The Testing of Empirical Trade Off Theory in Determining Value of the Firm in Manufacturing Industries in Indonesia

Abstract

This research aims to determine the application of trade off theory in determining the value of the firm by observing the factors of institutional ownership structure, liquidity and profitability that affect the capital structure and test the differences in capital structure in LQ-45 firms. The results showed that the independent variables jointly had a significant effect on the dependent variable of 15.90% with the fixed effect model as a fit model for measuring capital structure. The results showed that the structure of institutional ownership and profitability had a significant effect on capital structure variables, while the current ratio had no significant effect on capital structure variables. This research found that firms with high Institutional Ownership Structure (KPI) can increase external funding so that the capital structure is higher. Liquidity (current ratio) does not affect the capital structure (DER). Low profitability (return on equity) will increase the capital structure (DER), because firms need external funding to overcome their profitability. The results of this research indicate that there is no difference between the capital structure of firms that have high value and low value. Thus, the results of the research do not support the trade off theory in capital structure decisions in manufacturing firms in Indonesia.