The Effect of Capital Structure Management on Firm’s Value: The Case of Final Tax Regulation on Indonesian Construction Firm
In 2008, the Indonesian government implements the final income tax regulation, a new income tax concept. Since its implementation, the final income tax has had a significant impact on how the construction industry calculates its income tax liability. Implementation of the final income tax, which mandates that the final tax be calculated directly on the firm’s revenue, has directly reduced the tax shield that the firm benefits from. The M&M theorem provided a new perspective on capital structure. The theory stated that a firm’s capital structure influence on the cost of capital depends on the firm’s tax shield implications. Combining the M&M theorem and the final tax implementation, the purpose of this study is to determine if a firm’s capital structure influences the firm value and whether the cost of capital mediates such effect in the Indonesian construction industry through the proxy of long-term debt-to-equity ratio, share price, and weighted average cost of capital. Using a quantitative methodology, secondary data from construction companies listed on the Indonesia Stock Exchange between 2012 and 2019 are collected for this study. This study utilized linear regression and the simple mediation model. The result indicates that the long-term debt-to-equity ratio has a direct and significant positive effect on the stock price of the company. Meanwhile, the weighted average cost of capital does not have a significant mediating effect on the relationship between capital structure and stock price. The finding of this research is intended to provide firm managers an insight surrounding the implication of capital structure within Indonesia construction industry in order to be able to increase firm’s value.
Andow, H. A., & Wetsi, S. Y. (2018). Capital Structure and Share Price: Empirical Evidence From Listed Deposit Money Banks (DMB) in Nigeria Related papers A Review on t he Effect of Capit al St ruct ure on Financial Performance of Deposit Money Bank
Bank Indonesia. (2021). Laporan Perekonomian Indonesia Tahun 2020. Bank Indonesia. https://www.bi.go.id/id/publikasi/laporan/Pages/LPI_2020.aspx.
Baker, H. K., & Martin, G. S. (2011). Capital structure and corporate financing decisions: theory, evidence, and practice. Wiley.
Brealey, R. A., Myers, S. C., & Allen, F. (2011). Principle of corporate finance : Global edition. McGraw-Hill ; Irwin.
Brigham, E. F., & Ehrhardt. (2015). Financial Management Theory And Practice 13th edition. Ohio: South Western Cengage Learning.
Gitman, L. J., & Zutter, C. J. (2015). GlobAl edITIon • Principles of Managerial Finance FoUrTeenTh edITIon. www.pearsonmylab.com
Campbell, S., Greenwood, M., Prior, S., Shearer, T., Walkem, K., Young, S., Bywaters, D., & Walker, K. (2020). Purposive sampling: complex or simple? Research case examples. Journal of Research in Nursing, 25(8), 652–661. https://doi.org/10.1177/174 4987120927206
Caprio, G., & Demirguc-Kunt, A. (1998). The Role of Long-Term Finance: Theory and Evidence. World Bank Research Observer, 13, 171–189. https://doi.org/10.1093/wbro/13.2.171
Chin, W. W. (2010). Bootstrap Cross-Validation Indices for PLS Path Model Assessment. In V. Esposito Vinzi, W. W. Chin, J. Henseler, & H. Wang (Eds.), Handbook of Partial Least Squares: Concepts, Methods and Applications (pp. 83–97). Springer Berlin Heidelberg. https://doi.org/10.1007/978-3-540-32827-8_4
Damodaran, Aswath. (2022). Equity Risk Premiums (ERP): Determinants, Estimation, and Implications – The 2022 Edition). ://dx.doi.org/10.2139/ssrn.4066060
Dong, M., Hirshleifer, D., & Teoh, S. (2012). Overvalued Equity and Financing Decisions. Review of Financial Studies, 25. https://doi.org/10.2139/ssrn.1874726
Donaldson, G. (1961). Corporate Debt Capacity: A Study of Corporate Debt Policy and the Determination of Corporate Debt Capacity. Division of Research, Graduate School of Business Administration, Harvard University, Boston. https://www.worldcat.org/ search?q=au%3ADonaldson%2C+https://Gordon%2C&qt=hot_author
Freedman, & David A. (2009). Statistical Models Theory and Practice.
