Stock Ownership Structure and Its Effects on Capital Structure and Corporate Value: Evidence from Indonesia

Abstract

This research (1) examines the effect of stock ownership structure on capital structure; (2) explains the effect of stock ownership structure on corporate value; and (3) investigates the influence of capital structure on corporate value. This research is categorized as a quantitative research, which is directed to test various theories. In this study, the population of all consumption companies listed on the Indonesia Stock Exchange (IDX) consist of 38 companies. Population data in this study are all consumption companies, which have gone public in the period from 2010 to 2015. In this study, given the objectives and problem formulation and hypothesis, the analysis method used is Generalized Structural Component Analysis (GSCA). Ownership structure has a significant effect on capital structure; ownership structure has no significant effect on corporate value; capital structure has a significant effect on corporate value; corporate value has a significant effect on capital structure. Previous research found different results. Some researchers found a positive relationship and other researchers found a negative relationship, and there are studies that found both significant and non-significant effects. The inconsistency of previous research results prompted the researchers to examine the effect of ownership structure on capital structure and corporate value.

1. Introduction

Appropriate decision-making by managers is expected to achieve company goals. In general, a company does not only have a single purpose, it has many goals to be achieved. Company’s various objectives include profitability, efficiency, satisfaction, employee development, product quality for customers, social responsibility, market leadership, adaptability, community service, and maximum stock price. High stock price is the desire of stockholders. Shareholders want the capital they invest in their business to raise quickly. The owners expect the return on invested capital to be able to provide additional capital and prosperity to themselves and all their employees. Increasing the prosperity of stockholders is the most important goal for companies that go public with efforts to increase corporate value (Salvatore, 2005).

The company can survive and develop well if it is able to increase the prosperity of the company’s stockholders. Tough global competition requires greater managers’ capabilities, new methods and innovation. The expectation of increased income can be pursued gradually and continuously.

The capital structure theory of Modigliani and Miller (1958) states that capital structure has no impact on corporate value. On the other hand, it makes various assumptions, one of which is that there is no tax, which is called as irrelevant theory. In perfect capital markets, without taxes, a company that has debt or not has an equal impact, it has no effect on corporate value (Purbawangsa et al., 2019). Modigliani and Miller (1963) develop the capital structure theory by incorporating tax elements. As a result of income tax savings, it allows a company to be motivated to take on debt, with a hope of increasing corporate value. The interest that a company can pay may reduce taxable profits so that the tax paid becomes small. The profits on tax deductions from debt can reduce taxable income, so that it affects the profit received by stockholders. The existence of tax benefits can be seen in the income statement of the company, which shows that the interest cost will reduce taxable profits and reduce the payment of income tax.

Agency theory (Jensen & Meckling, 1976) posits the separation of corporate management from stockholders. Association of company management can lead to a conflict of interest between manager and owner. Managers cannot resist the temptation to perform actions that are more profitable to them. The interests of the owner will result in agency conflict, which can decrease corporate value. Fuerst et al. (2000) find a positive relationship between insider ownership and corporate value.

Conflicts of interest between owner and manager can be affected by ownership structures of managerial ownership and institutional ownership (Jensen & Meckling, 1976). Ownership of stocks by managers will expand the powers of management executives. Managers will develop businesses that tend to be more self-interested and less concerned about the interests of stockholders. The greater the stocks owned by managers, the greater it will motivate managers to work optimally for the benefit of stockholders (Hutahayan & Wahyono, 2019). Managers can also be the owners of the company, so that managers will work optimally in an effort to increase corporate value. The manager will feel the impact of his/her decisions directly. Managers can also influence strategic decisions, one of which is the capital structure.

Increased funding in the form of debt will help reducing disputes between stockholders and management. It can also reduce unused cash. The existence of excessive idle cash will lead to possible deviations of managers’ behavior. Decisions made by managers will be less likely to benefit stockholders. Purchasing debt by the company will make managers act more efficiently and carefully. Jensen and Meckling (1976) state that debt and ownership can be used as complementary tools to encourage managers not to invest with negative net present value.

