REVEALING THE CAPITAL STRUCTURE FACTOR IS DOMINATED BY DEBT TO LQ45 COMPANIES ON THE INDONESIA STOCK EXCHANGE

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J u r n a l A p l i k a s i M a n a j e m e n J o u r n a l o f A p p l i e d M a n a g e m e n t

V o l u m e 2 1 I s s u e 4 D e c e m b e r 2 0 2 3

2 1 | 4 | 2 0 2 3

R e c e i v e d J u n e ‘ 2 3

R e v i s e d J u n e ‘ 2 3

A u g u s t ‘ 2 3 A c c e p t e d S e p t e m b e r ‘ 2 3

REVEALING THE CAPITAL STRUCTURE FACTOR IS DOMINATED BY DEBT

TO LQ45 COMPANIES ON THE INDONESIA STOCK EXCHANGE

Jaelani La Masidonda

Department of Management, Universitas Darussalam Ambon, Indonesia

Tri Retno Hariyati Dwi Hariyanti

Department of Accounting, Politeknik Negeri Ambon, Indonesia

Abstract: Capital structure has an important role that must be determined to improve the welfare of the owner or the value of the company. Many studies have been done before about capital structure. This study aims to analyze the effect of Chief Executive Officer (CEO) ability, return on investment, return on equity and profit margin on capital structure. This study includes a database outside of accounting data, namely CEO Ability. This is important to study to determine the ability of the CEO in providing internal sources of funds in the capital structure of LQ45 companies on the Jakarta Stock Exchange which are more dominated by debt. The method used is a mixed method between quantitative methods and qualitative methods. The quantitative method uses multiple linear regression analysis. While qualitative methods are used to analyze the influence based on the results of interviews. The object of research was conducted on 45 companies included in the LQ45 stock list on the Indonesia Stock Exchange with a sample of 31 companies. The reasons for selecting 31 samples: a) the company has been listed on the IDX during the 2017-2021 research period, b) has financial statements with non-negative retained earnings and equity. The results showed that CEO ability, profit margin, return on investment as a factor causing capital structure is dominated by debt, while return on equity has no effect on capital structure. The implication of this research is that CEOs who are less able to increase profits to meet the availability of internal funds, the company must meet funding needs sourced from debt through good net working with fund owners.

Keywords: Capital Structure, CEO Ability, Return on Investment, Return on Equity, Profit Margin

CITATION

Masidonda, J. L., Hariyati, T. R., and Hariyanti, D. 2023. Revealing the Capital Structure Factor is dominated by Debt to LQ45 Companies on the Indonesia Stock Exchange. Jurnal Aplikasi Mana- jemen, Volume 21, Issue 4, Pages 1123-1133. Malang: Universitas Brawijaya. DOI: http://dx.doi.

org/10.21776/ub.jam.2023.021.04.19.

I N D E X E D I N

D O A J - D i r e c t o r y o f O p e n A c c e s s J o u r n a l s

S I N T A - S c i e n c e a n d T e c h n o l o g y I n d e x

D i m e n s i o n s G o o g l e S c h o l a r R e s e a c h G a t e G a r u d a

I P I - I n d o n e s i a n P u b l i c a t i o n I n d e x

I n d o n e s i a n O N E S e a r c h

C O R R E S P O ND I N G A U T H O R

J a e l a n i L a M a s i d o n d a D e p a r t m e n t o f M a n a g e m e n t , U n i v e r s i t a s D a r u s s a l a m A m b o n , I n d o n e s i a

E M A I L

j a e l a n i @ u n i d a r . a c . i d

OPEN ACCESS

e I S S N 2 3 0 2 - 6 3 3 2 p I S S N 1 6 9 3 - 5 2 4 1

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INTRODUCTION

Capital structure has an important role that mustbedecidedtoimproveownerwelfareorcom- pany value (Utami, 2019). It is in line with Trade- off Theory in the results of research (Husna and Satria, 2019) which explains that the capital structure must be determined effectively and efficiently to improve the welfare of the owner or company value. Many studies on capital structure have been conducted by previous studies, including (Alfiani- ta and Santosa, 2022; Nurwulandari, 2021), which explainthatcapitalstructureisinfluencedbyprofi- tability as a proxy for Return on Investment (ROI), Return On Equity (ROE) and CEO Ability. In this study, the capital structure was not tested using the Net Profit Margin. In this research, net profit margin is added to the capital structure. The basic con- sideration is that the researcher wants to analyze the company's ability to generate net profit compared to the sales achieved so that it can be a conside-

ration in making company decisions.

