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Reisha Savira Mulyawati Ardiansyah, Eriana Kartadjumena (2024) Profitability and Capital

Structure's Effect on Firm Value: The Moderating Influence of Company Size, (06) 10,

E-ISSN:

2684-883X

PROFITABILITY AND CAPITAL STRUCTURE'S EFFECT ON FIRM VALUE: THE

MODERATING INFLUENCE OF COMPANY SIZE

Reisha Savira Mulyawati Ardiansyah, Eriana Kartadjumena

Widyatama University, Indonesia

Email: [email protected]

Abstract

This study aims to examine and test the influence of profitability and capital structure on firm

value, with company size as a moderating variable in technology companies listed on the

Indonesia Stock Exchange (IDX) for the period 2019-2022. This quantitative research

employs convenience sampling with a sample size of 32 companies. The data used in this

study is secondary data, comprising 94 financial statements. The analysis was conducted

using moderated regression analysis with the assistance of eViews version 13. The results

indicate that profitability does not affect firm value, whereas capital structure does influence

firm value. Additionally, company size weakens the effect of profitability and capital

structure on firm value

Keywords: Capital structure, Firm Size, Firm Value, Profitability, Technology Companies.

INTRODUCTION

According to Salvatore (2005), the primary goal of a company is to enhance its value,

particularly for publicly listed companies, to increase shareholder wealth. Financial reports

and good financial ratios can indicate a well-run business and increase company value.

Emphasize the importance of company value for shareholder prosperity, measured by ratios

like Price to Book Value (PBV), which reflects the company's stock price relative to its book

value per share.

The Indonesia Stock Exchange (IDX) oversees stock trading and classifies industries

into sectors like IDXTECHNO, which includes technology companies. In August 2023, the

IDXTECHNO index declined by -0.91%, contrasting the overall market growth. Several key

companies in this index saw significant stock price drops and net losses, such as PT Digital

Mediatama Maxima Tbk. and PT Global Digital Niaga, Tbk.

The decline in IDXTECHNO can be attributed to the depreciation in the stock prices of

several companies classified within this category. When companies constituting the stock

index simultaneously experience a reduction in their share prices, the index itself is

consequently affected and declines. Several companies within the top ten constituents of

IDXTECHNO reported a decrease in their stock prices and incurred net losses during the

month of August 2023. Below is a list of the top ten constituents of IDXTECHNO

(dataindonesia.id):

JOURNAL SYNTAX IDEA

p–ISSN: 2723-4339 e-ISSN: 2548-1398

Vol. 6, No. 10, Oktober 2024

Profitability and Capital Structure's Effect on Firm Value: The Moderating Influence of

Company Size

Syntax Idea, Vol. 6, No. 10, Oktober 2024 6305

Table 1 Top Ten Constituent Companies On IDXTECHNO

Kode

Nama Perusahaan

Market

Capitalization

Index

Weight

Price

Change

(%)

Net

Profit/Loss

DCII

DCI Indonesia

Tbk.

15.34 T

21.83%

-5.77%

Rp 632,8 M

GOTO

GoTo Gojek

Tokopedia Tbk.

14.31 T

20.36%

-6.59%

-Rp 7.160

BUKA

Bukalapak.com

Tbk

11.33 T

16.13%

-16.79%

Rp -389,27

EMTK

Elang Mahkota

Teknologi Tbk.

8.98 T

12.78%

-43.20%

-Rp 444,18

BELI

Global Digital

Niaga Tbk.

8.66 T

12.32%

-3.83%

-Rp 1.750

MCAS

M Cash Integerasi

Tbk.

2.47 T

3.51%

-12.77%

Rp 3.550 M

MTDL

Metrodata

Electronic Tbk.

2.04 T

2.90%

-14.48%

Rp 272 M

NFCX

NFC Indonesia

Tbk.

1.81 T

2.58%

-11.87%

Rp 3,03 M

DMMX

Digital Mediatama

Maxima Tbk.

0.86 T

1.23%

-58.18%

Rp 10,48 M

WIRG

WIR ASIA Tbk.