Companies can transfer ownership of stocks to other parties, such as small industries, individuals and cooperatives. As in the New Order government, the government made a rule that large companies such as Gudang Garam cigarette company must give a small portion of its stocks to cooperatives that have healthy criteria in the city of Kediri. Because of distribution of stocks, there will be a separation between control and ownership. The stockholders become a legal symbol of ownership that does not run the company, while everyday control is in the hands of managers.

Institutional ownership is the ownership of stocks owned by companies such as insurance, banks, or investment companies. Jensen and Meckling (1976) argue that institutional ownership has a very important role in minimizing conflicts between managers and stockholders. The existence of institutional ownership is considered to be a powerful and effective monitoring tool for managers in making decisions. Institutional ownership is important in monitoring managers. The existence of institutional ownership will lead to increased and more optimal supervision. Such monitoring will help increasing the corporate value that will ensure stockholder’s wealth. High institutional ownership can serve as a regulatory agent, which can reduce/stop opportunistic behavior.

Financial managers in large companies have a very important task, namely, it must be able to make appropriate spending planning for the company, managing the assets owned by the company well, and setting up the financial structure and capital structure of the company appropriately. The financial and capital structure functions with respect to the right-hand components or the balance sheet of the company, among other things, determine the best allocation between debt and long-term capital and determine the type of current debt and the most profitable long-term capital (Van Horne, 2006).

The benefits of taking on a debt by the company in the capital structure can prevent unnecessary corporate expenses and can motivate the manager to run the company efficiently. It is said that the optimal capital structure will occur if the capital structure can cause the cost of capital of company to fall, which ultimately impacts the increase in economic returns and corporate value that can be seen in stock prices. The purpose of the capital structure is to integrate the permanent source of funds used by the company by maximizing stock prices and minimizing the cost of the company’s capital (Keown et al., 1996). Keown’s opinion adheres to the traditional capital structure theory, which formulates that the use of debt will increase the value of the company’s stocks if the use of such debt can lead to decreased cost of capital averages (cost of capital). The use of debt (leverage) by the company does not cause any influence on corporate value. In accordance with the theory of Modigliani and Miller (1963), that in perfect capital market conditions, the value of capital structure cannot affect corporate value. Improvement of corporate value cannot be done by the financial manager changing the amount of debt and equity of the company as a means of financing. Modigliani and Miller’s 1963 theory (in Bringham & Daves, 2004: 507) explains that the higher use of debt will lead to higher interest costs, resulting in greater stockholder profits due to corporate income tax savings. The trade-off theory proposed by Modigliani and Miller (1963) reveals that the company will owe up to a certain debt level, will obtain tax savings. The trade-off theory also predicts a positive relationship of capital structure on corporate value with the assumption that the benefits of tax are still below the cost of financial distress.

The sample of this study uses consumption companies listed on the Indonesia Stock Exchange. Consumption companies in Indonesia play a big role to achieve the nation’s goal, namely, to promote and prosper the community. Consumption companies have a macro economic effect in Indonesia, which is to drive the wheels of the economy. Moreover, they can create jobs and employment in large numbers and can build a network with suppliers of consumable materials.

Based on the discussion above, there are some differences with previous research, which become the rationale of this research, namely, (1) the impacts in research between capital structure and corporate value conducted by Itturaga and Sanz (2001), Antwi et al. (2012), San and Heng (2011), and Khan (2011) are unidirectional. In this study, the relationship between capital structure and corporate value is two-way or reciprocal. (2) This research examines the influence of ownership structure on capital structure and corporate value with the intention to check the consistency of result from previous research, whether the same variables in different places and times produce the same or different results. (3) Data analysis used in previous research includes regression, SEM, Chi Square, OLS, generalized least square, and PLS. In this study, given the objectives and problem formulation and hypothesis, the analysis method used is multivariate analysis by using Generalized Structural Component Analysis (GSCA). The GSCA analysis method can avoid the shortcomings of the PLS (Partial Least Square) analysis. The GSCA method can also be used in relationships between complex variables, either recursive or non-recursive, very small samples and structural models related to variables with replicate and formative indicators.