Based on this phenomenon, which is the re- ason for choosing LQ45 companies, because there are empirical facts that show that the development of the capital structure of LQ45 companies on the IDX has fluctuated, both foreign capital and equity capital, as shown in Figure 1. Figure 1 illustrates the development of foreign capital and equity capital in LQ45 companies on the IDX. Foreign capital, according to Figure 1, has increased every year.

Meanwhile, equity capital also shows fluctuations.

So this causes the capital structure, which is the ratio of foreign capital and equity from 2017 to 2021, to experience a very sharp increase, see Fig- ure 1. It is because from 2017-2021, debt experi- enced a higher increase when compared to the increase in equity (IDX, 2023). The empirical data shows that the capital structure has increased. But on the other hand, the net profit generated by the company has decreased, as shown in Figure 2.

Figure 1. Development of Foreign Capital and Own Capital of Companies

Source: Financial Statements of LQ45 Companies (2022)

Figure 2. Profit after Tax

0 20.000.000.000 40.000.000.000 60.000.000.000

2017 2018 2019 2020 2021

DEBT EQUITY

capital

0 20.000.000 40.000.000 60.000.000 80.000.000 100.000.000

2017 2018 2019 2020 2021

Income After Tax

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1125 Figure 3. Research Framework

Figure 2 shows the amount of net profit generated by the company during the study period from 2017-2021 in LQ45 companies on the Indo- nesia Stock Exchange (IDX), showing an increase from year to year. In 2017 the average was 39,111, 655. In 2018, it increased to 46,796,020. In 2019, to 51,270,767. In 2020, to 51,270,767. In 2020, to 58,958,081. In 2021, it will be 92,449,333 (IDX, 2023). At the same time, the CEO's ability is proxied by an average tenure of 4.74 years or 4 years 8 months 26 days. Furthermore, Figure 2 shows that the ability of the company's CEO has increased. It means that the CEO can generate a fairly good net profit from year to year. However, the increase in profits earned is not able to finance the company's operations, so the company still relies on funds from foreign capital (debt), see Figure 1.

This phenomenon is contrary to the pecking order theory, which explains that the company, in funding its operations, prioritizes the company's internal sources of funds and then uses debt (Cu- lata and Gunarsih, 2012). This condition is in line with the results of research (Masidonda et al., 2022), which explains that funding from debt has a negative and significant effect on capital structure. It means that by increasing the ability of the Chief Executive Officer (CEO), return on equity, profit margin, and return on investment, which re- flect the internal factors of the company, will reduce the use of debt in the company's capital structure.

Based on this phenomenon, this research is expected to be useful in revealing why LQ45 companies use more foreign capital than their capital.

The research objective is to analyze the influence of Chief Executive Officer (CEO) ability, return on equity, profit margin, and return on investment

on the capital structure dominated by debt in LQ45 companies in the Jakarta Stock Exchange. The novelty of this study is to use a database outside of accounting data, namely CEO Ability, to find out theCEO'sabilitytodeterminethecapitalstructure.

The method used is a mixed method between the quantitative method and the qualitative method.

The quantitative method uses multiple linear regression analysis. The qualitative method is used to analyze the influence based on the results of the interview. The research framework is as shown in Figure 3.

LITERATURE REVIEW

CEO Ability Research on Capital Structure Pecking order theory explains the order of financial resources used by the company as an internal source of funds from profit, short-term se- curities,debt,preferredstock,andfinally,common stock (Culata and Gunarsih, 2012). Research on the influence of CEO ability on the capital structure of the company was conducted by (Bhagat et al., 2011), which explains that CEO ability negatively affects the capital structure. This research is in line with (Masidonda et al., 2022), which explains that CEO ability does not affect capital structure. Furthermore, (Rupinder-Kaur, 2020) conducted research on manager-specific characteristics as a reflection of the CEO ability to significantly influence capital structure decisions.

