INDONESIAN
PHARMACEUTICAL COMPANIES: CAPITAL STRUCTURE, BUSINESS RISK, COMPANY VALUE AND
FIRM SIZE AS A MODERATING VARIABLE ANALYSIS
Anisah*, Moh. Ali Murad, Asriadi, Suryadi Samudra, Dilah
Magfirah
Faculty of Economics, Universitas
Tadulako, Palu, Indonesia
Email: [email protected]*
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Article
Information |
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ABSTRACT |
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Received:
December 18, 2022 Revised:
December 27, 2022 Approved:
January 12, 2023 Online:
January 25, 2023 |
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This study looks into how firm size affects the relationship between
capital structure and business risk in determining firm value. This study
makes use of panel data from ten pharmaceutical companies sourced from their
annual reports from 2015 to 2021. The data analysis method employed the
Structure Equation Modeling (SEM) method via the Partial Least Squares (PLS)
method with WarpPLS 6.0 software. According to the findings of this study,
capital structure had no effect on firm value, whereas business risk had a
significant negative effect on firm value. Only firm size can moderate the
relationship between capital structure and firm value. Thus, managers'
primary concern in order to maximize the value of pharmaceutical companies in
Indonesia is to ensure that the amount of income received by the company
remains stable in order to avoid income volatility, which can trigger
increased business risk for the company. Furthermore, when developing a
policy to determine how much debt or equity is used to finance the company in
order to maximize the company's value, the size of the company must be
considered. |
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Keywords |
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Capital Structure; Business Risk; Firm Size; Firm Value |
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INTRODUCTION
The current world conditions have changed the
Pharmaceutical Industry sector into one of the industries considered by
investors to invest. This is because companies that are members of the industry
are the main supporters in providing medical equipment and medicines to
overcome the Covid-19 pandemic that occurred. To maintain the interest and
interest of investors in investing, pharmaceutical companies need to improve
their performance through maximizing company value. This is because maximizing
company value reflects business value and is a goal to be achieved by the
company
(Jihadi
et al., 2021).
The
value of the company is an indicator of how the market reacts to the company.
The market reaction can be seen from the fluctuations in the price of the
shares being traded. When the stock price rises, it means that the company is
in its best performance or maximizing the value of the company will be
achieved. For investors, this condition will bring high profits because it will
attract other investors to buy shares of the company so that there will be an
increase in share prices. As for creditors, the value of the company is related
to the company's ability to repay loans, this means that the company has good
liquidity (Hirdinis,
2019).
The
ability to repay loans is related to the decision of how big the proportion of
debt is compared to equity. This decision is referred to as a capital structure
decision which is the most important decision for the company's finances (Gul
& Cho, 2019) (Anisah
et al., 2022). Because it relates to the efficient use of
debt and equity in financing company assets. Cuevas-Vargas
et al., (2022)
states that there is no universal theory about the formation of an optimal
capital structure in business. The policy for determining the capital structure
generally depends on the needs of each company.
Various
studies have emerged to explain how much the composition of debt and equity can
be used by companies to achieve an optimal capital structure in order to
maximize the value of the company. Theorem Modigliani
& Miller, (1958)
first sparked the irrelevance of capital structure in influencing firm value.
Next Setiadharma
& Machali, (2017)
also found the same result that the capital structure had no effect on firm
value. However, Sari
& Wijayanto, (2015)
and Hirdinis,
(2019)
found that capital structure has a significant positive effect on firm value, while Luu,
(2021)
found that capital structure has an inverse relationship with firm value.
Based
on this explanation, there is an inconsistency in the results of the study in
determining the optimal capital structure in order to maximize the value of the
company. For this reason, further efforts are needed to investigate the impact
of capital structure decisions on the value of the company that is adjusted to
the conditions and circumstances that occur in the object of the company under
study.
Another
factor to consider to maximize firm value is uncertainty. Bornhofen, (1967)
explains that this uncertainty is an important factor in business decisions
because it will trigger business risks for the company. Weiying & Baofeng, (2008)
confirmed that the company's business risk is an important determinant of
company value, the higher the business risk, the lower the company's value. Bandanuji & Khoiruddin, (2020)
also found the same thing, namely business risk had a negative effect on firm
value. Active risk management policies lead to an increase in firm value (González & Yun, 2022).
In contrast to the results of research by Sari & Wijayanto, (2015)
which found business risk does not affect the value of the company. Based on
this explanation, special attention needs to be given to see the effects of
business risks or risks inherent in the company's business operations in
influencing the value of the company.
Another
factor to consider to maximize firm value is uncertainty. Bornhofen,
(1967)
explains that this uncertainty is an important factor in business decisions
because it will trigger business risks for the company. Weiying
& Baofeng, (2008)
confirmed that the company's business risk is an important determinant of
company value, the higher the business risk, the lower the company's value. Bandanuji
& Khoiruddin, (2020)
also found the same thing, namely business risk had a negative effect on firm
value. Active risk management policies lead to an increase in firm value (González
& Yun, 2022).
