Profitability is considered as one of the information released by the company that can be used as a signal for investors to attract investors and want to invest in the company. When the market reaction responds positively to the signal issued by the company, it will increase the value of the company.
This means that the increase in company profitability is in line with the increase in firm value. Research by Fajaria and Isnalita also shows that profitability has a positive effect on firm value. Return on equity which is stated is the rate of return or part of the profit to the shareholders. Thus, a high return on equity indicates that the company can provide a high return of shareholders.
This will attract investors to buy company shares and result in an increase in share prices. Research by Aggarwal and Padhan shows that profitability measured using a return on assets ROA has a negative effect on company values. Based on the above discussion, previous theories and studies on the influence of capital structure, firm growth, and profitability on corporate value show inconsistent results.
This study was conducted to determine the effect of capital structure, firm growth, and profitability on corporate value. A Supriyono is a contractual relationship between the owner principal and management agent , the owner contracts management to work for a specific purpose so that management is given the authority to make decisions.
Agency theory has a relationship with income smoothing, explaining that agents and principals often have different interests. The agency relationship is defined as a contract in which one or more people called owners or shareholders or owners appoint another person called an agent or administrator or management to do some work on behalf of the owner. This work includes the delegation of authority to make decisions.
In this case, management is expected by the owner to be able to optimize the existing resources optimally. If both parties are maximizing their roles utility maximizers , what reason is there that management will not always act in the best interests of the owners.
This is very reasonable because in general, the owners have long-term welfare motives, on the other hand, management is more short-term so that sometimes they tend to maximize profits for the short term by ignoring the sustainability of profits in the long term.
To limit or reduce this possibility, the owner can set appropriate incentives for management, namely by spending monitoring costs in the form of salaries Andri Veno, This is known as symmetric information. One type of information released by a company that can be a signal for parties outside the company, especially for investors, is an annual report. Information disclosed in annual reports can be in the form of accounting information, namely information related to financial reports and non- accounting information, namely information that is not related to financial statements.
The annual report should contain relevant information and disclose information deemed important to be known by report users, both inside and outside. All investors need the information to evaluate the relative risk of each company so that they can diversify their portfolio and investment combinations with the desired risk preferences. Signaling theory can also help the company agent , the owner principal , and outsiders reduce information asymmetry by producing the quality or integrity of financial statement information Wijaya, The company value is the price that potential buyers are willing to pay if the company is sold Husnan and Pudjiastuti According to Fahmi , company value is a condition that has been achieved by a company as an illustration of public trust in the company after going through a process of activity for several years, namely from the time the company was founded until now.
Increasing company value is the achievement of a company in accordance with the wishes of the company owner. This task is specifically delegated to company management to achieve its goals. The higher the value of the company, the more prosperous the company owner is Kusumajaya, This ratio was developed by Professor James Tobin Chung and Stephen W.
This ratio is a valuable concept because it shows current financial market estimates of the return on each dollar of investment. Used to fund company assets. The capital structure of a company is only part of its financial structure. The debt equity ratio DER describes the extent to which owners of capital cover their debts to outsiders Kasmir, The smaller this ratio, the better. This ratio is also called the leverage ratio.
But for shareholders or management, this ratio must be large Fajaria and Isnalita, Company Growth is the change decrease or increase in total assets owned by the company. Asset growth is calculated as the percentage change in current assets against the previous year.
The more efficient the use of company assets, the lower the costs required to finance the operation of the assets. The more effective the use of company assets, the lower the possibility of unused assets. Unused assets can be sold so that the company gets additional funds. According to Jogiyanto company growth is measured using total asset growth TAG which compares the difference between total assets of the current year and total assets of the previous year against total assets of the previous year.
Husnan and Pudjiastuti say that profitability is intended to measure how a company generates profit from sales, and the assets it owns or from the equity it owns.
Kasmir says in practice company management is required to meet the targets set. To measure the level of profit of a company, the profitability ratio is used.
According to Kasmir return on equity is the ratio of net income to measure a tax with its capital. The higher this ratio, the better. This means that the position of the owner of the company is getting stronger, and vice versa. Research Conceptual Framework Note: 1. The effect of capital structure on firm value. Previous research conducted by Suzulia et al , Hardinis , Dhani and Utama , and Aggarwal and Padhan show that capital structure has a positive and significant effect on firm value.
However, Meythi and Debbianita found that firm structure does not affect value. Following the signal theory, companies that have definite equity and debt show that management for operational activities is good. This is a positive signal for investors because they are confident in the hope that they will also get maximum income. The right capital structure and used optimally can provide positive value for company value.