In addition, according to research (Hamidl- al and Harymawan, 2021), the longer the CEO serves, the better the capital structure management.

Research (Zheng and Zhu, 2021) found evidence that CEO trust increases firm value through capital structure management. Research (Al-Duais et al., 2021) also explains that the longer the CEO serves CEO Ability

Return on Invesment

Return on Equity

Profit Margin

Capital Structure

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or the more experience he has, the greater his power to make decisions in managing capital structure.

ROI on Capital Structure

Many studies on ROI on capital structure have been conducted by previous researchers, including (Lio, 2021; Masidonda et al., 2018), explaining that ROI has a positive effect on capital structure. In addition, (Verry et al., 2020) also explained the same thing that the capital structure is influenced by ROI. It is in accordance with the Packing order theory, which explains that in managing the capital structure, internal funding is pri- oritized through retained earnings as a reflection of profitability so as to increase company value (Culata and Gunarsih, 2012). This theory is also in line with the results of research from (Mubyarto, 2020; S and Machali, 2017), which explain that profitability has a significant effect with a positive direction on firm value through capital structure.

On the other hand, there is conflicting rese- archexplainsthatprofitabilityproxiedbyROI,and ROE according to Sudrajat and Setiyawati (2021) explain that profitability proxied by ROI has a negative and significant effect on capital structure. It is in line with the results of research (Linawati et al., 2022), which shows that profitability proxied by ROI has a negative and significant effect on capital structure. This research is in line with the opinion of (Amin, 2021), which explains that the impact of profitability with ROI and ROE proxies on capital structure is negative and significant.

ROE on Capital Structure

Research on ROE and capital structure has beenconductedby(BudiantoandBustaman,2018;

Choirunnisyah, 2022), which explains that profitability proxied by ROE and ROI affects the capital structure. In addition, Ngatemin et al. (2018) and Amalia and Hermawan (2022) explained the same thing profitability proxied by ROE has a positive and significant effect on capital structure. This research is in line with the Trade-off theory, which explains that additional debt of a company can increase the value of the company due to tax savings and interest expense on corporate debt (Culata and Gunarsih, 2012).

Researchrelatedtoprofitmarginandcapital structure has been conducted by (Susanto, 2019), which explains that profit margin has a negative

impact on capital structure. In addition, it was also conducted by (Poretti and Heo, 2022), who explained that profit margin affects capital structure and can affect firm value. This is not in line with the opinion (Julita, 2011), which explains that simul- taneously and partially, there is no effect of Net Profit Margin / NPM and Return On Investment / ROI on Debt to Equity Ratio / DER, which is proxied to Capital structure. The results of this study indicate that companies listed in LQ45, in financing their capital structure, tend to use debt or foreign capital. Therefore, the company must make efforts to increase profits so that the company is more efficient in financing all operational funds.

If the CEO is able to generate more profits, he will be able to increase investment returns so that he can reduce debt.

HYPOTHESIS DEVELOPMENT

A hypothesis is a statement or prediction that is proposed based on prior knowledge or ini- tial assumptions about a phenomenon or event that will be scientifically tested or researched. Hypoth- esesareusuallyusedinthescientificmethodtofor- mulate predictions that can be tested through research or experiments. Research (Masidonda, 2017) CEO ownership and profitability affect the company's capital structure. Companies with CEOs who own shares will further increase profitability as a form of increasing owner welfare, which has an impact on reducing the use of debt in the capital structure.

H1 : CEO ability has a significant negative effect on capital structure.

If the ROI of a company is high (indicating a profitable investment), then the company's capital structure will tend to have a lower proportion of debt. In other words, companies with high ROI are better able to use their profits to fund projects and growth without the need to rely heavily on debt. It is supported by previous researchers Novi- tasari and Mildawati (2017), who show ROI has a negative and significant effect on capital structure.

H2 : ROI has a negative and significant effect on capital structure.

When a company's ROE is high (indicating a good rate of return for shareholders), the company's capital structure will tend to have a lower pro-

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1127 portion of debt. Thus, companies with high ROE

are more able to use their equity capital to fund projects and growth without the need to rely heavily on debt. It is supported by previous researchers Ramadhani and Fitra (2019) who show ROE has a negative and significant effect on capital structure.