On the basis of background explanation above, previous research produces different results. Researchers found both positive and negative relationship with impacts both significant and non-significant. The inconsistency of previous research results prompted the examination of the effect of ownership structure on capital structure and corporate value. Based on the theories of capital structure and research that have been done, this study uses the basic Pecking Order theory, Trade Off and Agency theories, Signaling theory, Optimal Capital Structure theory, and MM theory with tax. Based on the description above, the objectives of the study are: (1) to examines the effect of stock ownership structure on capital structure; (2) to explains the effect of stock ownership structure on corporate value; and (3) to investigates the influence of capital structure on corporate value.

2. Conceptual Framework and Hypothesis Building

This research uses Pecking Order theory, Agency theory, Signaling theory, and Optimal Capital Structure theory, Capital Structure theory, and Trade Off theory. This study analyzes the effect of stock ownership structure on capital structure. The underlying theory is the agency theory. This theory states that the separation of corporate management will cause agency problems. Ownership of managers can harmonize relationships of managers and stockholders. The controlling stockholder powers can be reduced by the presence of institutional stockholders and public stockholders. This study uses measurement of managerial ownership, institutional ownership and public ownership.

There are three functions performed by financial management, including investment decision, financing decision and evident policy. Success in running these three functions will be seen in corporate value. Investment decisions made by financial managers will always be followed by the investment funding decision, whether the investments carried out will be funded from retained earnings, debt or issuance of new stocks. The policy of determining the source of funds made by the financial manager is a capital structure policy. Determination of source of funds obtained from retained earnings will be able to affect the evident policy. The dividend composition that the company will pay to stockholders is a component of its own capital so that the dividend policy will indirectly affect the investment policy. Proposal of stock ownership as a source of funding affect the capital structure. The optimal capital structure policy will affect the corporate value.

Based on previous research about conceptual models, this study aims to build on research shown in Figure 1. The research formulates a model about the effect of ownership of capital structure on corporate value. The conceptual framework can be seen in Figure 1.

Figure 1: Conceptual Framework

Pecking Order theory, Agency theory, Signaling theory, and Optimal Capital Structure theory, Modigliani and Miller (1963) and Trade Off theory

The influence of ownership structure on capital structure is based on agency theory (Jensen & Meckling, 1976). The separation of management can lead to conflict between management and stockholders. The stockholders expect the manager to run the company’s operations in accordance with what has been determined by the stockholders. There is a tendency for managers to take creative action that can increase profits for themselves. This creative action is due to the support of information asymmetry, the manager has more information about the condition of the company than the investor. Agency fees are required and costs incurred to supervise the performance of managers. Sumani (2020) explains that governance has a significant positive effect on capital structure, but corporate governance has a significant negative effect on liquidity policy, and governance has a significant positive effect on company performance. Zahari et al. (2020) show that public listed companies (PLC) that are actively involved in corporate social responsibility (CSR) practices such as the environment, community, workplace and market, find that this involvement increases their brand equity. These findings provide support and evidence for management of PLCs in Malaysia, as well as companies in other developing countries, to become more involved in corporate social responsibility (CSR) practices as a core element of their strategy and brand management. Vu et al. (2020) show that board size, state ownership, and concentrated ownership have a positive impact on the capital structure of companies, whereas foreign ownership appears to have a negative effect on capital structure. They found no evidence of a correlation between board independence, managerial ownership, and firm capital structure.

The mechanism to reduce the conflict between managers and stockholders is by adding ownership of stocks by managers. When managers have stocks, they will feel they have a stake in the company. Decisions are considered carefully, especially in funding decisions because managers will feel the consequences of the decisions taken by him/her directly. According to Jensen and Meckling (1976), the stock ownership of managers affects the decision of funding and corporate value. If the manager has a stake will have the power to influence the funding decision, so it can work optimally. Research conducted Sudarma (2004) shows that the ownership structure in food and beverage companies has a negative significance to the capital structure. Cheng and Tzeng (2011) show that the ownership of the nature of concentration and kinship have a significant negative effect on the capital structure. Research conducted by Ruan (2011) on companies in China show that the ownership structure has a significant negative effect on the capital structure. The theory and empirical testing above serve as the basis for proposing the first hypothesis:

H1: Stock ownership structure has a significant effect on capital structure.