The influence of company growth on firm value. Previous research conducted by Dhani and Utama and Fajaria and Isnalita showed that company growth affects firm value. Meythi and Debbianita found that company growth does not affect firm value.
Following the theory of signal, high asset growth indicates that the chances of the company benefit too high in the future. It is therefore expected with a great growth company will be a consideration for investors to invest, so Firm Value will increase. Effect of profitability on firm value. Hardinis and Aggarwal and Padhan found that profitability does not affect firm value.
The higher profitability of the bigger companies. Following the theory of signal that companies with high profitability companies are good at managing resources to generate income to be received in the form of dividends.
The investors will be interested in their shares of the company, so the stock price increases. This will increase Firm Value. The effect of capital structure, firm growth, and profitability on firm value. Previous research conducted by Dhani and Utama shows that capital structure, company growth, and profitability affect firm value. H2: Profitability has the most dominant influence on firm value in coal mining sub-sector companies listed on the Indonesia Stock Exchange. Research Method 3.
The data is obtained from go-public companies listed on the Indonesia Stock Exchange which provide financial reports in a row for the period. The sampling technique in this study was using a purposive sampling technique.
The data of this study were obtained by downloading the financial statements of coal mining sub-sector companies that have been listed on the Indonesia Stock Exchange during This research sample uses a purposive sampling method so that the selected sample is a representation of the population by the research objectives. The sample selection stage is carried out based on criteria, presented in Table 1. Based on the results of the sample selection process seen in Table 1.
Table 1. Sample Selection Stage No. The secondary data is obtained through a financial statement or publication report on Indonesia Stock Exchange www.
The existing data is obtained from the official website of the Indonesia Stock Exchange. Multiple linear regression analysis is used to test the effect of two or more independent variables on the dependent variable. The dependent variable in this study is a company value, while the independent variable is capital structure, company growth, and profitability. Research Results 4.
Deviation Debt to Equity Ratio The lowest TAG value X2 was The average value was 0. The lowest value of ROE X3 is The average ROE value is 0. The lowest score for Tobin's Q Y was 0. Tobin's Q average value was 0.
Heteroscedasticity Test Previous observation data were 60 observations, with outlier data as many as 9 observations, namely n8, n11, n12, n13, n14, n15, n49, n54, and n The number of observations after deducting outlier data became 51 observations. After the outlier data is removed, the Glesjer test is performed. The results of the Glesjer test are the significant value of the debt equity ratio X1 of 0. The significant value of total asset growth X2 of 0. The significant value of return on equity X3 of 0.
From the results of the analysis, the unstandardized residual value is 0. The tolerance value of the TAG is 0. The tolerance value of ROE of 0. The resulting significance value is less than 0. Based on hypothesis testing, capital structure, company growth, and profitability affect firm value. Thus, these results are by Dhani and Utama in their research that results show that capital structure, company growth, and profitability simultaneously affect firm value.
Tabel 3. Coefficients B Std. Error Beta Capital structure. Company growth has a significant value of 0. Profitability has a significant value of 0. Meanwhile, a higher gross-loan-portfolio to total-assets ratio implies increased risk associated with the net interest revenue.
Moreover, the micro-financing operations are, to a great extent, dependent on personal contacts, which results in greater transaction cost per loan, since the clients of micro- financing institutions may often reside in inaccessible locations and the execution of loan- deals through the means of personal contacts is time-consuming of a process. Due to the afore-mentioned reasons portfolio-to-asset ratio is expected to hold a significantly positive relationship with profitability.
Furthermore, a broad range of sources of financial-funding provides with: financial flexibility, wider chances of diversification, an encouraged long-term solvency and thus, risk mitigation Consultative Group to Assist the Poor [CGAP], A study consisting of a data-set of MFIs belonging from 61 countries , points out that most of the micro-financing firms incorporate more of debt-financing in their structures long term debt in particular.
The findings also propose that debt-financing enables the micro-financing firms to better reach a larger number of customers and experience greater economies of scales, allowing MFIs to better cope with moral hazards and tough situations.
The findings also conclude that the ratio of total-debt to short—term-debt significantly negatively impacts the ROA, while significantly positively affecting the ROE; strongly suggesting that profitable MFIs rely more on the long-term debt financing Kyereboah- Coleman, As through micro-financing, borrowers can apportion savings in building-up assets, which are then used as security.
