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

Abstract

Purpose

The 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/approach

The 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).

Findings

The 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/value

The 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.

Citation

Chandra, T., Junaedi, A.T., Wijaya, E. and Ng, M. (2022), "The impact of co-structure of capital, profitability and corporate growth opportunities on stock exchange in Indonesia", Journal of Economic and Administrative Sciences, Vol. 38 No. 2, pp. 246-269. https://doi.org/10.1108/JEAS-08-2019-0081