The Effect of Capital Structure Management on Firm’s Value: The Case of Final Tax Regulation on Indonesian Construction Firm

Abstract

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.