DOI QR코드

DOI QR Code

Relationships between Debt, Growth Opportunities, and Firm Value: Empirical Evidence from the Indonesia Stock Exchange

  • SUBAGYO, Herry (Faculty of Business and Economics, Universitas Dian Nuswantoro)
  • Received : 2020.09.30
  • Accepted : 2020.12.14
  • Published : 2021.01.30

Abstract

The relationship between capital structure policy and firm value is interesting to study because the concept of capital structure was initiated by Modigliani and Miller who claimed that the company's capital structure is not a factor in its value. They asserted that linking leverage with firm value was irrelevant. Therefore, this study examined the role of growth opportunities as a moderating variable for the relationship between capital structure and firm value. The population of this study is 300 companies from the manufacturing sector that are listed on the Indonesia Stock Exchange (IDX) for the period 2015-2018. To analyze the data, the subgroup moderation method was employed by dividing the data into two parts: companies with high growth opportunities and companies with low growth opportunities. The results revealed that capital structure had a direct positive effect on firm value. Furthermore, the test results of the two regression models of growth opportunities as the moderating variable are very interesting. It was found that for companies with high growth opportunities, the use of debt had a negative effect on firm value, and conversely, the use of debt had a positive effect on firm value for companies with low growth opportunities. The statistical F-test results proved that growth opportunities are a moderating variable for the relationship between capital structure and firm value.