H3 : ROE has a negative and significant effect on capital structure.

When a company's net profit margin is high (indicating efficiency in generating profits), the company's capital structure will tend to have a lower proportion of debt. This also means that companies with high net profit margins are better able to use their profits to fund operations and growth without the need to rely heavily on debt. This is supported by previous researchers Slamet and Is- mawati (2020), who show that ROE has a negative and significant effect on capital structure.

H4 : Net profit margin has a negative effect on capital structure.

METHOD

This research uses the mixed method. The study refers to (Utami, 2019), which explains that research that uses two analyses is called a mixed method. The object research was conducted on companies included in the LQ45 stock list listed on the Indonesia Stock Exchange (IDX) in 2017- 2021. LQ45 stocks are stocks that are ranked top based on market capitalization (CNN, 2021).

LQ45 stocks are a combined calculation of 45 stocks that are assessed and selected through assessment criteria based on liquidity, market capitalization, at least 3 months of existence on the In- donesia Stock Exchange, and transaction activity in the regular market seen from the volume, value,

and number of transactions (Frendy and Yusbardi- ni, 2022). The population is 45 companies. Deter- mination of the sample, using purposive sampling methodwiththefollowingcriteria:a)thecompany has been listed on the IDX during the 2017-2021 research period, b) has financial statements with non-negative retained earnings and equity.

Based on the predetermined criteria, 31 companies met the requirements as a sample with a total of 155 observations, namely 5 years x 31 companies. Secondary data collection uses docu- mentation techniques and pooled type. The primary data was obtained through in-depth interviews with 4 CEO informants representing sample companies. Data analysis using multiple linear regression. The research stages are carried out through the following stages in figure 4.

Figure 4 illustrates the stages of research, namely the first stage of secondary data collection.

The data collected are the financial statements of companies included in the LQ45 list on the IDX at the IDX Ambon representative office. In addition, researchersconductedinterviewsassupportingda- ta with 4 CEOs as representatives of sample companies. Interviews were conducted after data analysis. Furthermore, researchers confirmed the results of data analysis. The second stage is tabulat- ing secondary data using the help of MS. Excel.

As for primary data by grouping data. The third stage of processing secondary data using SPSS – Multiple Linear Regression refers to the opinion (Sukendri and Aryawati, 2021). Primary data is carried out through the stages of description, re- duction, display, and conclusion drawing referring to the opinion (Masidonda et al., 2022). In addition, the fourth stage is also explained, namely processing, followed by analysis and discussion.

Figure Figure 4. Research Stages Step 1

Data Collection

Step 2 Data Tabulation

Step 3 Data Processing

with SPSS

Step 4 Result

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Table 1. Examples of LQ45 Companies

No Group Company Total Required data

1 Financial Company 6 Financial report

2 Good Consumer 7 Financial statement

3 Miscellaneous Industries 1 Financial statement

4 Chemical Industry 6 Financial statement

5 Trade and Investment Services 4 Financial statement

6 Materials 3 Financial statement

7 Infrastructure and Transportation 3 Financial statement

8 Property and Construction 1 Financial statement

Source: LQ45 Company Website (2022)

The sample corporate groups of this study are outlined in Table 1. There are eight groups of companies: Financing Companies with six companies; Consumer Goods with seven companies;

Miscellaneous Industry with one company; Trade Service and Investment with four companies; Ma- terials with three companies; Infrastructure and Transportation with three companies; and Proper- ty and Construction with one company. In this study, there are five variables studied. To make it eas- ier to understand, the definition of operation and measurement is given as follows:

Capital Structure (SM) is a measure of the percentage of funds derived from debt (Bhagat et al., 2011).

SM = Total Debt/Total Assets x 100%

CEO Ability (CEOA) is the individual ca- pacity possessed by the CEO to carry out the work (Bhagat et al., 2011).

CEOA = log number of years in the position of CEO or managing director of the same company.

Return on Investment (ROI) is the company's ability to generate profits that will be used to cover investment (Linawati et al., 2022).

