The Impact of Capital Structure Determinant on Investment
Opportunity: Evidences from Manufacturing Companies in ASEAN
Countries
I Gede Adiputra
1
and Atang Hermawan
2
1
Faculty of Economics, Tarumanagara University, Jakarta, Indonesia
2
Faculty of Economics and Business, Pasundan University, Bandung, Indonesia
Keywords: Capital Structure, Investment Opportunity, Manufacture.
Abstract: The purpose of this research is to obtain the result that determines the capital structure that consists of: firm
size, financial risks, profitability, and debt policy on investments opportunity in fiveASEAN countries:
Indonesia, Malaysia, Singapore, Thailand, and Philippines. The subject of this research is the manufacturing
companies that are listed on the stock exchange market between the year of 2011 to the year of 2016. Data
analysis method that is used in this research is Simultaneous Regression and panel. The result of this research
proved that firm size had a positive and significant influence on Investment Opportunity in Indonesia,
Malaysia and Singapore but not significant in Thailand and Philippines. The financial risk had no influence
on Investment Opportunity in five ASEAN countries. Profitablity had a positive and significance influence
on Investment Opportunity in Singapore, Phillipines, and Thailand. The debt policy had negative and
significance influence in Indonesia, Thailand, and Phillipines. The currency rate plays a significant role for
Investment Opportunity in Indonesia, Malaysia, and Singapore. Altogether, the capital structure had
significant influence on Investment Opportunity. In Singapore, it gave no significance but instead had
significant influence in the other four ASEAN countries.
1 INTRODUCTION
1.1 Research Background
Investment is a stimulus economic growth for every
country. The more amount of investments means a
greater chance for an economic growth as it also
increases the prosperity of the people. The foreign
direct investment inflow of ASEAN countries are
counted as high. This proved that South East Asia
became a hotbed of the economic growth of the
world. The only matter becomes a concern is that the
spread of its investments is not as equal as every
ASEAN country received. Singapore takes on
majority of receiving 50% of foreign investments,
while Indonesia receiving 15%, Thailand 11%, and
Malaysia 10% (ASEAN investment report 2007).
ASEAN Economic Community is the biggest
integration that exists among developing countries.
AEC takes the role as an integrated economic power
that empowers ASEAN countries globally.
The size of the firm itself means that the small
or large the company will be seen on its amount of
equity or the total active results of the company
itself (Subekti, 2001). Based on Riyanto (2001), a
large scale companies usually has a set of
investment opportunity and are more likely to be
trusted by investors compared to smaller
companies. Trusted by the investors, a large
company would gain easier access to loan or
fundings for expansion as well as having its own
expansion policy.
Financial risks are the large amount of spread
between the expected return and the actual return.
The bigger spread means more risk will be taken. If
the risk determines as the amount that could deviate
from the expected value, the increased level of
investment risks will determine the decrease in the
IOS. This is due to the increase in risk that means the
increase in the rate of return deviation that will cause
the decreased chances of investment based on the
price proxy (Subchand and Sudarman, 2010).
The previous profitablity rate of a company will
determine or play a crucial role on the company’s
Adiputra, I. and Hermawan, A.
The Impact of Capital Structure Determinant on Investment Opportunity: Evidences from Manufacturing Companies in ASEAN Countries.
DOI: 10.5220/0008488901050112
In Proceedings of the 7th International Conference on Entrepreneurship and Business Management (ICEBM Untar 2018), pages 105-112
ISBN: 978-989-758-363-6
Copyright
c
2019 by SCITEPRESS Science and Technology Publications, Lda. All rights reserved
105
capital structure. High rate of profitabilities will give
a good signal of capital growth in the future. The
result of Subchan and Sudarman (2010) research
states that companies with high profitability rate had
a better Investment Opportunitys compared to other
companies with low profitability rate.
Debt policy had a relation with capital structure in
which the debts are part of capital structure.
Composition of a company is marked as risky if it
possesses a large amount of debts on the capital
structure. But if the debt could earn a profit, then
those debts will increase the value of the firm itself
(Hidayat, 2013). The usage of debts will determine
the price of the company share. A company with a
high debt rate will earn high Earning Per Share (EPS)
which will increase the chance of investments. Based
on Larry Lang et al., (2006) and Ferdinand A Gul
(2000), a debt that is proxied using DER is found to
have a negative and significant DER against the
investment policy.