Based on agency theory, management will maximize corporate value for stockholders (Jensen & Meckling 1976). Managers are assigned by stockholders to maximize corporate value. The manager’s stock of ownership will reduce the conflict between managers and stockholders. The synchronized relationship between managers and stockholders makes managers can work optimally, so as to increase corporate value. That ownership structure will affect the corporate value. The decisions outlined by the dominant stockholder executed appropriately can run with supervision by institutional stockholders. The influence of ownership structure on corporate value has been empirically verified by several studies. A company listed on the Nigerian Stock Exchange shows that managerial ownership has a positive effect on corporate value. The theories above and empirical tests make the basis of this research to propose a second hypothesis, that is:

H2: Stock ownership structure has a significant effect on corporate value.

Capital structure should have an effect on corporate value. This is in accordance with Keown et al. (1996) that the purpose of management is to integrate the source of permanent funds used by companies by maximizing stock prices and minimize the cost of capital. Increased debt can increase corporate value. On the other hand, if the company has too much debt, it will tend to experience bankruptcy. There are two theories underlying the influence of capital structure on corporate value, namely, the Agency theory and the Optimal Capital Structure theory. Based on agency theory, agency conflict can occur between management with creditors. The decision-making management associated with the use of debt funding sources will gain additional oversight from creditors. Creditor supervision is a must for companies to maintain financial ratios at a certain minimum. If the company cannot meet the specified standard, then the creditor can withdraw funding from the company. The increasing use of debt in the company’s capital structure will cause the interest cost to rise, so that the stockholder’ profit also increases due to income tax savings. The theory of capital structure is the optimal capital structure that can raise corporate value. Research conducted by San and Heng (2011) shows that, in large the companies in Malaysia, capital structure has a positive influence on corporate value. On the contrary, capital structure negatively affects corporate value on small companies. The capital structure has a positive effect on corporate value. The theory and the empirical testing above are the basis for proposing the third hypothesis:

H3: Capital structure has a significant effect on corporate value.

Capital structure has a positive effect on corporate value if the amount of debt has not reached the optimum point. If the addition of debt has reached the optimal point, then the debt will actually lower the corporate value (trade-off theory). Buying action by investors will raise stock prices. An increase in stock price will increase the corporate value, thereby giving prosperity to stockholders. This hypothesis is based on Signaling theory. The higher the corporate value, the higher the debt. If the corporate value increases, then the company has stable sales. If the company takes the debt, it means that it will be able to pay interest and installments. High corporate value shows the company is in good condition, therefore the company will make an investment. Financing for investment required funds from debt due to insufficient profits. Increased corporate value will be assessed by creditors that the company has good prospects, so creditors participate in providing loans. On the other hand, companies that have high corporate value will gain high profits. The company does not need a loan for corporate funding. The Company will use the profit earned for its corporate funding. The theory underlying this research is novel, so the fourth hypothesis is as follows:

H4: Corporate value has a significant effect on capital structure.

3. Design and Method

This research is a quantitative research, which is directed to test certain theories. Tests are conducted to examine the relationship between research variables. In this study, in accordance with the objectives and problem formulation and hypothesis, the analysis method used is multivariate analysis Generalized Structural Component Analysis (GSCA). To analyze and test the influence of variable of ownership structure, capital structure, and corporate value, then the type of research used is a causality or explanatory research (see Table 1).

Table 1: Research on the Effect of Ownership on Firm Value

Source: Sudarma (2004), Cheng and Tzeng (2011), Ayodele (2012).

Consumption companies listed on the Indonesia Stock Exchange are designated as the location of this research. Consumption companies are companies that offer a fundamental goods to consumers. Consumption company consists of five sub-industries, namely 1) food and beverage, 2) pharmaceutical, 3) cosmetic, 4) cigarette, and 5) household appliances. The company uses a lot of resources, absorbs a lot of manpower, increases people’s income, improves public health, and improves the quality of life of the community. And it assists the government in mobilizing the economy (Limba et al., 2019).

