CHAPTER 5 CONCLUSIONS, RECOMMENDATIONS, AND LIMITATIONS. Capital structure decision is believed to play an important role in maximizing the

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1 CHAPTER 5 CONCLUSIONS, RECOMMENDATIONS, AND LIMITATIONS 5.1 Conclusions Capital structure decision is believed to play an important role in maximizing the value of a firm. By having the most optimal capital structure, firms might be able to push its cost to the minimum point, which then will help them in dealing with the competitive environment. Throughout this research, the interest-bearing debt to total assets ratio was used to measure the level of leverage of a firm. This ratio was then used to find out the relationship between leverage and several factors that are deemed to have influence on capital structure, which are profitability, size, and dividend payout. Besides, to determine whether capital structure has any effect on the shares price of a company, another proposition was then developed to test the relationship between leverage and a firm s growth of shares price. Thus, based on the calculation and analysis that had been discussed in the previous chapters, several conclusions have been made, which are in the following: 1. Capital structure decisions vary across industries in Indonesia. There are several issues that might lead to the variation in capital structure across industries, such as the nature of the business itself as well as the macroeconomic condition in Indonesia. Moreover, factors that might influence capital structure can be from external and internal of the company. The external factors are the macroeconomic condition of the country, inflation rate, tax rate, condition in stock and bonds market, et cetera, whereas the internal factors are the company s profitability, size, dividend payout, asset structure, management behaviors, and so on. 123

2 Profitability negatively affects the level of leverage in a company in Indonesia, which supports the pecking order theory. Thus, it can be derived that highly profitable companies are more likely to choose equity over debt as their source of financing. However, this condition is not always occurred in all type of industry. In agriculture, mining, miscellaneous, property, and trade and service industries, it is found that there is no significant relationship between leverage and profitability. 3. Company s size has a positive relationship with leverage, which implies that the larger the size of companies, the higher level of debt they will have. This conclusion also concurs for all type of non-finance industry in Indonesia. 4. Dividend payout is found to have a negative relationship with leverage for all companies listed in JSX in year 2006 and companies in the miscellaneous industry only. Accordingly, the higher companies in Indonesia pay their dividend, the lower their leverage level will be. This finding does not support the pecking order theory, in which it suggests that there is positive relationship between leverage and payout. 5. There is no relationship found between leverage and the company s growth of shares price in Indonesia. Hence, from the findings, it can be concluded that the growth of shares price is not affected by the capital structure decisions. 5.2 Recommendations Based on the empirical findings of this research regarding capital structure in Indonesia, the author would like to provide some recommendations, which are: 1. Companies in Indonesia have to be more concerned on their capital structure decisions since it is one of the most important aspects to maximize their shareholders value. This is mainly because maximizing the value of a firm requires

3 125 that the costs of all inputs, as well as capital, be minimized. Hence, to minimize the cost of capital, companies have to compose their target capital structure based on the market values of debt and equity, as well as several other factors, such as their profitability, size, assets structure, growth tax rate, and business risk. 2. University should initiate more research on capital structure in order to have more graduates students whom understand the importance of capital structure. Capital structure holds an essential part in maximizing the company s value, so that it would be favorable to obtain some knowledge and understanding about it. 3. For further research, there should be more variables added as the independent variables to discover more factors that have influence in the capital structure of companies listed in Indonesia. These factors could be the operating risk or business risk, company s growth, assets structure, corporate tax rate, and so on. 4. Additionally, there should be other alternatives to proxy the variables. Return on Equity (ROE) can be applied to proxy the company s profitability, as the substitute to Return on Assets (ROA). Meanwhile, a natural logarithm of sales can also be used to measure the firm s size to replace the total assets. For the leverage, there are also many measurements that can be used, such as the debt-to-capital ratio, total debt-to-total assets, and long-term debt-to-equity. 5. The return on assets ratio that is used to measure the profitability in this study is formulized by dividing the Earnings before Interest and Taxes (EBIT) with total assets. However, if the numerator is changed with the Net Income, the results would be different since the Net Income includes the interest expense and taxes, which will show the capital structure condition of a company. Hence, for further research in determining the relationship between profitability and leverage, the Return on

4 Assets ratio should be the Net Income divided by total assets, so that the results will reflect the capital structure decision of the company Limitations There are some limitations that occur in this research, which are as follows: 1. The period of time in the analysis process is only for one year. The regression analysis process in determining the relationship between variables was only tested for the data in 2006, whereas there might be different results from year to year. This research does not count for the trend analysis in testing the relationships. 2. There are no alternatives of financial data to proxy the variables. There is only one measure for each variable, while the results might be different if another measurement is being used as the proxy. 3. The difficulties in gathering several annual reports of the sample companies due to poor maintenance of public resources in Jakarta Stock Exchange. 5.4 Avenue for Further Research Because this research can be considered as an exploratory study, the findings from this study signify a possibility to extend the future investigation in several other approaches. First, analyses in this study are drawn on data from firms within non-finance industry in Indonesia only. Thus, additional research can be conducted from firms in finance industry and/or from different countries. Secondly, the financial data that include in the regression process is only for year Hence, further research should be performed over a longer period so that the analysis will be more extensive and clearer.

5 127 Furthermore, in this study, the variables used are the interest-bearing debt to total assets ratio, return on assets ratio, natural logarithm of total assets, dividend payout ratio, and growth of shares price. Hence, other measurements of leverage, profitability, size, dividend, and shareholders value should be used as the alternatives in analyzing the factors that are related to capital structure in conducting the future study. Finally, further research should be conducted to determine other factors that are believed having an influence on capital structure, such as the corporate tax rate, sales stability, asset structure, growth rate, capital market condition, et cetera.