IOS (IOS) is a chance of future investments that
determines the active growth of the company or
project that has a positive net present values so that
IOS had an important role for a company due to the
investment decision that combines the asset in place
and the future available investment options in which
the IOS will influence the company value (Pagalung,
2002).
The capital structure of the company has a strong
connectivity in every factor that forms the Capital
Structure. Voulgaris (2002) stated that Capital
Structure Determinant is a company’s characteristic
that consists of the company measurement, chances
of growth, stock turnover, profitability, tangibility,
and liquidity. In this research, the variable of capital
structure that is used by the writer is the firm size,
financial risk, profitability, and Debt Equity Ratio
(DER). The purpose of this research is to test the
influence of certain factors of capital structure that
will affect the Investment Opportunities. In specific,
the purpose of this study is to answer the question of
this research: How massive is the effect of company
capital structure that consists of the firm size,
business risk, profitability, and debt policy on the
investment opportunity of manufacturing companies
in five ASEAN countries?
2 LITERATURE STUDY,
CONCEPTUAL FRAMEWORK,
AND HYPHOTESIS
2.1 Literature Study
2.1.1 Investment Opportunity Set
(IOS)
Myers (1977) stated that company is a mix between
active asset in a place and future investment options.
This future investment options are later known as IOS
(IOS).
Investment option is a chance for a company to
expand and grow, but often many companies didn’t
have a chance to conduct such investment
opportunity. The value of Investment Opportunity is
the current marks that consist of investment
alternatives for a company to invest in the future.
Gaver and Gaver (1993) stated that a future
investment option is not only based on a company
projects that is supported by research activities and
its development, but also from the company’s ability
to exploit the chances of profit compared to other
companies in their product segments.
Smith and Watts (1992) stated that an IOS is a result
of choices for future investments. This set of
Investment Opportunities shows the company’s
abilities to make a profit from the growth prospects.
This research will be using a market value to book
value of equity (MVE/BVE) as the IOS proxy.
Systematically, market value to book value of equity
(MVE/BVE) formula is stated as follows:
MVE/BE =


2.1.2 Firm Size
A large scale company had an easier access to loan
due to its large amount of assets and the higher trust
it earns from the bank that makes it easier for the
company to create investment. Therefore, in this
research, investment is a variable on the scale of the
company itself. Titman (1988), Homaifar (1994), and
Gilson (1995) measured the firm size variable with
the logarithm of total assets. Burgman (2002) and
Moh’d et al., (2005) measure the variable of the firm
size based on the sales logarithms.
Peasnell,
Pope, and Young (2008) point that there
is a negative relationship between the firm size and
profit management in England. Thus, it is concluded
that the company manager that leads a larger
company has a smaller chances in manipulating the
ICEBM Untar 2018 - International Conference on Entrepreneurship and Business Management (ICEBM) Untar
106
profits compared to that from a small scale company.
Albrecth and Richardson (1990) and Lee and Choi
(2002) discovered that a large scale company had a
direction to stabilize its profit compared to other
smaller companies due to the large company is
considered more critical by the foreign investments.
On the other hand, if the profit management is
proven to be efficient, the investment rate will be
bigger as well. The size of the firm also symbolizes
the prosperity level for the company (Fraser, 2006).
The variable measured using
natural log of sales
(moh’d Perry and Rimbey, 2005).
2.1.3 Financial Risk
Financial Risk is a profit variable that is received by
the shareholders. The financial leverage is one of
factors that affects the financial risks. The higher
usage of financial leverage means higher capital cost
and a higher financial risk. The higher the degree of
financial leverage (DFL) is, the higher the financial
risk will be.
The studies conducted by Chaplinsky (2004), Lee
and Kwok (1988), Mao (2003), Law and Chen (1999)
stated that a business risk had a negative relation to
the debt ratio. This proved that a company with a high
risk business had a small debt ratio. The higher the
business risk, the usage of debt rates will result in
difficulties for the company to pay their debts. As an
implication, the large business risk company will use
small debts if compared to a business with a low risk.
Based on the research conducted by Herwono Indra
Saputra and Njo Anastasia (2013) over all investation
that is provided, only an investment group of cash,
deposits, and mutual funds had a connection with the
respondent profiles. That is known as the portfolio as
the group of cash, deposits, and mutual fund that is
measured in a formula as:
Risk =


2.1.4 Profitability
Profitability shows the company’s ability to make a
profit resulted from the capital or aktivas that is
utilized on a given time. The fulfilments of the funds
on the condusive macro economic conditions are best
fulfilled through debt due to the tax saving.
