The Effect of Capital Structure on Profitability of Electricity Companies In Southeast Asia
Keywords: Capital Structure, Electricity Companies, Profitability, Southeast Asia
Abstract
Capital structure is increasingly important in determining the optimal combination of funding for investment needs that can increase firm value from profitability. The study aims to examine the effect of capital structure on profitability of electricity companies in Southeast Asia. The study used multiple regression model represented by pooled least square to calculate 48-panel data from the annual financial report during the time period of 2009-2016. We utilized short-term debt to total assets (STD), long-term debt to total assets (LTD), total debt to total assets (TD), and debt to equity ratio (DER) as proxies of capital structure (independent variables). Operating income margin (OIM), return on asset (ROA), and return on equity (ROE) were the profitability proxies (dependent variables). Firm size and firm age were used as control variables in the study. The results of this study indicate that STD and LTD have a negative relationship that consequently has significant effect on LTD and OIM. Other than positive and negative relationships between the capital structure (TD and DER) and profitability, this study also finds that TD and DER have positive significant influence on OIM and ROE, but have negative insignificant relation with ROA. Thus, it is necessary to optimize the capital structure by adjusting the target of capital structure that can provide a balance on the marginal cost and marginal benefit.
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References
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Tifow, A. A., & Sayilir, O. (2015). Capital Structure and Firm Performance: An Analysis of Manufacturing Firms in Turkey. Eurasian Journal of Business and Management, 3(4), 13–22. https://doi.org/10.15604/ejbm.2015.03.04.002.
Vătavu, S. (2015). The Impact of Capital Structure on Financial Performance in Romanian Listed Companies. Procedia Economics and Finance, 32(15), 1314–1322. https://doi.org/10.1016/S2212-5671(15)01508-7.
Al-Najjar, B., & Hussainey, K. (2011). Revisiting the Capital-Structure Puzzle: UK Evidence. Journal of Risk Finance, 12(4), 329–338. https://doi.org/10.1108/15265941111158505.
Byoun, S., & Rhim, J. (2003). Tests of The Pecking Order Theory and The Tradeoff Theory of Optimal Capital Structure. Global Business and Finance Review, (10), 1–16. Retrieved from https://www.researchgate.net/publication/267160977.
Eriotis, N. (2007). How Firm Characteristics Affect Capital Structure: an Empirical Study. Managerial Finance, 33(5), 321–331. https://doi.org/10.1108/03074350710739605.
Fischer, E., Heinkel, R., & Zechner, J. (1989). Dynamic Capital Structure Choice: Theory and Tests. The Journal of Finance, XLIV(1), 19–40. https://doi.org/http://www.jstor.org/ stable/2328273.
Frank, M. Z., & Goyal, V. K. (2002). Testing The Pecking Order Theory of Capital Structure. Journal of Financial Economics, 67, 1–32. https://doi.org/10.1016/S0304-405X(02)00252-0.
Gibson, C. H. (2010). Financial Reporting & Analysis - Cycle 2 - The Financial Statements.
Graham, J. R., & Leary, M. T. (2011). A Review of Empirical Capital Structure Research and Directions for The Future. Annual Review of Financial Economics, 0–59. https://doi.org/https://dx.doi.org/10.2139/ssrn.1729388.
Haron, R. (2014). Capital Structure Inconclusiveness: Evidence from Malaysia, Thailand and Singapore. International Journal of Managerial Finance, 10(1), 23–38. https://doi.org/10.1108/IJMF-03-2012-0025.
Haykir, Ö., & Çelik, M. S. (2018). The Effect of Age on Firm’s Performance: Evidence From Family-Owned Companies. Ömer Halisdemir Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 11(2), 129–137. https://doi.org/10.25287/ohuiibf.403257.
Jensen, M. C., & Meckling, W. H. (1976). Theory of The Firm: Managerial Behavior, Agency and Ownership Structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X.
Kraus, A., & Litzenberger, R. H. (1973). A State-Preference Model of Optimal Finance Leverage. The Journal of Finance, 28(4), 911–922. https://doi.org/10.1111/j.1540-6261.1973.tb01415.x.