0.84 T

1.20%

2.44%

Rp 26,02 M

The decline in technology sector stocks is attributed to financial performance falling

short of market expectations. Such losses are inevitable due to the substantial investments and

extended timelines required for establishing a digital ecosystem. According to Nafan Aji

Gusta, an Analyst at Mirae Sekuritas, achieving profitability in technology firms is a gradual

process (Gumilar, 2023).

The continuous decline in stock prices of IDXTECHNO companies, despite increased

consumer bases for firms like Gojek and Bukalapak, is problematic for investors, as it

negatively impacts the company's value. Companies must sustain their stock prices to deliver

optimal returns to shareholders. A high Price-to-Book Value (PBV) ratio boosts market

confidence in the company's future prospects and signifies significant shareholder wealth

(Hermuningsih, 2013). Investors evaluate a company's value based on its financial

performance, as detailed in financial statements. Improved financial performance is expected

to enhance company value, thereby increasing investor returns. Better financial performance

correlates with higher company value and greater investor returns (Widagdo et al., 2020).

Thus, a company's increased value can attract potential investors seeking returns on their

investments.

The Price-to-Book Value (PBV) ratio is a valuable metric for assessing firm value as it

compares the share price to the company's book value. Share demand typically increases with

rising share prices, driven by enhanced profitability, higher dividend payouts, and improved

company liquidity. It is anticipated that better financial performance will correspondingly

enhance firm value. Essentially, stronger financial performance leads to higher firm value and

increased returns for investors (Widagdo et al., 2020).

Profitability can influence the fluctuations in a company's stock price (Hikmah et al.,

2019). Profitability impacts stock prices, and the technology sector's stock decline is

Reisha Savira Mulyawati Ardiansyah, Eriana Kartadjumena

6306 Syntax Idea, Vol. 6, No. 10, Oktober 2024

attributed to unmet financial performance expectations. Noteworthy companies like Gojek

and Bukalapak, despite increased user transactions, experienced net losses and falling stock

prices post-IPO, highlighting challenges in financial performance and liquidity risks.

Capital structure is crucial to a company's overall value. An optimal capital structure

balances debt and equity to minimize costs and maximize returns. According to Brigham &

Houston (2011), a well-managed capital structure, as measured by ratios such as the Debt-to-

Equity Ratio (DER), significantly influences company value. A high DER indicates greater

financial leverage and risk, whereas a balanced ratio reflects a stable financing approach.

Effective management of capital structure impacts investor confidence and market valuation.

Firm size can moderate the relationship between capital structure and company value. Larger

firms often have more resources and better access to capital markets, allowing them to

manage debt more effectively and potentially mitigate the risks associated with high leverage.

This size advantage can enhance the positive effects of a well-structured capital mix on

company value, making firm size a critical factor in financial strategy and performance

optimization.

Companies must optimize their financial performance to sustain or increase stock

prices, thereby attracting investors by demonstrating strong profitability, liquidity, and low

leverage, which collectively enhance company value and shareholder returns. Strong

profitability and an efficient capital structure are generally associated with higher firm values,

as improved financial performance leads to better returns for investors.

This study aims to determine whether profitability and capital structure positively

impact firm value, addressing phenomena and research gaps identified in previous studies.

Researchers seek to examine the relationship between profitability, capital structure, and firm

value, with firm size as a moderating variable, to provide valuable insights for investors and

companies in enhancing firm value.

RESEARCH METHOD

The data for this study comes from the annual financial statements of technology

companies listed on the Indonesia Stock Exchange (IDX) for the period 2019-2022. This

research adopts a quantitative approach, utilizing financial data with independent variables

(profitability, capital structure) and a moderating variable (firm size). The dependent variable

is firm value, assessed through the minimum, maximum, and average values of each indicator.

Profitability is measured using the Return on Assets (ROA) indicator, capital structure using

the Debt to Equity Ratio (DER) indicator, firm size using the natural logarithm of total assets,

and firm value using the Price to Book Value (PBV) indicator.