Higher profitabilities mean higher Investment
Opportunities (Baskin, 1983 on Saputro and
Hindasah, 2007). Company with bigger funds had
bigger management that could take a decision in
investing its resources for a profitable results that
would increase the company value. Based on the
research by Ahmed Riahi and Belkaoui (2001) on 100
manufacturing companies in America from the year
1987 to 1992, it is found that profitabilities had a
significant positive impact against the investment
policy.
In this research, profitability is measured using the
return on asset (ROA), which means an ability of the
total asset invested on the whole active to earn a profit
counted as a nettor profit after tax cuts of the total
aktiva. The ROA ratio could be define as a formula
of:
2.1.5 Debt Policy
Debt policy is a company policy to fund all of the
operations using the company loans. This financial
loans are intended to fund all the companies activities
either operation process or investments. The
combination of loan and equity on the company will
be counted as the main topic of capital structure
decision. An efficient capital would press the cost of
capital that will increase the economic nettoreturn and
increase the Value of the firm.
In its measurement of the debt policy, this
research will be proxied by DER (Debt Equity Ratio).
Debt to equity ratio is a part of rasio leverage or a
comparison of the total debts (short, middle or long
terms) against the company’s capital. Debt to Equity
Ratio (DER) shows the company’s ability to fulfill its
obligation that points out at the personal apital to pay its
debts.
Lang et al., (2006) state that there is a negative
relation between the leverage and the company
growth that possesses a limited growth chances. Gull
and Jaggi (1999) found that a relation between the
free cash flow and the debt policy shows
differences between the company that has a low
IOS with the company that possesses high IOS.
Smith a n d Watts (1992) by empiric found that there
is a proof that a company might have a bigger chance
to possess a low debt to equity ratio in terms of capital
structure due to the equity financing that decreases
the agency problems that associate with the
company’s free cash flow. Based on this matter, it is
stated that the influences of the IOS against the debt
policy is negative. Debt Equity Ratio based on
Sukirni (2012) ratios are measured on formula:
DER =


2.2 Conceptual Framework
The construct of this research is that the firm size, the
The Impact of Capital Structure Determinant on Investment Opportunity: Evidences from Manufacturing Companies in ASEAN Countries
107
financial risks, profitability, and debt policy had a
chance to affect the Investment Opportunity that is
measured by the IOS. It could be seen on this body
construction graph:
Figure 1: The Efects of Firm Size, Financial risks,
Profitability, and Debt Ratio Against the Investment
Opportunity.
2.3 Hypothesis
H1: There is an effect in the firm size againsts the
investment opportunity set.
H2: There is an effect of financial risks againsts the
investment opportunity set
H3: There is a profitability effect againsts the
investment opportunity set
H4: There is an effect between the Debt policy and
the investment opportunity set
3 RESEARCH METHODOLOGY
3.1 The Method of Data Collection
The data used for this research consist of secondary
data in a form of cross – sectional data panel and time
series of ASEAN-5 countries. To earn the variable
numbers from this research, a yearly report of each
country based on 35 high capital manufactured
companies was utilized. This research will observe
the financial report of the companies that are recorded
in the Stock Exchange of ASEAN-5 countries:
Indonesia, Malaysia, Singapore, Thailand, and
Phillipines from the year 2011 – 2016.
3.2 Design Analysis and Testing
Hypothesis
The regression asumption test will be conducted
using regression model panel and the simultan that
had passed the general terms as stated:
On the regression data panel there will be 3 types
of approach that consist of pooled least square, fixed
effect, and random effect. Pooled Least Square
approach is a model that is obtained through a
combination of retreiving all cross section data and
time series data. This model will be estimated using
Ordinary Least Square as below:
ititit
Xy
(1)
where,
idetermines unit cross-section (i= 1,….,n)
tdetermines the time range(t = 1,…., t).
3.3 Research Results
The outcomes of this research will analyze the
difference of the effect of the firm size, the financial
risks, the profitability, and the debt policy against the
IOS (IOS) of each of the ASEAN-5 Countries.
Table 1: The Effects of Structural Factor of The Company’s
Capital Against the IOS (IOS) on Share Manufacturs of
Each ASEAN-5 Countries.