In this study, the population of all consumption companies listed on the Indonesia Stock Exchange (IDX) totals 38. The reason for the selection in consumption companies listed on the Indonesia Stock Exchange as research objects is because the financial data is relatively complete and accountable for its validity. Each annual report is issued by ICMD (Indonesian Capital Market Directory), the company’s financial report has been audited by an accounting consultant appointed by the Bapepam authority. Population data in this study are all consumption companies that have gone public in the period from 2010 to 2015.

Selection and determination of the sample in this study was conducted by using purposive sampling technique. It is the technique of sampling conducted deliberately based on the criteria set by researchers. Precisely, it is called as Judgment Sampling, where the selected sample uses certain criteria. Criteria or consideration of sampling of this study are as follows: (1) Consumption companies are listed on the Indonesia Stock Exchange in 2009 until 2015. The selection of the incident year until 2015 is because there is the process of writing the company’s financial report, which has been published only until 2015. The period of data pooling is considered as sufficient, for it was used in 2009 as the beginning of the incident year. An excessively long period can reduce the number of companies being sampled. This is because it does not qualify continuously (consecutively) within the study period listed on the Indonesia Stock Exchange. (2) Consumers listed in Indonesia Stock Exchange in 2010 until 2015 shall issue the financial statements of companies with the final period of December 31. It starts in 2010 because there are indicators that require financial data to be one year before the year of observation. (3) Consumers listed in Indonesia Stock Exchange during the 2009–2015 period that have no loss. The sample in this study is 20 companies for six years pooling data, as much as 20 × 6 = 120 observations obtained from the total year of research, multiplied by the number of companies as research objects.

The tool of analysis used to test the influence between variables is Structure Equation Modeling with the variant approach or component (with Generalized Structural Component Analysis software). In the test tool, it is suggested that the size of the sample is between 30 to 150 samples. The Monte Carlo simulation results state that the Generalized Structural Component Analysis performs very well for small sample sizes, especially 50 < N < 200. Based on the rule, the sample in this study is 100 ideal observations when using data analysis by using SEM approach with variant approach (with GSCA software).

4. Results

The first stage in model testing is the goodness of fit. Model is declared fit if the value of R²_overall > 0.75 (Hair et al., 2011). The result of analysis by using GSCA shows that the value of R²_overall > 0.75 is equal to 0.825, thus, the model obtained from this research is fit, and feasible for relationship between variables to be tested. As much as 0.825 or 82.5% of the diversity of the original data can be explained by the model, the remaining 17.5% cannot be described by the model. The second stage is testing the relationship hypothesis between variables. The relationship is stated as being significant if the value of Critical Ratio (CR) > 1.96, or Probability-Value (P-value) < 0.05; otherwise non-significant. The positive sign of a significant relationship states a like-minded/one way relationship.

Influence of Ownership Structure on Capital structure

GSCA test results in Figure 2 show that the path coefficient with an estimated value of –0.267, CR value 2.35 > 1.96, and P-value = 0.019 < 0.05. The statistical test results (Figure 2) show enough empirical evidence to accept hypothesis 1. Ownership structure has significant effect on capital structure. Capital structure is one of the strategic decisions. Increasing the portion of debt can increase the harmony of the interests of managers and stockholders. Managers will work more carefully because the company has debts, has the responsibility to pay the principal and interest on the loan. Debt can be a necessary mechanism for managers to act in the interests of stockholders. But the results of this study, on the contrary, states that the increase in institutional ownership and public ownership is able to influence debt reduction.

Figure 2: Analysis Result

Institutional ownership has the task of monitoring the decisions taken by managers. Strong monitoring can prevent the occurrence of earnings management and the actions of unqualified managers. Institutional Ownership acts as a monitoring agent that can reduce agency costs. Institutional ownership can act professionally in controlling corporate debt. The greater percentage of stocks owned by institutional investors will lead to more effective oversight. Institutional ownership is the foremost party in monitoring the debt decided by the manager, so that the decision taken manager is right. Monitoring of debts incurred by institutional holders can reduce agency costs, debt and prevent bankruptcy.