Keywords

References

  1. Adam, T., & Goyal, V. K. (2008). The investment opportunity set and it's proxy variables : Theory and evidence The Journal of Financial Research, 16(1), 41-63. https://doi.org/10.1111/j.1475-6803.2008.00231.x
  2. Adenugba, A. A., Ige, A. A., & Kesinro, O. R. (2016). Financial leverage and firms' value : a study of selected firms in Nigeria. European Journal of Research and Reflection in Management Sciences, 4(1), 14-32.
  3. Aggarwal, D., & Padhan, P. C. (2017). Impact of capital structure on firm value: Evidence from the Indian hospitality industry. Theoretical Economics Letters, 07(04), 982-1000. https://doi.org/10.4236/tel.2017.74067
  4. Aggarwal, R., Jindal, V., & Seth, R. (2019). Board diversity and firm performance: The role of business group affiliation. International Business Review, 28(6), 101600. https://doi.org/10.1016/j.ibusrev.2019.101600
  5. Barclay, M. J., Smith, C. W., & Morellec, E. (2006). On the debt capacity of growth options. Journal of Business, 79(1), 37-59. https://doi.org/10.1086/497404
  6. Bei, Z., & Wijewardana, W. P. (2012). Financial leverage, firm growth, and financial strength in the listed companies in Sri Lanka. Procedia - Social and Behavioral Sciences, 40, 709-715. https://doi.org/10.1016/j.sbspro.2012.03.253
  7. Bhama, V., Jain, P. K., & Yadav, S. S. (2016). Testing the pecking order theory of deficit and surplus firms: Indian evidence. International Journal of Managerial Finance, 12(3), 335-350. https://doi.org/10.1108/IJMF-06-2014-0095
  8. Billett, M. T., King, T. H. D., & Mauer, D. C. (2007). Growth opportunities and the choice of leverage, debt maturity, and covenants. Journal of Finance, 62(2), 697-730. https://doi.org/10.1111/j.1540-6261.2007.01221.x
  9. Chabachib, M., Fitriana, T. U., Hersugondo, H., Pamungkas, I. D., & Udin, U. (2019). Firm value improvement strategy, corporate social responsibility, and institutional ownership. International Journal of Financial Research, 10(4), 152-163. https://doi.org/10.5430/ijfr.v10n4p152
  10. Chen, K. (2002). The influence of capital structure on company value with different growth opportunities. In: Paper for EFMA 2002 Annual Meeting. https://doi.org/10.2139/ssrn.313960
  11. Chen, L., & Zhao, X. (2006). On the relation between the market-to-book ratio, growth opportunity, and leverage ratio. Finance Research Letters, 3(4), 253-266. https://doi.org/10.1016/j.frl.2006.06.003
  12. Dang, H. N., Vu, V. T. T., Ngo, X. T., & Hoang, H. T. V. (2019). Study the impact of growth, firm size, capital structure, and profitability on enterprise value: Evidence of enterprises in Vietnam. Journal of Corporate Accounting & Finance, 30(1), 144-160. https://doi.org/10.1002/jcaf.22371
  13. Dang, V. A. (2013). Testing capital structure theories using error correction models: Evidence from the UK, France, and Germany. Applied Economics, 45(2), 171-190. https://doi.org/10.1080/00036846.2011.597724
  14. Danila, N., Noreen, U., Azizan, N. A., Farid, M., & Ahmed, Z. (2020). growth opportunities, capital structure, and dividend policy in an emerging market: Indonesia case study. The Journal of Asian Finance, Economics, and Business, 7(10), 1-8. https://doi.org/10.13106/jafeb.2020.vol7.no10.001
  15. Ferris, S. P., Hanousek, J., Shamshur, A., & Tresl, J. (2018). Asymmetries in the firm's use of debt to changing market values. Journal of Corporate Finance, 48, 542-555. https://doi.org/10.1016/j.jcorpfin.2017.12.006
  16. Frank, M. Z., & Goyal, V. K. (2003). Testing the pecking order theory of capital structure. Journal of Financial Economics, 67(2003), 217-248. https://doi.org/10.1016/S0304-405X(02)00252-0
  17. Frank, M. Z., & Sanati, A. (2019). Financing corporate growth. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3377665
  18. Gaver, J. J., & Gaver, K. M. (1993). Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Accounting and Economics, 16, 125-160. https://doi.org/10.1016/0165-4101(93)90007-3
  19. Goyal, V. K., Lehn, K., & Racic, S. (2002). Growth opportunities and corporate debt policy: The case of the US defense industry. Journal of Financial Economics, 64(1), 35-59. https://doi.org/10.1016/S0304-405X(02)00070-3
  20. Gul, F. A., & Kealey, B. T. (1999). Chaebol, investment opportunity set and corporate debt and dividend policies of Korean companies. Review of Quantitative Finance and Accounting, 13(4), 401-416. https://doi.org/10.1023/A:1008397808221
  21. Helm, R., & Mark, A. (2012). Analysis and evaluation of moderator effects in regression models: State of art, alternatives, and empirical example. Review of Managerial Science, 6(4), 307-332. https://doi.org/10.1007/s11846-010-0057-y
  22. Hermuningsih, S. (2013). Profitability, growth opportunity, and capital. Bulletin of Monetary, Economics and Banking, 1, 115-136. https://doi.org/10.21098/bemp.v16i2.440
  23. Ifada, L. M., Faisal, F., Ghozali, I., & Udin, U. (2019). Company attributes and firm value: Evidence from companies listed on Jakarta islamic index. Espacios, 40(37), 1-14. http://www.revistaespacios.com/a19v40n37/19403711.html
  24. Kallapur, S., & Trombley, M. A. (2001). The investment opportunity set: determinants, consequences, and measurement. Managerial Finance, 27(3), 3-15. https://doi.org/10.1108/03074350110767060
  25. Kayhan, A., & Titman, S. (1984). Firms' histories and their capital structures. Journal of Financial Economics, 83(1), 1-32. https://doi.org/10.2139/ssrn.552144