Variable coefficient Prob
Indonesia
1. Firm size -0.041990 0.0098***
2. Ris
k
0.010723 0.7124
3. ROA 0.006163 0.7187
4. DER -0.021115 0.0255**
Prob(F-statistic) 0.016782**
Malaysia
1. Firm size 0.140813 0.0128**
2. Ris
k
0.000135 0.5451
3. DPR -2.24E-05 0.4774
4. DER -0.100258 0.0747*
Pro
b
(F-statistic) 0.000000***
Singapore
1. Firm size -0.006195 0.9807
2. Ris
k
-5.57E-05 0.1280
3. DPR -4.88E-06 0.9087
4. DER -0.000650 0.0496**
Prob(F-statistic) 0.846553
Thailand
1. Firm size 0.050301 0.5622
2. Ris
k
-9.69E-05 0.3140
3. DPR -1.60E-06 0.3663
4. DER -0.137351 0.0001***
Prob(F-s
t
atistic) 0.000072***
Philippines
1. Firm size -0.159804 0.0450**
2. Ris
k
0.000501 0.4517
3. DPR 0.000536 0.0394**
4. DER -0.023347 0.0001***
Prob(F-statistic) 0.000000***
Note: *** Significant at 1%; ** significant at 5%; *
significant at 10%.
From the table above, it is stated that:
Profitabilities
Risk
DebtPolicy
FirmSize
Investment
O
ortunit
ICEBM Untar 2018 - International Conference on Entrepreneurship and Business Management (ICEBM) Untar
108
3.3.1 Indonesia
The firm size shows positive effects on the
Investment Opportunity. This results show that the
larger the firm size means the higher the IOS is. The
measurement of the large company defines as a
company that possesses large assets that could be
used for investments, and easier access to compete
and dominate the market.
All Najjar and Riahi-Belkaoui (2001) also
empowers that the firm size had a positive impact on
IOS. They state and argue that a small scale company
is potential to limitations or difficulties in restricting
their own assets, while the bigger companies
dominate the market and their industries.
Research results of Dhanaraj and Bearnish (2003)
also state that a large company had bigger quantum
resources of the availability of managerial resources.
Risks do not affect the IOS. Thus, the business
risk cannot be used to determine the investment
chances. This proves that this research shares a
common ground with Cassar and Holmes (2003),
even though its research found that a business risk
showed no true effect on leverage, but its studies
showed that consistency of efficient of business risks
against the IOS was proven to be negative. This
proved that a company with higher business risks
tends to have a low IOS. When it possesses higher
business risk with a higher debt usage, it will result in
complication for a company to pay its debts. Brigham
et al., (2001) put his opinion based by Modigliani and
Miller (1959) where an addition in debts where the
variable return condition is high will result in
bankruptcy. That causes a high capital but low value
that will result in a failed investments.
Profitabilities show a positive and unsignificant
result against the IOS. This proves that profitabilities
play an undominant role in determining the IOS. The
higher profitabilities allows the company to exist in
selecting their industries. The profitability rates
represent the results that show the bigger profits the
business had for their companies (Keown et al.,
2002). Next, the higher the company’s profitabilities
it had, the bigger chances for its profit to be defended
for investment.
Debt equity ratio shows a negative effect on the
IOS. This shows that the bigger the DER leads to
lower IOS. The companies with a higher financial
leverage will possess a risk of high default due to their
inability to pay the interest and the debts given
(Angeline, 2016). The same thing applies to the
payment of interests and the debts that may increase
the potential loss of the investment due to the higher
rate interests and payment over profits and
investments.
The usage of company structural leverage gave a
barrier in investments due to its barriers and debt
regulations (negative border). The loan makers
define the deadlines of the payment and ensure the
payment will commence with interests. Francis et al.,
(2013) shows that a financial leverage indicates a risk
and a higher leverage that cause an external expenses.
And thus, the high leverage company will possess a
higher financial risks compared to a low leverage
company and they tend to reduce the business risk
through a lower IOS.
Therefore, leverage had a negative effect against
IOS (Gaver and Gaver, 1993; Gul, 1999; Al Najjar
and Riahi-Belkaoui, 2001).
3.3.2 Malaysia
The firm size shows a positive influence on the IOS.
The bigger the firm size usually gave a larger asset
that could be used for investment that could lead to an
easier chance for a company to compete and dominate
the market based on Gaver and Gaver (1993). The
more prosperous and larger scale company is, the
more active the company to increase its investment
values through various forms like differentiating its
products to produce a barrier, economic scale, and
copyrights (Chung and Charoenwong 2001). Bolino
and Blood good et al. (2002) also stated that a large
scale company tends to employ more skilled and
professional manager compared to smaller
companies. Therefore, a large company possesses a
large capacity to dung growths compared to small
company.
