Capital structure, corporate performance, and life cycle: Evidence from Indonesia

Abstract

This study aims to investigate firstly, the influences of company life cycle (i.e., pioneer, growth, mature, and decline) and set of control variables (i.e, tax level, interest rate, institutional ownership, and managerial ownership) on capital structure; secondly, the influence of capital structure on company performance; and thirdly, the moderating role of each stage of the company life cycle on the relationship between capital structure and company performance. Implementing quantitative approach by using OLS Regression Analysis and Moderated Regression Analysis (MRA) on a set of the sample that consists of 157 Indonesian non-financial listed firms for 2010-2015 periods (942 firm years), findings show that company life cycle has a significant influence on capital structure. While for control variables, tax level and institutional ownership have a positive influence on the capital structure, wherein interest rate and managerial ownership have a negative effect on capital structure. Moreover, capital structure ratio influences positively on company performance. Finding also documents that pioneer and growth stages have a moderating role in strengthening the influence of capital structure on company performance, while mature and decline stages have a moderating role in weakening the influence of capital structure on company performance. This study provides important implications for corporations and business practitioners with regard to the best choice in the composition of capital structure which is able to improve company performance. On the best of our knowledge, it is the first study testing the moderating role of company life cycle on the relationship between capital structure and company performance.