The effect of capital structure on profitability and stock returns: Empirical analysis of firms listed in Kompas 100

Abstract

Purpose

The purpose of this study is to examine the factors that influence capital structure, profitability and stock returns and the relationship between capital structure, profitability and stock returns. The endogenous variables in this study are capital structure, profitability and stock returns, whereas the exogenous variables are firm size, growth opportunity, tangibility, liquidity, volatility and uniqueness.

Design/methodology/approach

The population used is a company that is listed on the compass index 100 period of August 2016. A total of 64 companies are sampled in this study. The unit of analysis is 448 data. The data analysis technique used is path analysis with the help of AMOS.

Findings

The results obtained show only profitability variables that affect stock returns. Variable capital structure, firm size, growth opportunity, tangibility and liquidity have no significant effect. Variables that influence capital structure are only influenced by growth opportunity, whereas other variables are not significant and variables that affect profitability are firm size, growth opportunity, uniqueness and volatility.

Originality/value

Path analysis is a model similar to the multiple regression analysis, factor analysis, canonical correlation analysis, discriminant analysis and more general multivariate analysis groups. This research discusses that capital structure is useful for increasing the value of the company in the sense that the more debt that is used, a tax deduction will be obtained because of interest costs. So that the company’s profits will increase and eventually will increase the value of the company. This opinion remains a controversy among financial experts. Until now, there is no agreement that can explain the capital structure in all conditions of the company. There are two important theories concerning capital structure, trade-off theory and pecking order theory.

Citation

Chandra, T., Junaedi, A.T., Wijaya, E., Suharti, S., Mimelientesa, I. and Ng, M. (2019), "The effect of capital structure on profitability and stock returns: Empirical analysis of firms listed in Kompas 100", Journal of Chinese Economic and Foreign Trade Studies, Vol. 12 No. 2, pp. 74-89. https://doi.org/10.1108/JCEFTS-11-2018-0042