The results of this study state that there is significant negative effect of ownership structure on the capital structure of the consumption companies listed on the Indonesia Stock Exchange. It can be interpreted that the higher the institutional and public ownership, the less debt of the company. This result explains that ownership structures whose indicators of institutional ownership and public ownership substitute debt policy as part of the phenomenon of equity agency conflict and the phenomenon of trade off the debt agency conflict.

The supervision of institutional ownership becomes efficient and effective including oversight of corporate debt, thereby reducing agency costs. Institutional and public ownership assumes debt as an inevitable burden, as it may cause the company to have financial difficulties/ bankruptcy. The results of this study are in line with Jensen and Meckling (1976) who state that the composition of managerial ownership and institutional ownership can affect the capital structure. If agency fees are still high, institutional and public ownership may also seek debt holder assistance for oversight by means of debt covenant. The creditor can lend to the company, with certain conditions to be met by the manager.

The results of this study correspond to agency theory by Jensen and Meckling (1976) that raising the portion of debt can reduce agency problems between managers and stockholders. This study supports the results of research by Hamidulah and Shah (2011), Sudarma (2004), Ruan (2011) and Liu et al. (2011) who state that the ownership structure has a significant negative influence on the capital structure. The results of this study do not support and Tzeng (2011) who state that the ownership structure has a positive influence on the capital structure.

Influence of Ownership Structure on Corporate Value

The result of GSCA test shows the estimated value of coefficient path of ownership structure on corporate value of 0.276. CR value = 1.78 < 1.96, and P-value = 0.075 > 0.05. The result of statistic test shows that there is not enough empirical evidence to accept hypothesis 2. Ownership structure has significant effect on corporate value, so the hypothesis is rejected. The theory used in this hypothesis is agency theory. Institutional stockholders are the majority ownership that can be an effective monitoring mechanism for the manager’s performance, so managers’ decisions are not deviated. Appropriate and accurate manager decisions will bring good influence to the company, thus increasing the corporate value. Public ownership also plays an important role in supervising companies, encouraging motivated managers to work well, in order to have a good impact on improving corporate value. Public ownership can also exercise corporate control, since public ownership can also drive the market value of stock prices. If public stock ownership increases, investors will respond positively.

Ownership structure has no significant positive effect on corporate value. It can be interpreted that the ownership of institutional and public ownership in companies listed in Indonesia Stock Exchange is not responded positively by investors. Institutional ownership is still controlled by the founding family in the form of corporate legal entity of 76.49 percent. The company’s public ownership is still a small percentage of 21.45 percent. There is no positive response to institutional ownership and public ownership, affecting the company cannot increase corporate value.

This study does not support agency theory, which states that managerial and institutional ownership structures can influence funding and corporate value policies. The results of this study do not support Cheng and Tzheng (2011), Reyna et al. (2011) who said that the ownership structure has a significant positive effect on corporate value. The results of this study do not support the research by Sudarma (2004), ownership structure has a significant negative effect on corporate value.

Influence of Capital structure to Corporate Value

GSCA test results states that the value of the coefficient path effect of capital structure on corporate value is 0.777. CR value = 4.40 > 1.96 and P-value 0.001 < 0.05. The statistical test results show that there is enough empirical evidence to accept hypothesis 3. Capital structure has a significant effect on corporate value. The theory used in this hypothesis is the Trade-off theory, which is part of the MM theory (Modigliani & Miller, 1963). The trade-off theory is a theory that takes into account the costs and benefits of debt taken by the company. Debt taken by the company should be greater than costs. Debt can increase the corporate value if the capital structure is still below the optimal point and vice versa, if the company’s capital structure has passed the optimum point, then any additional debt will lower the corporate value. The optimal capital structure is the capital structure that maximizes corporate value. The results of this study indicate that the capital structure has a significant positive effect on corporate value, it can be interpreted that the company’s debt consumption is still below the optimum point/has not passed the optimal point, so that additional debt taken by Consumption Companies listed on the Indonesia Stock Exchange can still raise the corporate value.