ROI = EAT / Investment x 100%

Return on Equity (ROE) is the company's ability to generate profits with equity (Choirunnis- yah, 2022).

ROE = EAT/Equity x 100%

Profit Margin (PM) is the company's ability to generate profits with the sales achieved (Poretti and Heo, 2022).

PM = EBIT / Sales x 100%.

RESULTS AND DISCUSSIONS

Discussing the effect of CEO Ability, ROI, ROE, and PM on Capital Structure (TDTA) begins with descriptive statistical analysis. The type of descriptive statistics used is average statistics, which describes the average value of the research variables (Orkaido and Moges, 2022).

Table 2. Descriptive Statistics

Mean St. Deviation N

SM 46.8397 29.12049 155

CEO Ability 5.9677 6.37611 155

ROI 8.5246 13.73449 155

ROE 176.0811 1983.65889 155

PM 15.2145 14.97168 155

Source: SPSS Data Analysis (2022)

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1129 Table 3. Results of Path Coefficient Test on Capital Structure (TDTA)

Variable Beta t-count Sig. Information

CEO Ability 0,16 2.238 0,027 Significant

ROI 0,18 2.511 0,013 Significant

ROE -0,01 -0,220 0,826 Insignificant

PM 0,37 5.009 0.000 Significant

Source: SPSS Data Analysis (2022)

CEO Ability on Capital Structure

The effect of CEO ability on capital structu- rehasapositiveandsignificantimpact.Theresults of this study are in line with the opinion of Ha- midlal and Harymawan (2021), explaining that the longer the CEO is, the better the capital structure will be. This research is also in line with (Zheng andZhu,2021)findingevidencethatCEOtrustin- creases firm value through capital structure management. Research by Al-Duais et al. (2021) also explains that the longer the CEO serves or the more experience he has, the greater his power to make decisions in managing capital structure.

Table 3 explains that CEO Ability has a positive and significant effect on capital structure.

The result of this study shows that the higher the CEO's ability, the higher the capital structure. That is, if the CEO can raise foreign capital compared to the ability to generate their own capital, the capital structure increases. The result of this study does not support hypothesis 1, which is the ability of the CEO to negatively and significantly affect the capital structure. This condition is caused by the CEO having a good enough network to generate foreign capital compared to the ability to generate their own capital (net profit). It is in accordance with the results of interviews with one of the CEOs

"1" as follows:

"The CEO must have a network to be able to help each other. If the financial condition is not good, then a solution must be found, namelyusingforeigncapital"(Informant1).

These results are in accordance with the pecking order theory, which explains that the order of financial resources used by the company is the internal source of funds from profit, short-term se- curities,debt,preferredstock,andfinally,common

stock (Culata and Gunarsih, 2012). Research on the influence of CEO ability on the capital structu- reofthecompanywasconductedby(Bhagatetal., 2011), which explains that CEO ability negatively affects the capital structure, meaning that the CEO can increase profits or the availability of internal sources of funds. However, the result of this study is in line with (Masidonda et al., 2022), which explains that CEO ability has no effect on capital structure. The capital structure is more determined by funds sourced from debt. Furthermore, Rupin- der-Kaur (2020) conducted research on the specific characteristics of managers as a reflection of the CEO's ability to significantly influence capital structure decisions.

ROI on Capital Structure

The effect of ROI on capital structure is positive and significant (see Table 2). The result of this study is in line with the opinion of (Lio, 2021), which explains that profitability proxied by ROI has a positive effect on capital structure. It means that the company's ability to generate profits is not enough to increase the availability of its own capital, so the company must make loans. The result of this study does not support hypothesis 2, which explains that ROI negatively affects the capital structure. This is because the return obtained from the company's profit increases but is not proportional to the increase in funding needs, so the company, in meeting the funding needs, relies on funds from foreign capital (debt). The results of this study are reinforced by the results of interviews with informant 2, who stated that:

"If we try to get a large profit, but sometimes the amount of profit earned is not able to finance the company's operations, then we look for funds from outside parties so that

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our funding needs are fulfilled" (Informant 2).

