Determinants of Firm Value and Profitability: Evidence from Indonesia

Abstract

The purpose of this study was to examine the role of profitability as a mediating variable in influencing firm value. This study uses a sample of manufacturing companies listed on the Indonesia Stock Exchange from 2016 to 2018. The data used is panel data, with data analysis using multiple regression. Based on the Sobel test, profitability plays a role in mediating the effect of firm size on firm value. The effect of firm size on firm value is indirect, however, through profitability. Therefore, the market price of the shares of large-scale companies will increase if the resulting profitability is high. The capital structure and managerial ownership directly influence firm value. The results showed that managerial ownership and firm size had a positive effect on profitability, while capital structure had no effect on profitability. Capital structure and managerial ownership have a negative effect on firm value, while firm size and profitability have a positive effect on firm value. The main finding of this study is that profitability acts as an intervening variable in mediating the relationship between firm size and firm value.

How Capital Structure And Financial Performance Impact On Food And Beverage Company Value?

“…This result is in accordance with the view expressed which states that the larger the debt-based capital structure as a burden on the company, the lower the financial performance. And the declining level of profitability is caused by the costs that must be borne by the company when they use a high level of debt [16], [17], [18].…”

“…The right theory to relate the influence of financial performance to firm value is signaling theory about how companies should signal to users of reports in the form of information about the company's financial performance [19]. There is a less expensive method for companies to signal to investors that the company can ISSN: 2722-4015 http://ijstm.inarah.co.id issue announcements about the company's prospects and ability to generate profits by hiring outsiders to examine the company's books or other materials and provide an opinion on whether managers are telling the truth [20], [21].…”

Intervention Variable in Indonesian Industry: Case Study on Capital Structure

“…The Debt to Equity Ratio measures capital structure (DER). Several earlier studies concluded that capital structure reduces corporate value [1]. Others concluded that capital structure positively impacts corporate value [2].…”

“…Profitability measures a company's capacity to make money from sales and investments. Profitability has been shown to positively impact business value [1,17,18]. Various studies claim that profitability has no impact on firm value [19].…”

“…Firm Size is a metric that can be used to determine the size of a company (FS). Numerous prior studies indicated that firm size had a beneficial effect on firm value [1], [2], and [17]. Meanwhile, other studies suggest that the firm has little impact on the firm's worth [22].…”