automotive companies listed on IDX were collected for the period of 1998-
2016 (19 years). The data is collected from secondary data by analyzing the financial statement of sample
companies. Panel data analysis has been used to find out the regression based on data collection. Findings of
this research showed that liquidity, profitability, and firm age have an influence partially on total debt ratio. While
growth opportunities and firm size have no influence partially on total debt ratio.
Keywords: total debt ratio, capital structure, trade-off theory, pecking order theory
Abstrak: Tujuan dari penelitian ini adalah untuk mendapatkan hasil empiris mengenai faktor penentu dalam
struktur modal dan pengaruhnya terhadap total debt ratio. Liquidity, growth opportunities, firm size, profitability,
dan firm age digunakan sebagai variabel independen. Data 8 perusahaan otomotif yang tercatat di BEI
dikumpulkan untuk periode 1998-2016 (19 tahun). Data tersebut dikumpulkan dari data sekunder dengan
melakukan analisa terhadap laporan keuangan perusahaan sampel. Analisis data panel digunakan untuk
mengetahui regresi berdasarkan data yang telah dikumpulkan. Temuan penelitian ini menunjukkan bahwa
liquidity, profitability, and firm age berpengaruh secara parsial terhadap total debt ratio. Sedangkan growth
opportunities dan firm size tidak berpengaruh secara parsial terhadap total debt ratio.
Kata kunci: total debt ratio, capital structure, trade-off theory, pecking order theory
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determine the exact optimal capital structure of chapter of this research. Introduction explains
the firm. about the research background, research
Although several researches have objectives, research outline, theoretical
been done, there are many assumptions of the framework and hypothesis formulation.
theory that contradict with one another. Those Research methodology explains research
researches mostly uses the data and taken in objects, operational definition of variables and
the developed countries. There are still few its measurements, and data analysis method.
researches have been done in the developing Results elaborate the empirical results and
countries and the differences in result still analysis. Conclusion elaborates the conclusion
exists regarding which factors have significant and limitation of this research, and also
impact to a firm’s capital structure. recommendation for further researches.
Regarding to those three gaps,
researcher was considered that this research The Trade-off Theory
has to be taken in Indonesia as the developing Brigham et al. (2014, 577) stated that
countries. The aim is to get the empirical “Trade-off theory says that the value of a
results about determinant factors in capital levered firm is equal to the value of an
structure and its influence on total debt ratio. unlevered firm plus the value of any side
Those factors are liquidity, growth effects, which include the tax shield and the
opportunities, firm size, profitability, and firm expected costs due to financial distresses”.
age (Ullah et al., 2017). Titman et al. (2014, 529), there are two factors
This research uses companies in that can have a material impact on the role of
automotive industry listed in Indonesia Stock capital structure in determining firm value,
Exchange for the period 1998-2016 as the which are (1) interest expense is tax
object of the research. The reason is because it deductible, and (2) debt makes it more likely
has contributed to export performance of that firms will experience financial distress
Indonesia and is included in the export of ten costs. Myers (1984) on Ullah et al. (2017, 32)
major commodities. Eventually it could attract mention that, the trade-off theory emerged
investors to invest their money in the company. because the need to balance gains and costs
Based on the explanation above, the of debt financing. It values the firm as the value
title of this research is “Factors in Capital of it unlevered plus the present value of the tax
Structure and Its Influence on Total Debt shield minus the present value of bankruptcy
Ratio of Automotive Industry”. This research and agency costs. From the explanation above
hopefully gives many advantages and benefits it can be concluded that in determining firm
such as, (1) can give a wide knowledge about value, a company have to balance its cost and
capital structure and can be used as reference benefit to achieve the optimum capital structure
to conduct next research for academy, (2) can (Arilyn 2016) . A company would increase its
be used as information to corporate managerial debt financing to avoid financial distresses.
and as consideration in deciding the optimal
capital structure for the firm’s financing The Pecking Order Theory
decision, (3) can give a wide knowledge to Brealey et al. (2015, 482) stated that
investor about capital structure in investing “Firms prefer to issue debt rather than equity if
their money for corporate financing, so that internal finance is insufficient”. Myers and
investors could get the maximum return with Maljuf on Ullah et al. (2017, 32) also stated that
minimum risk. “Firms would prefer internal sources to costly
The research outline made to give a external finance”. According to Ullah et al.
wider and clearer overall picture on every (2017, 32), “Firms that are profitable and,
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therefore, generate high earnings and “Liquidity refers to the ease and quickness with
expected to use less debt than those that do which assets can be converted to cash (without
not generate high earnings “. According to significant loss in value)”.