The results of this study contradict the opinion (Sudrajat and Setiyawati, 2021), which explains that profitability proxied by ROI and ROE has a negative and significant effect on capital structure.Itisinlinewiththeresultsofresearch(Linawati et al., 2022) showing that profitability proxied by ROI has a negative and significant effect on capital structure. This research is in line with the opinion of (Amin, 2021), which explains that the impact of profitability with ROI and ROE proxies on capital structure is found to be negative and significant. The incompatibility of the results of this study with the results of previous studies, which have a negative effect, is due to the increase in the ability to generate profits from the total investment ma- de is not sufficient to increase the availability of own capital in the capital structure, so it must raise funds from loans or debt.

ROE on Capital Structure

Based on the result of the path test (table 2), it shows that ROE has no effect on capital structure. The result of this study does not support hypothesis 3, which explains that ROE negatively affects capital structure. These results illustrate that the ability to generate net income with Equity (ROE), although increasing every year, is not able to affect the capital structure. This is due to the large amount of funds needed by the company exce- eding the profits earned, thus causing the company to seek funds from foreign capital. The research is in line with the opinion of informant 3, who explained that:

"A manager must have networking; indeed, the company wants to increase profits, but sometimes it cannot meet the company's needs. Therefore, we must be smart to find funds from other people" (Informant 3).

The results of this study contradict the results of research from (Budianto and Bustaman, 2018; and Choirunnisyah, 2022), which explain that profitability proxied by ROE and ROI affects the capital structure. In addition, (Amalia and Her- mawan, 2022; Ngatemin et al., 2018) explain the same thing that profitability proxied by ROE has

a positive and significant effect on capital structure. The difference with this research is that the additional profit earned by the company is not able to meet the needs of funds in the capital structure.

Profit Margin on Capital Structure

The net profit margin on capital structure is positive and significant (see Table 2). It does not support hypothesis 4, which explains that net profit margin has a negative and significant effect on capital structure. It is due to the profit margin that increases every year but is not able to fund the operational fund needs, thus causing the company to seek funding from third parties (debt). This condition will increase the capital structure, which is not proportional to the increase in net profit margin.

This result is in accordance with the opinion of informant 4, who said:

"Actually, the key for a company is not only profit in developing the company, but it must be able to finance its operations. If funds are insufficient from internal sources, then they must come from external sources" (In- formant 4).

The results of this study are not in line with research from (Poretti and Heo, 2022; Susanto, 2019), which explains that profitability proxied by net profit margin has a negative effect on capital structure. This research is also not in line with the opinion of (Julita, 2011), which explains that sim- ultaneously and partially, there is no effect of Net Profit Margin / NPM and Return On Investment / ROI on Debt to Equity Ratio/ DER, which is a proxy for Capital Structure. The difference with the findings of this study is that the companies listed in LQ45 in financing their capital structure tend to use debt or foreign capital. After all, the profits earned are not sufficiently available to increase their capital. Therefore, the company must make efforts to increase profits so that the company is more efficient in financing all operational funds.

IMPLICATIONS

This research implies that for CEOs who are less able to increase profits to meet the availability of internal funds, the company must meet funding needs from debt through good networking with fund owners.

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1131 RECOMMENDATIONS

This research is limited to companies listed in LQ45, and the sample should be expanded by grouping the types of companies. In addition, this study only reveals factors from the profitability si- de with CEO Ability, ROI, ROE, and PM. There- fore, for further research, add the Liquidity ratio, Activity ratio, and valuation ratio.

CONCLUSIONS

Researchers try to reveal that the capital structure factor is more dominated by debt than equity. Based on the research results, it is explained that the CEO's ability has not been able to generate sufficient profit to finance the company's operations. Likewise, ROI return on investment, namely theprofitobtainedfromthecompany'sinvestment, is not able to meet the company's funding needs, so there are efforts to fulfill funds with foreign capital. It is also the same as ROE, namely return on equity, meaning that the income from the capital owned cannot affect the capital structure. Because Net profit margin (PM) means that net profit on sales has not been able to generate sufficient funds forthecompany,sothecompanymustfulfillfunds through foreign capital. Based on the test results, to maintain the value of capital structure, the CEO should further improve the ability to generate sufficient profit to fund the company so as to reduce foreign capital.

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