This study can be classified as causal research, as it aims to identify, describe, and

determine the direction of the relationship between profitability and capital structure on firm

value, with firm size acting as a moderator. The population comprises all annual financial

reports of technology companies listed on the IDX. The sample was selected using

convenience sampling, a method that involves collecting information from a population that is

conveniently accessible. A total of 32 companies and 94 financial reports were included in the

sample. The operational definitions and variable measurements are detailed in Table 1.

Profitability and Capital Structure's Effect on Firm Value: The Moderating Influence of

Company Size

Syntax Idea, Vol. 6, No. 10, Oktober 2024 6307

Table 2 Operational Definition

Variable

Definition

Measurement

Source

Firm Value

Firm value is investors' perceptions of

the level of frequent success firms linked

with price stocks

Price Book Value

Brigham and

Houston

(2011)

Profitability

Ratio profitability is the objective ratio

for knowing the ability firm to produce

profit during a certain period.

Return on Asset

Kasmir

(2019)

Capital

structure

combination of long-term debt, short-

term debt, preferred stock, and common

stock used by a company to finance its

assets.

Debt to Equity

Ratio

Brigham dan

Houston

(2011)

Firm Size

The firm size describes how big or small

something firm is, seen as how a great

firm more easily gets funds from

investors.

Natural Log

indicator of Total

Assets

Munawir

(2010)

Source: Data Processed, 2024

Hypothesis testing and data analysis in this study involve descriptive analysis, panel

data regression tests, and Moderated Regression Analysis (MRA). Before choosing the

appropriate panel data regression model, three approaches must be considered: the Common

Effect Model (CEM), Fixed Effect Model (FEM), and Random Effect Model (REM). To

determine the most suitable model for this study, three tests are conducted: the Chow Test,

Hausman Test, and Lagrange Multiplier Test. The regression equation used in this study is as

follows:

= α + β

+ β

M + ε

In this study, the moderator variable is firm Size. Firm size will moderate the

relationship between ROA and DER on Firm Value. Thus, the panel data moderation

regression equation can be formulated as follows:

Y = α + β

+ β

M + β

M + ε

Description:

Y = Predicted value

α = Constant

1-2

= Regression coefficient

3-5

= Regression coefficient of X and M variable interaction

= ROA

Reisha Savira Mulyawati Ardiansyah, Eriana Kartadjumena

6308 Syntax Idea, Vol. 6, No. 10, Oktober 2024

= DER

M = Firm Size

M = Interaction between ROA and Firm Size variables

M = Interaction between DER and Firm Size variables

ε = Residual Value

RESULT AND DISCUSSION

The method used to determine the sample in this study is convenience sampling, where

this study indicates that the sample is a representation of the existing population and is in

accordance with the objectives of the study. Companies included in the IDXTECHNO

classification in 2019-2022 amounted to 32 companies, the data used in this study amounted

to 94 financial reports. This is because there are several companies that have started listing

their shares on the Indonesia Stock Exchange in the current period, so this is included in the

unbalanced data panel.

The unit of analysis in this study is the company. The object of this study is the

financial report. The subjects in this study are technology sector companies listed on the

Indonesia Stock Exchange for the 2019-2022 period. The independent variables in this study

are profitability, liquidity, and leverage with the addition of a moderating variable, namely

company size. The dependent variable in this study is the value of the Company.

Descriptive analysis provides an overview or description of data seen from the average

value (mean), maximum, minimum, and standard deviation of each variable. The results of

descriptive statistical analysis showed in Table 2.

Table 3 Descriptive Statistics

Variable

Minimum

Maximum

Mean

Std. Deviation

Profitability

-3,753075

0,971244

0,001137

0,445860

Capital structure

-81,31083

15,76881

-0,309812

9,364150

Firm Size

Firm Value

23,15952

-17,17689

32,56705

86,03392

27,53480

5,357202

1,842407

13,15878

Source: The Processed Primary Data (2024)

The descriptive statistics of this research are listed in table 2. The descriptive

profitability test results show that Envy Technologies Indonesia Tbk (ENVY) has a minimum

of -3,753. The maximum value is owned by Tourindo Guide Indonesia Tbk (PGJO). The

mean 0,001, the standard deviation value more significant than the mean in the sample

identification, meaning that the profitability variable has a high level of data variation.

