The Effect of Company Size and Profitability on the Capital Structure in Manufacturing Companies Listed on the Indonesia Stock Exchange

Oct 13, 2025 by talynt.org 2 views

The Effect of Company Size and Profitability on the Capital Structure in Manufacturing Companies Listed on the Indonesia Stock Exchange

Introduction

The capital structure of a company is a crucial aspect of its financial management, as it determines the mix of debt and equity used to finance its operations. In the context of manufacturing companies listed on the Indonesia Stock Exchange (IDX), the capital structure is influenced by various factors, including company size and profitability. This study aims to investigate the effect of company size and profitability on the capital structure in manufacturing companies listed on the IDX.

Background

The capital structure of a company is determined by the trade-off between the costs and benefits of various funding sources. The trade-off theory explains that companies choose the optimal capital structure by considering the costs and benefits of debt and equity financing. The capital structure is influenced by various factors, including company size, profitability, business risk, market structure, and economic conditions.

Methodology

This study uses an associative approach with a population of all manufacturing companies listed on the IDX. A total of 79 manufacturing companies were selected as samples through the _Tar targeted sampling method. Secondary data used comes from the company's financial statements published on the IDX. The research hypothesis was analyzed using multiple linear regression methods with a significance level of α = 5% (0.05).

Results

The results of the analysis show that simultaneously, the effect of company size and profitability on the capital structure is significant. Partially, profitability has a negative and significant effect on the capital structure, while the company's size has a positive and significant effect on the capital structure. The Adjusted R Square value of 0.144 shows that the independent variable, namely the size of the company and profitability, can explain 14.4% variations in the dependent variable, namely the capital structure. The remaining 85.6% variations are explained by other variables that are not included in this study.

Further Analysis

The results of this study are in line with the theory of trade-off theory which explains that the company chooses the optimal capital structure by considering the costs and benefits of various funding sources. A more profitable company tends to have more internal benefits to fund its growth, thereby reducing dependence on debt. This explains the negative effect of profitability on the capital structure. Larger companies generally have easier access to the capital market and can get funds at a lower cost. Large companies also tend to have more diverse and more liquid assets, so as to improve their ability to take debt. This explains the positive effect of company size on the capital structure.

Implications

The results of this study have several implications for stakeholders, such as:

Company Management: Understanding the effect of company size and profitability on capital structure can help management in formulating optimal funding strategies.
Investor: This research can provide an overview of how company fundamental factors can affect their capital structure. This can help investors in assessing risk and investment opportunities.

Limitations

It is essential to remember that this research is limited to manufacturing companies listed on the IDX and may not apply to other types of companies. This research only analyzes two factors, namely company size and profitability. Other factors, such as business risk, market structure, and economic conditions, can also affect the capital structure.

Conclusion

This study shows that company size and profitability have a significant influence on the capital structure in manufacturing companies on the IDX. Companies with higher profitability tend to have a lower capital structure, while companies with larger sizes tend to have a higher capital structure. The findings of this study provide valuable insights for company management and investors in understanding the effect of company size and profitability on the capital structure.

Recommendations

Based on the findings of this study, the following recommendations are made:

Company Management: Companies should consider their size and profitability when formulating their capital structure. Companies with higher profitability should aim to reduce their dependence on debt, while companies with larger sizes should aim to increase their access to the capital market.
Investor: Investors should consider the company's size and profitability when assessing the risk and investment opportunities of a company. Companies with higher profitability and larger sizes may be considered as lower-risk investments.

Future Research Directions

This study provides a foundation for future research on the capital structure of manufacturing companies listed on the IDX. Future studies can investigate the effect of other factors, such as business risk, market structure, and economic conditions, on the capital structure. Additionally, future studies can explore the impact of the capital structure on the performance of manufacturing companies listed on the IDX.
Frequently Asked Questions (FAQs) on the Effect of Company Size and Profitability on the Capital Structure in Manufacturing Companies Listed on the Indonesia Stock Exchange

Q: What is the capital structure of a company?

A: The capital structure of a company refers to the mix of debt and equity used to finance its operations. It is a crucial aspect of a company's financial management, as it determines the company's ability to raise funds and manage its risk.

Q: How does company size affect the capital structure?

A: Larger companies generally have easier access to the capital market and can get funds at a lower cost. They also tend to have more diverse and more liquid assets, which improves their ability to take debt. Therefore, company size has a positive effect on the capital structure.

Q: How does profitability affect the capital structure?

A: A more profitable company tends to have more internal benefits to fund its growth, thereby reducing dependence on debt. This explains the negative effect of profitability on the capital structure.

Q: What is the trade-off theory, and how does it relate to the capital structure?

A: The trade-off theory explains that companies choose the optimal capital structure by considering the costs and benefits of various funding sources. It suggests that companies balance the benefits of debt financing (e.g., lower costs) against the costs of debt financing (e.g., higher risk).

Q: What are the implications of this study for company management?

A: Understanding the effect of company size and profitability on capital structure can help management in formulating optimal funding strategies. Companies with higher profitability should aim to reduce their dependence on debt, while companies with larger sizes should aim to increase their access to the capital market.

Q: What are the implications of this study for investors?

A: This research can provide an overview of how company fundamental factors can affect their capital structure. This can help investors in assessing risk and investment opportunities. Companies with higher profitability and larger sizes may be considered as lower-risk investments.

Q: What are the limitations of this study?

A: This research is limited to manufacturing companies listed on the IDX and may not apply to other types of companies. This research only analyzes two factors, namely company size and profitability. Other factors, such as business risk, market structure, and economic conditions, can also affect the capital structure.

Q: What are the future research directions based on this study?

A: Future studies can investigate the effect of other factors, such as business risk, market structure, and economic conditions, on the capital structure. Additionally, future studies can explore the impact of the capital structure on the performance of manufacturing companies listed on the IDX.

Q: What are the practical implications of this study for policymakers?

A: Policymakers can use the findings of this study to develop policies that promote the growth of manufacturing companies listed on the IDX. For example, policymakers can provide incentives for companies to increase their access to the capital market and reduce their dependence on debt.

Q: What are the implications of this study for the Indonesian economy?

A: The findings of this study can contribute to the development of the Indonesian economy by promoting the growth of manufacturing companies listed on the IDX. This can lead to increased economic activity, job creation, and improved living standards for the Indonesian people.