Le, T. P. V., & Phan, T. B. N. (2013). Capital Structure and Firm Performance: Empirical Evidence from a Small Transition Country. Research in International Business and Finance, 42, 710–726. https://doi.org/10.1016/j.ribaf.2017.07.012.
Loderer, C., & Waelchli, U. (2010). Firm Age and Performance. Journal of Evolutionary Economics, 28(1). https://doi.org/10.1007/s00191-017-0532-6.
M’ng, J. C. P., Rahman, M., & Sannacy, S. (2017). The Determinants of Capital Structure: Evidence from Public Listed Companies in Malaysia, Singapore and Thailand. Cogent Economics and Finance, 5(1), 1–34. https://doi.org/https://doi.org/10.1080/ 23322039.2017.1418609.
Mayers, S. C., & Majluf, N. S. (1984). Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/doi:10.1016/0304-405x(84)90023-0.
Modigliani, F., & Miller, M. (1958). The Cost Of Capital, Corporation Finance and The Theory of Investment. The American Economic Review, 48(3), 261–297. https://doi.org/10.1136/ bmj.2.3594.952.
Nassar, S. (2016). The Impact of Capital Structure on Financial Performance of The Firms : Evidence From Borsa Istanbul. Journal of Business & Financial Affairs, 5(2), 5–8. https://doi.org/10.4172/2167-0234.100017.
Ozioma, A., & Grace, N. (2015). Impact of Capital Structure on Financial Performance of Construction and Real Estate Quoted Companies in Nigeria. International Journal of Scientific Research and Management, 5(10), 7186–7199. https://doi.org/10.18535/ ijsrm/v5i10.04.
Pervan, M., Pervan, I., & Ćurak, M. (2017). The Influence of Age on Firm Performance: Evidence from the Croatian Food Industry. Journal of Eastern Europe Research in Business and Economics, 1–9. https://doi.org/10.5171/2017.618681.
Rehman, O. U. (2016). Impact of Capital Structure and Dividend Policy on Firm Value. Journal of Poverty, Investment and Development, 21, 40–57. Retrieved from www.iiste.org.
Salim, M., & Yadav, R. (2012). Capital Structure and Firm Performance: Evidence from Malaysian Listed Companies. Procedia - Social and Behavioral Sciences, 65, 156–166. https://doi.org/10.1016/j.sbspro.2012.11.105.
Singh, P., & Kumar, B. (2012). Trade-off Theory vs Pecking Order Theory Revisited: Evidence from India. Journal of Emerging Market Finance, 11(2), 145–159. https://doi.org/10.1177/ 0972652712454514.
Suardi, I., & Noor, K. D. (2015). The Impact of Capital Structure on Financial Performance of The Listed Agriculture Companies in Indonesia. Global Journal of Business and Social Science Review, 3(1), 9–17. Retrieved from www.gatrenterprise.com/GATRJournals/ index.html.
Sultan, A., & Adam, M. (2015). The Effect of Capital Structure on Profitability: an Empirical Analysis of Listed Firms In Iraq. European Journal of Accounting, 3(2), 61–78. Retrieved from www.eajournals.org.
Tailab, M. K. (2014). The Effect of Capital Structure on Profitability of Energy American Firms. International Journal of Business and Management Invention, 3(12), 54–61. https://doi.org/10.4018/978-1-4666-6635-1.ch018.
Tifow, A. A., & Sayilir, O. (2015). Capital Structure and Firm Performance: An Analysis of Manufacturing Firms in Turkey. Eurasian Journal of Business and Management, 3(4), 13–22. https://doi.org/10.15604/ejbm.2015.03.04.002.
Vătavu, S. (2015). The Impact of Capital Structure on Financial Performance in Romanian Listed Companies. Procedia Economics and Finance, 32(15), 1314–1322. https://doi.org/10.1016/S2212-5671(15)01508-7.
Published
Mar 15, 2019
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Wibowo, A., & Rahim, R. (2019). The Effect of Capital Structure on Profitability of Electricity Companies In Southeast Asia . Jurnal Organisasi Dan Manajemen, 15(1), 54–67. https://doi.org/10.33830/jom.v15i1.297.2019
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