Descriptive capital structure test results shows that Anabatic Technologies Tbk (ATIC) has a

minimum of -81.31. The maximum value is 15,769 also from Anabatic Technologies Tbk

(ATIC). Mean -0,309. the standard deviation value more significant than the mean in the

sample identification, meaning that the capital structure variable has a high level of data

variation.

Profitability and Capital Structure's Effect on Firm Value: The Moderating Influence of

Company Size

Syntax Idea, Vol. 6, No. 10, Oktober 2024 6309

The descriptive firm size test results show that Tourindo Guide Indonesia Tbk (PGJO)

has a minimum of 23,16. Maximum value 32,57 from GoTo Gojek Tokopedia Tbk. Mean

value 27,53, the mean value more significant than the standard deviation in the sample

identification, has been optimal to represent the overall observation data. Descriptive firm

value test results shows that Anabatic Technologies Tbk (ATIC) has a minimum of -17,18.

The maximum value is 86,03 from DCI Indonesia Tbk. Mean 5,35, the standard deviation

value more significant than the mean in the sample identification, meaning that the capital

structure variable has a high level of data variation.

To examine the moderating effects of firm size on the relationship between

profitability and capital structure on firm value, a Moderated Regression Analysis (MRA) was

conducted. The results of the MRA provide insights into whether and how firm size

strengthens or weakens these relationships. The following table 3 presents the detailed

findings of the MRA statistical test results.

Table 4 MRA Statistical Test Results

Dependent Variable: Y

Method: Panel Least Squares

Date: 09/07/24 Time: 19:22

Sample: 2019 2022

Periods included: 4

Cross-sections included: 32

Total panel (unbalanced) observations: 94

Variable

Coefficient

Std. Error

t-Statistic

Prob.

8.84870

20.64520

0.42860

0.66925

-47.87728

68.86117

-0.69527

0.48871

16.95652

7.82432

2.16715

0.03292

-0.14519

0.75153

-0.19320

0.84724

X1M

1.99232

2.76067

0.72167

0.47240

X2M

-0.57316

0.26984

-2.12403

0.03647

Source: Eviews13

Based on the MRA regression results in the table above, the MRA equation can be

formulated:

Y = 8.84870 - 47.87728 ROA + 16.95652 DER - 0.14519 FirmSize+ 1.99232 ROA*FirmSize

- 0.57316 DER*FirmSize + e

Effect of Profitability on Firm Value

The profitability variable has a regression coefficient 47.87728, this shows that the

variable has a positive influence on the company value variable. This means that if

Profitability (ROA) increases by one unit, the company value will increase by 47.87728

assuming other variables remain constant. The probability value for the profitability variable

is 0.48871. The value is greater than the α value (0.48871 > 0.05) indicating that the

profitability variable has no effect on the firm value variable. From these results it can be seen

that the first hypothesis is rejected, there is no positive influence of profitability on firm value

in technology companies listed on the Indonesia Stock Exchange.

Reisha Savira Mulyawati Ardiansyah, Eriana Kartadjumena

6310 Syntax Idea, Vol. 6, No. 10, Oktober 2024

The results of this study indicate that profitability has no significant influence on firm

value. The results are in line with research conducted by Firdaus (2019), Hapsoro and Falih

(2020), and Reschiawati, Syahdina, and Handayani (2020). The results show that if the

change in profitability increases or decreases, it will not affect to firm value. Many

technology companies are operating in a growth phase, where they invest their revenues back

into research and development of new products, marketing, and business expansion. Investors

may be more focused on the company's long-term prospects in adopting or creating new

technologies that will generate competitive advantages, rather than just looking at current

profitability.

Effect of Capital Structure on Firm Value

The capital structure variable has a regression coefficient of 16.95652, this shows that

the variable has a positive influence on the firm value variable. This means that if Return on

Assets (ROA) increases by one unit, the firm value will increase by 16.95652 assuming other

variables remain constant. The probability value for the capital structure variable is 0.03292.