  26. Khan, K., Qu, J., Shah, M. H., Bah, K., & Khan, I. U. (2020). Do firm characteristics determine the capital structure of Pakistan listed firms? A quantile regression approach. Journal of Asian Finance, Economics, and Business, 7(5), 61-72. https://doi.org/10.13106/jafeb.2020.vol7.no5.061
  27. Kim, W. S., Park, K., Lee, S. H., & Kim, H. (2018). R & D investments and firm value: Evidence from China. Sustainability, 10(11). https://doi.org/10.3390/su10114133
  28. Li, H., & Stathis, P. (2017). Determinants of capital structure in Australia: An analysis of important factors. Managerial Finance, 43(8), 881-897. https://doi.org/10.1108/MF-02-2017-0030
  29. Maxwell, O., & Kehinde, F. (2012). Capital structure and firm value: Empirical evidence from Nigeria. International Journal of Business and Social Sciences, 3(19), 252-261.
  30. McConnell, J. J., & Servaes, H. (1995). Equity ownership and the two faces of debt. Journal of Financial Economics, 39(1), 131-157. https://doi.org/10.1016/0304-405X(95)00824-X
  31. Modigliani, F., & Miller, M. H. (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
  32. Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital. The American Economic Review, 53(3), 433-443. https://www.jstor.org/stable/1809167
  33. Munoz Mendoza, J. A., Sepulveda Yelpo, S. M., & Veloso Ramos, C. L. (2019). Non-linear effects of ownership structure, growth opportunities and leverage on debt maturity in Chilean firms. Revista Mexicana de Economia y Finanzas, 14(1), 21-40. https://doi.org/10.21919/remef.v14i1.357
  34. Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-175. https://doi.org/10.1016/0304-405X(77)90015-0
  35. Myers, S. C. (2003). Financing of corporations. Handbook of the Economics of Finance, 1(1), 216-247.
  36. Myers, 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/10.1016/0304-405X(84)90023-0
  37. Nguyen, Ho, & Vo. (2019). An empirical test of capital structure theories for the Vietnamese listed firms. Journal of Risk and Financial Management, 12(3), 148. https://doi.org/10.3390/jrfm12030148
  38. Nguyen, N. M., & Tran, K. T. (2020). Factors affecting the capital structure of listed construction companies on the Hanoi stock exchange. The Journal of Asian Finance, Economics, and Business, 7(11), 689-698. https://doi.org/10.13106/jafeb.2020.vol7.no11.689
  39. Ni, J., & Yu, M. (2008). Testing the pecking-order theory: Evidence from Chinese listed companies. Chinese Economy, 41(1), 97-113. https://doi.org/10.2753/CES1097-1475410105
  40. Qu, W., Wongchoti, U., Wu, F., & Chen, Y. (2018). Does information asymmetry lead to higher debt financing? Evidence from China during the NTS Reform period. Journal of Asian Business and Economic Studies, 25(1), 109-121. https://doi.org/10.1108/jabes-04-2018-0006
  41. Quynh-Nhu, D. (2009). Leverage, growth opportunities, and stock price response to new financing. International Journal of Business and Management, 4(9), 35-49. https://doi.org/10.5539/ijbm.v4n9p35
  42. Rahman, S. M. K. (2018). Effect of financial leverage on a firm's market value creation in Bangladesh. International Journal of Corporate Finance and Accounting, 4(2), 41-58. https://doi.org/10.4018/ijcfa.2017070103
  43. Ross. S. (1997). The determination of financial structure: The Incentive-Signalling Approach. The Bell Journal of Economics, 8(1), 23-40. https://doi.org/10.2469/dig.v27.n1.2
  44. Saif-Alyousfi, A. Y. H., Md-Rus, R., Taufil-Mohd, K. N., Mohd Taib, H., & Shahar, H. K. (2020). Determinants of capital structure: Evidence from Malaysian firms. Asia-Pacific Journal of Business Administration, 1(1), 1-11. https://doi.org/10.1108/apjba-09-2019-0202
  45. Salehi, M., & Biglar, K. (2009). Study of the relationship between capital structure measures and performance: Evidence from Iran. International Journal of Business and Management, 4(1), 97-103. https://doi.org/10.5539/ijbm.v4n1p97
  46. Stiglitz, J. E. (1969). A re-examination of the Modigliani-Miller of the Miller theorem. The American Economic Review, 59(5), 784-793. https://EconPapers.repec.org/RePEc:aea:aecrev:v:59:y:1969:i:5:p:784-93
  47. Stulz, R. M. (1990). Managerial discretion and optimal financing policies. Journal of Financial Economics, 26(1), 3-27. https://doi.org/10.1016/0304-405X(90)90011-N
  48. Syaifulhaq, M. D. H., Herwany, A., & Layyinaturrobaniyah. (2020). Capital structure and firm's growth in relations to firm value at oil and gas companies Listed on Indonesia Stock Exchange. Journal of Accounting Auditing and Business, 3(1), 14-28. https://doi.org/10.24198/jaab.v3i1.24760
  49. Uzliawati, L., Yuliana, A., Januarsi, Y., & Santoso, M. I. (2018). Optimization of capital structure and firm value. European Research Studies Journal, 21(2), 705-713. https://doi.org/10.35808/ersj/1034
  50. Vijayakumaran, S., & Vijayakumaran, R. (2019). Debt maturity and the effects of growth opportunities and liquidity risk on leverage: Evidence from Chinese listed companies. Journal of Asian Finance, Economics, and Business, 6(3), 27-40. https://doi.org/10.13106/jafeb.2019.vol6.no3.27
  51. Viviani, J. L. (2008). Capital structure determinants: An empirical study of French companies in the wine industry. International Journal of Wine Business Research, 20(2), 171-194. https://doi.org/10.1108/17511060810883786
  52. Wang, X., Liu, L., & Meng, C. (2011). Modeling risk management for resources and environment in China. In: D. D. Wu & Y. Zhou (Eds), Computational risk management (pp.193-202). Verlag Berlin Heidelberg: Springer.