Gitman and Zutter (2015, 586), “A hierarchy of H1 There is an influence of liquidity on total
financing that begins with retained earnings, debt ratio of automotive industry
which is followed by debt financing and finally
external equity financing”. Growth Opportunities
It can be concluded that pecking Based on Trisnawati (2016, 35),
order theory assumes that a firm is tend to use “Kemampuan perusahaan untuk
the internal financing other than the external mempertahankan posisi usahanya dalam
financing. A firm will use its external financing if perkembangan ekonomi dan industri dimana
only it do not generate high earnings. This perusahaan tersebut beroperasi ditunjukkan
means a firm will use retained earnings to oleh rasio pertumbuhan”. According to
finance its activities. If a firm need more funds Setyawan et al. (2016, 109), “Growth
then a firm chooses to issue debt, and if a firm opportunity merupakan kesempatan
still needed more funds then equity is issued. perusahaan untuk melakukan investasi pada
hal-hal yang menguntungkan perusahaan”.
Total Debt Ratio Filsaraei et al. (2016, 29) also stated that
Gitman dan Zutter (2015, 126) stated “Growth opportunity represents the potential
that “Debt ratio measures the proportion of total ability of company investment”.
assets financed by the firm’s creditors. The H2 There is an influence of growth
higher this ratio, the greater the amount of opportunities on total debt ratio of
other people’s money being used to generate automotive industry
profits”. According to Titman et al. (2014, 520),
debt ratio measures the extent to which the firm Firm Size
has used non-owner financing (borrowed Mouamer (2011, 230) stated that
money) to finance its assets. A higher ratio “Empirically, the total asset, the total sales, or
indicates a greater reliance on non-owner the number of employees typically measures
financing or financial leverage. According to firm’s size”. According to Brigham and Houston
Cornett et al. (2015, 84), “Debt ratio measures (2011, 119) on Setyawan et al. (2016, 109),
the extent to which the firm uses debt (or “Firm size merupakan rata-rata total aktiva
financial leverage) versus equity to finance its tahun bersangkutan sampai beberapa tahun
assets as well as how well the firm can pay off mendatang”. According to Nugrahani and
its debt”. Sampurno (2012, 3) on Tamam and Wibowo
(2017, 131), “Firm size menggambarkan
Liquidity besarnya aset yang dimiliki perusahaan”.
Titman et al. (2014, 4) stated that H3 There is an influence of firm size on
liquidity is the speed with which the asset can total debt ratio of automotive industry
be converted into cash without loss of value.
Liquidity ratio measures the ability of a firm to Profitability
pay its bills in a timely manner when they come According to Gitman and Zutter
due. Cornett et al. (2015, 78) also stated that (2015, 655), “Profitability is the relationship
liquidity ratios measure the relationship between revenues and costs generated by
between a firm’s liquid (or current) assets and using the firm’s asset─both current and
its current liabilities. Ross et al. (2008, 21) on fixed─in productive activities”. Based on
Tamam and Wibowo (2017, 131) stated that Cornett et al. (2015, 87), “Profitability ratios
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show the combined effects of liquidity, asset overcome problems associated with the
management, and debt management on the evaluation of creditworthiness. According to
overall operating results of the firm”. Brigham et Ezeoha and Botha (2012, 59), Firm age can be
al. (2014, 96) stated that “Profitability is the net defined in terms of years of formation,
result of a number of policies and decisions”. incorporation, or listing.
H4 There is an influence of profitability on total H5 There is an influence of firm age on
debt ratio of automotive industry total debt ratio of automotive industry
Debt ratio measures how much a given time (maturity date) without significant
firm’s total assets financed by its debt from the loss in value. According to Mouamer (2011,
firm’s creditors and it represents the extent to 233) liquidity is defined as a ratio of current
which a company can use the debt to finance assets to current liabilities. The measurement
its assets. The higher the debt ratio, the higher is expressed as follows:
fund that is got from creditors. According to 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐
Gitman and Zutter (2015, 126) the equation 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
that is used to calculate the debt ratio is =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
presented as below: Growth ratio shows the ability of a
𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 company to maintain its business position in
𝑫𝒆𝒃𝒕 𝑹𝒂𝒕𝒊𝒐 = the economic and industrial development
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕
Liquidity can be used to measure the where it operates and growth opportunities is
ability of a firm to pay its current liabilities in a related to a firm’s investment opportunities.