The value is smaller than the α value (0.03292 < 0.05) indicating that the capital structure

variable has an effect on firm value. From these results it can be seen that the second

hypothesis is accepted, namely that there is a positive influence of capital structure on firm

value in technology companies listed on the Indonesia Stock Exchange.

There is a positive influence of capital structure on the firm value of technology

companies listed on the Indonesia Stock Exchange. This indicates that technology companies

with a well-optimized capital structure can enhance their firm value. A balanced mix of debt

and equity financing allows these companies to leverage their growth opportunities while

maintaining financial flexibility. Additionally, an effective capital structure can signal to

investors that the company is well-managed and capable of sustaining its growth, leading to

increased investor confidence and higher firm value. This finding is supported by research

conducted by Dewi et al. (2024), Hirdinis (2019), Saragih et al. (2019) which concluded that

capital structure, approximated by the debt-to-equity ratio, has a positive and significant effect

on firm value (PBV).

Firm Size Moderates the Effect of Profitability on Firm Value.

The estimated results of the interaction variable between profitability and company size

has a regression coefficient of 1.99232, this shows that the variable has a positive influence of

the interaction variable between capital structure and firm value variable. The probability

value is 0.47240. The probability value above the α value (0.47240 > 0.05) indicates that the

interaction variable is between profitability and company size. From these results it can be

seen that H0 is rejected and shows that company size weakens the influence of profitability on

firm value in technology companies listed on the Indonesia Stock Exchange.

Firm size weakens the influence of profitability on the firm value of technology

companies listed on the Indonesia Stock Exchange. This is consistent with the research

conducted by Fitria and Irkhami (2021) and Rosihana (2023). It indicates that larger

technology companies are more oriented towards long-term growth rather than short-term

profitability. In this regard, investors may consider the future growth potential of the company

more than current profits when assessing its value. Investors believe that large technology

companies have the ability to withstand changes in profitability due to their large resources,

Profitability and Capital Structure's Effect on Firm Value: The Moderating Influence of

Company Size

Syntax Idea, Vol. 6, No. 10, Oktober 2024 6311

access to broad markets, and flexibility to adapt to market changes. Additionally, larger

technology companies tend to have strong institutional shareholders who prioritize long-term

growth. This can reduce the pressure to achieve a certain level of profitability that may affect

the firm's value. Thus, Firm size cannot moderate profitability's effect on the firm value.

Firm Size Moderates the Effect of Capital structure on Firm Value

The estimated results of the interaction variable between capital structure and company

size have a regression coefficient of -0.57316, this shows that the variable has a negative

influence of the interaction variable between capital structure and firm value variable. The

probability is 0.03647. The probability value shows below the α value (0.03647 < 0.05).

These results indicate that company size can weaken the relationship between capital structure

and firm value.

The firm size weakens the effect of capital structure on firm value. The firm size

weakens the effect of capital structure on firm value. Larger firms often have more diversified

operations, greater access to capital markets, and stronger bargaining power with creditors

and suppliers. As a result, they may not rely as heavily on their capital structure to influence

their firm value compared to smaller firms. Additionally, larger firms often have more

established reputations and creditworthiness, which can lead to lower costs of capital and less

sensitivity to changes in their capital structure. In contrast, smaller firms might experience

more significant changes in firm value due to adjustments in their capital structure, as they

typically face higher risks and costs associated with financing. Therefore, the moderating

effect of firm size suggests that the relationship between capital structure and firm value is

less pronounced for larger firms, as they benefit from economies of scale and other

advantages that mitigate the impact of their capital structure decisions.

CONCLUSION

This study aims to investigate the firm size in moderating the effect of profitability and

capital structure on firm value. The results of this study indicate that profitability have no

significant influence against firm value. The results also showed there is a positive influence

of capital structure on the firm value. The results showed that firm size weaken the effect of

profitability and capital structure on firm value, because technology companies are considered

to have sufficient resources to cope with changes in profitability and possess the flexibility to

adapt to market fluctuations.

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Reisha Savira Mulyawati Ardiansyah, Eriana Kartadjumena (2024)

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