This helps the borrowers maintain their seasonal consumption, acts as a buffer with regard to shocks and enables them to finance major expenditures. As Ledgerwood describes voluntary and compulsory savings, stating that voluntary savings are much easier to be adopted as when compared to the compulsory savings, since these are provided by the MFIs to not only the borrowers but also the non- borrowers and are not considered to be an obligation towards the accessing credit services of MFIs.
Furthermore, since savings play an essential part in the economic growth and exploitation, MFIs rely on them all the more so. The most important question here is perhaps that of whether the savings collected by the MFIs are apportioned relatively equally for both the rural and urban areas. Furthermore, savings mobilization is often a long-term strategic-decision for most of the MFIs out there. Since savings do not relate to the volatility of interest-rates and other external sources, they are perhaps the foremost independent financing source for most of the credit activities of a MFI.
Moreover, depositors at MFIs highly value guaranteed access and security of their savings, while an interest rate is the second most attractive feature of making deposits. Therefore, it is apparent that MFIs must work on the factor of trust in order to encourage depositors, and thereby be able to offer lower interest rates; for which it is crucial for the MFIs to adhere to sound, professional, and ethical management.
While the factors of firm-age, firm-size, and portfolio-at-risk by 90 days are taken as control variables. Furthermore, three dummy variables of total deposit receipts, women borrowers and regulations are also included in the study; which take a value of 1 if they are identified as parts of the MFIs, if not, 0. The conceptual framework of this study is as follows: Hypotheses The following hypotheses are used to test the relationships as lying between the independent variables and the dependent variables: H1: More leveraged micro-financing institutions have larger profitability margins.
H2: Older micro-financing institutions have larger profitability margins. H3: The higher the amounts of deposits taken-in by the MFIs, the greater is their profitability. H4: TMFIs with more women borrowers have larger profitability margins.
H5: Large-scale size MFIs have larger profitability margins. Data and Methodology The study utilizes an unbalanced panel data of MFIs from across seventy countries around the world. The data ranges from the year to the year , whereby Microfinance Information Exchange mix is the data-source. Five-star MFIs have been taken into account in the present study, since their numbers are periodically audited; as the data has been previously externally audited, it is granted to be reliable.
Furthermore, the micro-financing industry is characterized by a differing production function than that of conventional retail banks or corporate entities. The micro-financing sector is very diverse in terms its industrial organization; whereby MFIs are organized as not- for-profit organizations NPOs credit unions, and as banks or non-bank financial institutions.
It can therefore be argued that additional factors come into play and impact the profitability of the MFIs, along with the known specifics of banking industry, one example being the measures of outreach.
The results testify that the mean operational-efficiency is at 1. Moreover, the average ROE is found to be 9. The mean debt-to-equity ratio is 3. Any presence of multi co-linearity is tested by the use of correlation-matrix. Since the results indicate a very low degree of correlation among the variables, presence of any multi co-linearity is negated.
Error Coefficient t -Statistic Prob. Estimations identify DT as having a significantly positive effect on the ROA; since the t-value is greater than 3. Thereby proving that increased deposits lead to increased profitability.
It is also identified that the PAR at 90 days, which is a proxy of net-risk, has an overall significantly negative effect on the ROA, since its t-value is more than 5; which verifies our hypothesis that an increased risk leads to decrease in profitability. The estimations also validate our hypothesis of the MFIs profit more from their borrowers of the female gender, since the chances of default are reduced and the loans-reimbursements are made on time.
Whereas it is identified that firm-size and regulations do not strongly impact the profitability of the MFIs. Error T -Statistic Prob. Estimations identify DT as having a significantly positive effect on the ROE; since the t-value is greater than 2.
It is also identified that the PAR at 90 days, which is a proxy of net-risk, has an overall significantly negative effect on the ROE, since its t-value is greater than 8; which verifies our hypothesis that an increased risk leads to decrease in profitability. Whereas it is identified that firm-size and regulations have an overall in- significantly negative impact on the ROE. Error T -Statistic Prob, e 0. Estimations identify DT as having a significantly positive effect on the OSS; since the t-value is greater than 3.
While, the debt-to-equity ratio holds an insignificantly positive relationship with the OSS. Same the case of risk, as default chances are increases the profitability of microfinance institutions starts decreasing.
The value of women clients are positive and significantly affect the profitability of microfinance institutions as the t value is greater than 5. It is also identified that the PAR at 90 days, which is a proxy of net-risk, has an overall significantly negative effect on the ROE, since its t-values are more than 2 and 3; which verifies our hypothesis that a decrease in efficiency leads to an increase in the operating costs, thereby decreasing the profitability which is also the case with the risks of default.
