The Mediating Role of Firm’s Performance on The Relationship between Free Cash Flow and Capital Structure

Asep Risman, Parwoto, Agus Sunarya Sulaeman

doi:10.17762/pae.v58i1.871

Abstract

This study aims to examine the effect of Firm’s performance as an intervening in the influence of the free cash flow on the capital structure. As well as the direct effect of Firm’s performance and free cash flow on the capital structure. This study uses a path analysis model and polling data from on 22 companies of various industrial subsectors on the Indonesia Stock Exchange (IDX), over a period of 10 years (2009 to 2018). The results show that although free cash flow does not directly affect the capital structure, it is proven that profitability affects the capital structure and can mediate the effect of free cash flow on capital structure. These findings support agency theory, that management prefers to use free cash flow to make investments, so that fluctuations in the free cash flow will affect the financial performance, this condition will ultimately affect the capital structure.

Highlights

CAPITAL structure is an important topic in the company's financial management literature (Brealey et al, 2011), because the combination of capital structure will have a direct effect on the company's financial condition
The first thing to do is to calculate the data using the formula for each variable (DER, Return on Assets (ROA), free cash flow (FCF)) which is tabulated for each variable value
Lagrange Multiplier (LM) testing does not need to be done because the results of the Chow test and the Hausman test show that the appropriate model is the fixed effect model (FEM), while the LM test is used to select the appropriate model between the fixed effect model or the random effect model

Summary

Introduction

CAPITAL structure is an important topic in the company's financial management literature (Brealey et al, 2011), because the combination of capital structure will have a direct effect on the company's financial condition. Atseye et al (2014), Oppong-Boakye et al (2013), Khalid Alkhatib (2012), Xu (2012), Gill et al (2011) and Chou and Lee (2010), as well as Karadeniz et al (2009). Another factor is free cash flow, this is a new topic in the last decade, many previous studies do not consider free cash flow as a factor that affects the capital structure. Recent studies on this topic include Ulum and Matrodji (2019), Alnawaiseh et www.psychologyandeducation.net al. (2017), Rezaei and Jafari (2015), Rezaei and Jafari (2015), Zurigat et al (2014), Shah and Jame-Kausar (2012), Shubita and Alsawalhah (2012), Charalambakis and Psychoyios (2012), Qureshi et al (2012), Amalendu (2012), Khalid Alkhatib (2012)

Objectives

Methods

Results

Conclusion