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Growth opportunities can be measured by the 32), profitability is defined as net income scaled
percentage of change the total asset over the by total asset. The equation is expressed as
last three years (Mouamer 2011, 233). Growth follows:
can be calculated as follows: 𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
TAt − (TAt − 3) 𝑷𝒓𝒐𝒇𝒊𝒕𝒂𝒃𝒊𝒍𝒊𝒕𝒚 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕
𝑮𝒓𝒐𝒘𝒕𝒉 =
(TAt − 3)
Firm age refers to a firm’s reputation
Firm size is a reflection of total that built up over years which can be used as a
assets owned by the company. The larger the guarantee to the creditor. It represents a firm’s
firm size means that the company’s assets are ability to stabilize every economic condition.
larger and the funds required by the company Based on Mouamer (2011, 233), age is
to maintain its operational activities even more. calculated as the present year minus the year
Firm size is measured by the natural logarithm of inception.
of asset (Mouamer 2011, 233). It is calculated Age = present year - year of inception
as follows:
𝑺𝒊𝒛𝒆 = 𝑳𝒏 × 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕 Data analysis method of this study is multiple
regression analysis, where there are one
Profitability represents the ability of a dependent variable that is influenced by many
firm to pay its liabilities and to reach the independent variables. The data will be
maximum profit. It shows the overall quantitatively processed by using Eviews 10.
effectiveness of firm in generating profits using
firm’s assets. According to Ullah et al (2017, RESULTS
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The probability value of liquidity (LQ), be concluded that firm age have a negative
0.0000, is lower than the alpha value ( = influence (-0.014353). The higher value of
0,05), this means that H1 is accepted. It can be profitability could decrease the value of total
concluded that liquidity have a negative debt ratio. This result is consistent with the
influence (-0.106094). This result is consistent previous research done by Ullah et al. (2017),
with the previous research done by Ullah et al. but inconsistent with Chadha and Sharma
(2017), Mouamer (2011), and Serghiescu and (2015) and Mouamer (2011). Age refers to a
Vӑidean (2014). The higher value of liquidity firm’s reputation that built up over years. The
could decrease the value of total debt ratio. longer a firm’s existence, the better reputation
Liquidity shows the ability of a firm to meet its of a firm in the market. It could attract investors
financial obligations as they come due. The to invest their money in the company in the
more liquid a firm, the more capable a firm pay form of equity financing. Therefore, the value of
its obligations, therefore it could decrease the total debt ratio could decrease.
value of total debt ratio.
Growth opportunities (G) have a CONCLUSION
higher probability value than the alpha value
(prob. 0.9238 > 0.05) this means that H2 is Based on results above, it can be
rejected, therefore growth opportunities have concluded that liquidity, profitability, and firm
no influence on total debt ratio. This result is age have a negative influence on total debt
consistent with Kőksal and Orman (2015). ratio. While growth opportunities and firm size
Firm size (SIZE) have a higher have no influence partially on total debt ratio.
probability value than the alpha value (prob. Limitation of this study due to several
0.4270 > 0.05), this means that H3 is reasons consists of, (1) Limited number of
rejected, therefore firm size have no influence variable to be used on this research, where
on total debt ratio. This result is a new finding only 5 independent variables, which are
that differs from previous research. liquidity, growth opportunities, firm size,
Profitability (PROFIT) has a lower profitability, and firm age. (2) Limited number of
value than the alpha value (prob. 0.0000 < companies to be used as sample, because this
0,05), this means that H4 is accepted. It can be study only examines the capital structure on
concluded that profitability has a negative the automotive industry listed on Indonesia
influence (-0.509279). The higher value of Stock Exchange. (3) Limited number of period
profitability could decrease the value of total chosen which only 19 years of period conduct
debt ratio. This result is consistent with the in this research from 1998 to 2016.
previous research done by Ullah et al. (2017), Here are some recommendations
Serghiescu and Vӑidean (2014), Li and Stathis that can be used for further research regarding
(2017), Kőksal and Orman (2015), Imtiaz et al. capital structure and total debt ratio, which are,
(2016) and Chadha and Sharma (2015). (1) use other research objects besides
Profitable firms can use retained earnings to automotive industry that could provide another
finance its activities and tend to use less findings because the capital structure would
external debt, therefore it could decrease the have different effects in different industry
value of total debt ratio. This finding is according to the differences of financial
supported by the pecking order theory. statement, (2) use other additional variables of
The probability value of firm age capital structure that probably influence the
total debt ratio, such as taxation and volatility,
(AGE), 0.0001, is lower than the alpha value (
(3) lengthen the research period to be more
= 0,05), this means that H5 is accepted. It can
updated.
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