In contrast to the results of research by Sari
& Wijayanto, (2015) which found business risk does not affect the
value of the company. Based on this explanation, special attention needs to be
given to see the effect of business risks or risks inherent in the company's
business operations in influencing the value of the company.
Firm
size is used as a moderator to determine whether these variables can strengthen
or weaken the relationship between capital structure and business risk on firm
value. Usually large companies have to borrow more funds to support their
operations. Logically, this condition will increase the risk of bankruptcy or
financial distress. But because in general large companies tend to have more
diversified businesses, so the possibility of default risk on loan funds is
lower (Sheikh
& Wang, 2011).
In addition, a diversified type of business also makes the business risks faced
by the company more controllable. This condition will later strengthen or
weaken the relationship between capital structure and business risk on firm
value. Therefore, this study will provide empirical evidence regarding the
relationship between the three variables of interest, especially firm size in
strengthening or weakening the influence of capital structure and business risk
on firm value in pharmaceutical companies in Indonesia.
Relationship
between Capital Structure and Firm Value
Firm value is an investor's perception of the
success of a company as reflected in its share price, measured by Price Book
Value or the ratio of the company's stock market value (share price) over the
book value of its equity (Jihadi
et al., 2021). While the capital structure is measured by the
Debt to Equity Ratio (DER), namely by comparing debt and equity (Hirdinis,
2019).
The relationship between capital structure and firm
value has been explained by various theories including the theory of capital
structure which explains the relationship between debt and equity in optimizing
firm value as proposed by Modigliani
& Miller, (1958); Modigliani
& Miller, (1963). The trade-off theory recommends that managers
whose firms are in a favorable condition to use more debt than equity, in order
to benefit from tax reductions (Jensen
& Meckling, 1976), while the pecking order theory recommends using
lower debt with equity as a top priority. , in order to avoid the risk of
financial distress (Myers
& Majluf, 1984). Thus, building an optimal capital structure leads
to momentum for company development. Therefore, capital structure decisions
dynamically affect firm value and are an important and inseparable part of the
goal of maximizing shareholder wealth (Almahadin
& Oroud, 2019).
H1
= Capital structure has a significant positive effect on Firm Value.
Relationship
between Business Risk and Company Value
Business risk is very important for the company's
financial performance and the economic well-being of company owners (Forster,
1996). Therefore, every decision taken by the company in
relation to increasing the value of the company must consider business risks (Sari and Wijayanto, 2015). Usually business risk is measured using a degree of
operating leverage (DOL) which compares EBIT and the Company's Sales activity (Vakilifard
& Oskouei, 2014); (Data
et al., 2017); (Sutrisno,
2019).
The relationship between business risk and firm
value occurs because of income volatility or income instability when the
business environment becomes uncertain (Alnajjar,
2015). The uncertainty inherent in projected future asset
returns or equity returns will affect investor interest in investing in the company,
especially if the company uses larger debt to finance its company. Thus, the
higher the business risk, the lower the firm value (Weiying
& Baofeng, 2008).
H2
= Business Risk has a significant negative effect on Firm Value
Firm
Size moderates the relationship between Capital Structure and Business Risk to
Firm Value
Firm Size can be calculated with the natural log of
total assets (Bandanuji
& Khoiruddin, 2020). The greater the total assets, the greater the
company's growth, which makes investors respond positively to this, so that the
value of the company will increase. The use of Firm Size as a moderating
variable is very little taken up in various financial studies. (Kurshev
& Strebulaev, 2015). In terms of capital structure and business risk in
influencing value, often large companies have many strategies and face less
risk, and thus have better credit than small businesses. Large companies also
often have better reputations due to their greater popularity and
proportionally lower expected bankruptcy costs as a fraction of the assets. All
of these factors make it easier for large companies to enter the equity
securities market (Chen
& Chen, 2011). For this reason, this study will examine the
interaction of Firm Size as a moderator between capital structure and business
risk on firm value. Thus, the findings of this study can provide important
insights for academics and can be implied by decision makers.
H3
= Firm Size is significant as a moderator of the relationship between Capital
Structure and Firm Value
H4
= Firm Size is significant as a moderator of the relationship between Business
Risk and Company Value.
METHODS
An explanation of how the independent variable
affects the dependent variable which is strengthened or weakened by the
moderating variable using a causative relationship approach or a causal
relationship (Wasininingsih
& Mulyadi, 2019).
Panel data sourced from the annual
financial statements of pharmaceutical companies on the Indonesia Stock
Exchange in 2015-2021 are used as secondary data consisting of 10 companies
that meet the sample criteria for research. Structure Equation Modeling (SEM)
method with Partial Least Square (PLS) approach and multigroup analysis using
WarpPLS 6.0 software are data analysis techniques used in this study.