Similar to Indonesia, the risk had no effects on the
IOS, and therefore, the risk couldn’t be used to
determine the IOS. In a situation that the way of the
business risks against the IOS is proven to be
negative, this means that the company that possesses
a high business risk and the higher debt usage will
complicate the company to pay its debts.
Profitability does not affect the IOS. This proves
that profitabilities are not dominant in determining
the IOS. Debt equity ratio had a negative and
insignificant result on the IOS. In addition, larger
DER means a decreased in the IOS. The negative
value proved that this research is based on Francis et
al., (2013) statement that says financial leverage
indicates the high leverage and high risk in the
company, which cost and access external fundings.
Therefore, higher leverage of a company means
higher financial risk. It is compared to the low
leverage that causes a low IOS. Thus, the leverage
points on a negative value on the IOS (Gaver and
The Impact of Capital Structure Determinant on Investment Opportunity: Evidences from Manufacturing Companies in ASEAN Countries
109
Gaver, 1993; Gul, 1999; All Najjar and Riahi-
Belkaoui, 2001).
3.3.3 Singapore
The firm size had a positive remark on IOS. The
bigger the firm size means the bigger asset they could
use for investments. In addition, it will be easier for a
company to compete and dominate the market based
on Gaver and Gaver (1993). A large elite company
had an active role in increasing the investments in
using any methods, such as product differentiation to
create a barrier, economic scales, and copyrights
(Chung and Charoenwong, 2001)
Risk had no effect in determining the IOS, and
therefore, risk factor could not be used to determine
the IOS in Singapore. The bigger the business risk it
had, and the higher debt it gets will complicate the
company in repaying its debts.
Profitability had a positive effect on the IOS. This
proved that a dominant profitability will determine
the IOS in Singapore. By having higher
profitabilities, the IOS will be high as well. The larger
the company profitability it had, the bigger its
chances for profit for the companies’ investment.
Thus, the investment chance is all based on the
company profitabilities by Boedie et al., (2009) and
(Riahi – Belakoui, 2002).
The Debt Equity Ratio had shown a negative
remark and had no effect on IOS. This proved that
DER isn’t dominant in determine the IOS in
Singapore. This negative remark proved the
researches conducted by Smith and Watts (1992),
Gaver and Gaver (1993), and Skinner (1993) and Gul
(1999), which state that a company with a high
leverage will have a chance of giving a low
investment. This will be resulting in an avoidance of
bankruptcy cost that is created from the high debt
amounts that are resulted in a decreased chance of
investments in Singapore.
3.3.4 Thailand
Unsignificant size of the firm against the IOS had
shown that the measurement could not be used to
determine the IOS in Thailand.
Risk factors do not affect the IOS in Thailand. As
the trade off implicates the theory from Brigham et
al., (1999), which states that a company with a high
business risk is better to use a lower debt compared to
other companies with a low business risk.
Profitabilities had affect and shown a positive
rates on the IOS, which shows that profitability is
dominant in determining the IOS in Thailand.
3.3.5 Philippines
Measurement had no effect on an IOS. This proved
that a measurement could not be used to determine
the investment chance in the Philippines. A negative
mark showed that Philippines’ investments are
against the theory of Gaver and Gaver (2003), All
Najjar and Riahi – Belakoui (2001), Dhanaraj and
Bearnish (2003) and Bolino (2002), that state the
bigger the size of the firm means a higher IOS.
The risk does not influence the IOS, and therefore,
the risk does not determine the IOS in Philippines.
Profitabilities have shown a positive
determination with the chance of investments, which
proves the profitability domains in determining the
investment in Philippines.
4 CONCLUSION AND
DISCUSSION
1. Debt Equity Ratio (DER) had a negative impact
and significant against the Investment
Opportunity on ASEAN-5 countries. This showed
that the more DER = decreased in Investment
Opportunity. This is because of the bigger the
debts means more rates that are resulted in
bankruptcy due to the debt payments + interests
that are resulted in decreasing investment rates.
2. The risk did not have significant effects on the
Investment Opportunity. This means that
investments are not done through high risk
companies due to its risk of bankruptcy.
3. Insignificant profitabilities of all ASEAN
countries are not domain in determining the
Investment Opportunity in each of these
countries. These countries did not consider the
profit based on the activeness of the Investment
Opportunity.
4. The effects of the firm size on the Investment
Opportunity for Indonesia, Malaysia and
Singapore have resulted in negative connections.
This proves that the bigger the size of the firm
means the lower chances of investment it has.
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