Gebka, B. (2008). Volume- and size-related lead-lag effects in stock returns and volatility: An empirical investigation of the Warsaw Stock Exchange. International Review of Financial Analysis, 17(1), 134–155. https://doi.org/10.1016/j.irfa.2005.07.002
Hoover, S. A. (2005). McGraw-Hill STOCK VALUATION An Essential Guide to Wall Street’s Most Popular Valuation Models. https://doi.org/10.1036/0071452249
Hayes, A. F. (2012). Introduction to Mediation, Moderation, and Conditional Process Analysis. www.guilford.com/MSS
Hayes, A. F. (2004). PROCESS: A Versatile Computational Tool for Observed Variable Mediation, Moderation, and Conditional Process Modeling 1. http://www.afhayes.com/
Jahanzeb, A., Saif, U.-R., Bajuri, N. H., Karami, M., & Ahmadimousaabad, A. (2013). Trade-Off Theory, Pecking Order Theory and Market Timing Theory: A Comprehensive Review of Capital Structure Theories. International Journal of Management and Commerce Innovations (IJMCI), 1(1), 11–18.
Menon, U. V. (2016). Impact of Capital Structure on Stock Prices: Evidence from Oman. International Journal of Economics and Finance, 8(9), 249. https://doi.org/10.5539/ijef. v8n9p249
Modigliani, F., & Miller, M. H. (1958.). American economic Revlew VOLUME XLVIII JUNE 1958 NUMBER THREE THE COST OF CAPITAL, CORPORATION FINANCE AND THE THEORY OF INVESTMIENT.
Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction.
Myers, S. C., & Majiuf, N. S. (1981). CORPORATE FINANCING AND INVESTMENT DECISIONS WHEN FIRMS HAVE INFORMATION THE INVESTORS DO NOT HAVE.
Mullins, D. W. (1982). Does the capital asset pricing model work? Boston, Ma, Harvard Business Review.
Paramitha, A. L., Hartoyo, S., & Maulana, N. A. (2014). THE VALUATION OF INITIAL SHARE PRICE USING THE FREE CASH FLOW TO FIRM METHOD AND THE REAL OPTION METHOD IN INDONESIA STOCK EXCHANGE. Jurnal Manajemen Dan Kewirausahaan, 16(1). https://doi.org/10.9744/jmk.16.1.9-16
Rahmadewi, P. W., & Abundanti, N. (2018). PENGARUH EPS, PER, CR, DAN ROE TERHADAP HARGA SAHAM DI BURSA EFEK INDONESIA. 7(4), 2106–2133. https://doi.org/10.24843/EJMUNUD.2018.v7.i04.p14
Shrout, P., & Bolger, N. (2002). Mediation in Experimental and Nonexperimental Studies: New Procedures and Recommendations. Psychological Methods, 7, 422–445. https://doi.org/ 10.1037/1082-989X.7.4.422
Siahaan, L., & Iskandar, D. (2021). The Effect Of Capital Structure Mediation On The Influence Of Liquidity And Profitability On Firm Value (Vol. 19, Issue 3). https://jurnal.ubd.a c.id/index.php/ds
Tjahjono, M. (2015). Analisis Pengenaan Pajak Final Dan Non Final Pada Perusahaan Jasa Konstruksi di BEI. Jurnal Ekonomi , 6(2).
Vega, C. (2006). Stock price reaction to public and private information. Journal of Financial Economics, 82(1), 103–133. https://doi.org/https://doi.org/10.1016/j.jfineco.2005. 07.011
Zhao, X., Lynch, J. G., & Chen, Q. (2010). Reconsidering Baron and Kenny: Myths and truths about mediation analysis. Journal of Consumer Research, 37(2), 197–206. https://doi.org/10.1086/651257.