Results with interaction effects To determine the combined effect of the debt-to-equity ratio and the firm-age on the MFIs profitability, deposit-taking is interacted with the debt-to-equity ratio, while firm-age is interacted with the debt-to-total assets ratio.
The results identify an association between the net deposits taken and the debt-to-equity ratio. Since deposits are cheaper of a source of funding, an increase in these is identified to positively relate with the MFIs profitability; as since deposits allow the MFIs to better bear the fixed obligations which come along with debt financing while maintaining profitability, at the same time.
The interaction results of the net deposits taken-in with the debt-to-equity ratio, show that the profitability of the MFIs significantly enhances as more financing options become available. As similarly when the firms become older, they come to diversify their operations by re-employing profits back into the running operations.
Whereby, retention of profits back into the firm reduces the reliance on borrowed capital or debt. Error t-Statistic Prob.
Although, the following factors associated in-significantly negatively: firm-size, firm- age, industry regulations, gross loan-portfolio to assets ratio, and firm-efficiency.
The gearing-ratio and deposit-taking both have a significantly positive impact on the ROA. Whereas, the firm-age and the gearing-ratio both hold a significantly positive association with profitability. This demonstrates that the dependence of older MFIs on debt-financing is minimal, while the retained earnings hold more value in comparison, which in-turn reduces the costs associated with debt. The effect of interaction between the deposit-taking and the debt-to-equity ratio reveals that deposit-taking reduces the debt costs.
Error t-Statistic Prob C 0. The interaction results of firm-age and gearing-ratio, and also the interaction results of deposit-taking and gearing-ratio lead us to results identifying that the following have a significantly positive impact on the ROA: WB, DT, DER, and DAR. Moreover, the combined effect of gearing-ratio along-with the deposit-taking holds a positive impact on the profitability.
The interaction between the gearing-ratio and age provides us with in-significant positive correlation with profitability. Error t -Statistic Prob. While the effect of portfolio-at-risk by 90 days and firm efficiency hold a significantly negative effect on the Profitability; implying that risk is perhaps the primary factor which dumbs down the profitability.
Moreover, the results further indicate Vol. Discussion For the MFIs, the decision with regard to capital-structuring dictates many points. In the present times, MFIs utilize a wide variety of funding sources, these allow the firms to not only be able to diversify its operations but also it also allows the MFIs to better optimize their capital structures; even in the complex environments they operate in, in the modern days Consultative Group to Assist the Poor [CGAP], Since a capital-structuring can be done for the specified purposes of reduction of risks, enhancement of financial flexibility, and prevention of long-term solvency etc.
Therefore, its better allowing the MFIs to provide sustainable loans especially to their most under-privileged of customers. The primary purpose of the research was to identify the impact of the various financing-sources on profitability of the MFIs.
The factors of portfolio- yield and financial self-sufficiency are not taken into consideration. Therefore, MFIs face a tradeoff between the financial and the social profitability. Varying factors can be taken into consideration to account for social-profitability, these include: average loan-size, number of rural clients, and net female borrowers Balkenhol, It is further specified that the determination of whether a particular MFI could satisfy its goals, also includes taking into consideration the factors of effective management, technological innovations, policies under implementation, and organizational efficiency.
Moreover, as the hypotheses describe the deposit-taking as something which reduces the costs of funds for the MFIs, which indicated that it is an effective tool of efficiency. A well financially- managed MFI makes sure to maintain enough firm-liquidity to not only meet the loan-repayment-obligations but also to give-out loans to the borrowers; whereby, long-term-debt to ration, and the cost-of-funds, are the considered indicators of financial management.
Not only that, but it also benefits the shareholders of the MFIs since more of the earnings remain available to them; the results are according to Abor study.
This is since the women-borrowers turn back in regular payments at the MFI are and less likely to default. Measuring this risk is quite tough for the MFIs, since the micro-financing loans usually are not tied with any security, due to the inability of the borrowers to provide securities from the money borrowed. This study considered the PAR at 90 days as a proxy of risk, which includes all the granted loans by the MFIs, whereby payments are overdue exceeding the 90 days period out of the total gross-loan portfolio of the MFIs.
Since the risk of default faced by the MFIs is represented by the PAR 90 days , the fact that the risk goes contrary to the profitability factor is represented by the negative coefficient of PAR; implying that an increase in the risk-type reduces the profitability of the MFIs.
Productivity refers to the amount of output in units and the relative input per unit, while efficiency is the price of the outputs and the relative costs of the inputs; both the factors measure how well the operations are being conducted.
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