Debt for the company has great benefits because it can help developing the business. If the company takes on very high debt, its level of usefulness decreases. This is because the company will pay installments and high interest, corporate profits can be reduced. Companies must have the ability to take the best debt. Capital structure will have a positive influence on corporate value. If the company only takes long-term debt, then the company is advised to multiply long-term debt.

The result of this study is in accordance with the Trade-off theory/Modiglian Miller (1977), which states that the capital structure has a positive effect on corporate value because it is still below the optimal point. The results of this study support the research by Itturaga and Sanz (2001), Antwi et al. (2012) that the capital structure has a significant positive effect on debt. Optimal capital structure has been achieved, so that there is a negative effect on corporate value. Nor does it support Khan’s (2011) research that capital structure has a negative effect on corporate value.

Influence of Corporate Value on Capital structure

GSCA analysis results state that the value of the coefficient path of corporate value on capital structure is 0.486. CR value = 2.83 > 1.96 and P-value 0.005 < 0.05. The statistical test results show that there is enough empirical evidence to accept hypothesis 4, which says corporate value has a significant effect on capital structure. The basis of this hypothesis is Signaling theory. If corporate value increases, then there is a positive signal to increase the capital structure. The results of this study indicate that corporate value has a significant positive effect on capital structure. It can be interpreted that if consumption corporate value increases, it indicates that company gives positive signal to market and creditors that the company is in good condition. If a company that is in good condition, it will make it easier for the company to increase the debt if it is felt that the fulfillment of funds derived from retained earnings is not sufficient. Increased corporate value of the consumption companies listed on the Indonesia Stock Exchange is a positive signal to the creditors, providing information to the creditors that the company will be able to repay the debt when taking on debt. Debt taking by the consumption companies is made when internal funds are insufficient. A good corporate value signals the creditor that causes the consumption companies to have the opportunity to gain ease of taking on debt. The creditors will volunteer and compete to offer funds to companies that are in good condition.

Corporate value and capital structure influence each other (reciprocal) that is significant and positive. The influence of capital structure on corporate value is 77.7 percent, while the influence of corporate value on capital structure is 48.6 percent. Reciprocal influences indicate that the capital structure affects the corporate value more strongly than the corporate value of the capital structure. This result means that company should consider more optimal capital structure to give higher contribution to increase corporate value. As feedback from corporate value, it will strengthen to keep capital optimally.

5. Conclusion

Some implications of the research are as follows: (1) Company should not take high quantity of debt from outsiders, it is better to use internal profit and it is advisable to take long-term debt only; (2) Company needs to improve the presentation of managerial ownership because it can increase corporate value; (3) Consumption companies are companies that mostly import raw materials, which can make them vulnerable to decline in growth if there is volatility of rupiah. It is expected that the government can issue a policy that can stabilize the rupiah.

This study has limitations. (1) This study uses one retained earnings indicator in the hope that the population earns a positive retained earnings. Facts in the field show that there are many companies that suffered losses (negative retained earnings), so the sample only consists of 20 companies from 38 companies; (2) Managerial ownership of consumption companies as indicators, many of which have a value of 0. From 20 companies, managerial ownership that has a zero value total 13 companies.

Suggestions for future studies could include the following: (1) Suggestions for management: Companies can be financially active, which provide a good signal of the company’s condition by maintaining and improving the financial ratios of the company so as to enhance the corporate value. Companies can still increase the amount of debt, because it is still below the optimal point, so the addition of debt will increase corporate value. (2) Suggestions for investors: Investors can pay attention to the financial statements, especially Return-On-Equity, Gross Profit and Net Profit as a basis for investing in a company, but also pay attention to other factors, such as ownership structure. (3) Suggestion for the government: Consumption companies are very important companies. Companies that are able to help move the economy, help the government, create a lot of jobs, but raw materials still depend heavily on imported materials. The government is expected to make macro economic policies that can keep, especially stability of rupiah value. It is expected that the government engages in infrastructure improvements that can have an efficient impact on the distribution of goods and open up new consumer opportunities.