RESULTS
Model Partial Least Square (PLS) test results using
WarpPLS 6.0 software can be seen in the following figure:
Figure 1. SEM Model
Source: Data
processed in 2022 (WarpPLS 6.0 Output Results)
Table 1. Path Coefficients Results
Source: Data processed in
2022 (WarpPLS 6.0 Output Results)
Based on the table and figure
above, the results of hypothesis testing in this study can be explained as
follows:
1. H1 = Capital Structure has no
effect on Firm Value (P = 0.356 > 0.05) with a path coefficient of -0.044.
Thus, H1 is rejected.
The policy to increase the
use of total debt in the company's DER ratio does not contribute significantly
to the increase in company value. Investors consider that the policy of
determining the company's capital structure is not the main factor when they
want to invest in pharmaceutical companies. This finding is not in accordance
with the proposed hypothesis, but is in accordance with the packing order
theory where most companies use internal sources of funds to finance the
company's operations. These results support the statement of Alaoui et al., (2016)
namely the DER value is categorized as good for total assets if it has a
maximum value of 33%, because this indicates a lower level of volatility, so
that financial distress can be minimized. In addition, this study recommends
that companies always compare the marginal benefits of using long-term debt
with the marginal costs of long-term debt before making a
decision to use them to finance the company's operations. These results
support the Theorem Modigliani
& Miller, (1958); Setiadharma
& Machali, (2017); and (Wijayaningsih
& Yulianto, 2022)
which states that capital structure has no effect on firm value.
2. H2 = Business Risk has a
significant negative effect on Firm Value (P = 0.009 <0.05) with a path
coefficient of -0.264 Thus, H2 is accepted
The value of a pharmaceutical
company will increase if the company is able to keep the value of business risk
low. Business risk reflects how much deviation the company's profits get. This
means that the greater the deviation of profits obtained by the company, the
greater the business risk faced by the company. This condition is one of the
factors that triggers the market reaction to the company's stock price which
can affect the behavior of investors to be careful when deciding to invest in
the company. The results of this study are in line with research conducted by Weiying & Baofeng, (2008); Bandanuji & Khoiruddin,
(2020); (González & Yun, 2022)
which states that the higher the business risk, the lower the firm value.
3. H3 = Firm Size is significant
as moderating the relationship between Capital Structure and Firm Value (P
Value Z*X1 = 0.013 < 0.05). Thus, H3 is accepted.
These results become the
basis for managers of pharmaceutical companies to consider the company size
factor when making decisions related to the policy of determining the capital
structure that will have an impact on the value of the company. Based on agency
theory, the larger the size of the company, the greater the opportunity to
obtain funding sources, both internal and external sources of funding, so that
management is more flexible in managing and maximizing company value.
Furthermore, the findings reveal that firm size also has a significant
influence on its market value. In this case, investors feel different signals
from small companies compared to large companies which indicate the company is
growing or not (Luu, 2021).
In addition, the larger the size of the company, the more difficult it is to
control and supervise the company's management (Wijayaningsih & Yulianto, 2022).
Thus firm size acts as a moderating variable to strengthen or weaken the relationship
between capital structure and firm value.
4. H4 = Firm Size is not
significant as a moderator of the relationship between Business Risk and Firm
Value (P Value Z*X2 = 0.417 > 0.05). Thus, H3 is rejected.
In pharmaceutical companies,
company size is not the main consideration to strengthen or weaken the
relationship between business risk and company value. Companies with a larger
size tend to have a higher operating return because they are able to provide a
more profitable rate of return on investment compared to small companies. Large
companies also do not consider direct bankruptcy costs as an active variable in
determining the level of leverage because larger companies tend to be more
diversified (Rafiq
et al., 2008)
Company size is not the only
consideration for investors because of the large amount of assets. Without
optimal management, it will not have significant implications for the value of
the company. In general, the size of the company will affect the assessment of
investors in making investment decisions because the size of the company will
predict the ability to earn operating profits of the company and will also be
able to predict the level of stability in managing finances. Large companies
have the ability to generate more stable profits so that the dividends paid are
larger. This is in line with the research results (Nurwulandari
et al., 2021); (Jihadi
et al., 2021).
CONCLUSION
Capital structure has no effect on firm value, while
business risk has a significant negative effect on firm value. Firm size is
only able to moderate the relationship between capital structure and firm
value. These results indicate that in order to maximize the value of
pharmaceutical companies in Indonesia, the main concern of managers is to
ensure that the amount of income received by the company remains stable in
order to avoid income volatility that can trigger an increase in the company's
business risk. In addition, it is also necessary to consider the size of the
company when you want to make a policy to determine how much debt or equity is
used to finance the company so that maximizing the value of the company can be
achieved.
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