IDEAS home Printed from https://ideas.repec.org/a/ers/ijebaa/vviiiy2020i2p53-64.html
   My bibliography  Save this article

Profitability Determinants of Manufacturing Firms in Indonesia

Author

Listed:
  • Didik Susilo
  • Sugeng Wahyudi
  • Irene Rini Demi Pangestuti

Abstract

Purpose: The purpose of this study is to explore the most significant profitability determinants of the manufacturing companies in Indonesia. Design/Methodology/Approach: Several independent variables examined for their influence on profitability were working capital, firm size, firm growth, capital structure, and non-debt tax shields. The sample of this study were manufacturing firms listed on the Indonesia Stock Exchange from 2010 to 2017. The number of samples were 350 manufacturing companies. Findings: The results of this study indicate that working capital, firm size and firm growth were positively related to profitability. Meanwhile, capital structure and non-debt tax shield did not affect profitability. The findings of this study were consistent with the pecking order theory and the financial agency theory. Practical implications: This study implies that managers need to adjust their investment needs with the profitability that has been achieved and the total assets of the company, and to maximize the value of the company by managing current assets so that the rate of the return on marginal investment is equal to or greater than the cost of capital used to finance the current assets. Furthermore, financial managers must be able to determine essential investment objectives by maximizing the use of assets and fixed assets which are expected to make the company to enjoy the sales growth in the future. Originality/Value: Although this study organically builds upon recent studies about the firms’ profitability, it conducted in the new administrative setting in Indonesia, which is the Widodo’s administration. Widodo’s administration supports the manufacturing industry to be able to compete globally.

Suggested Citation

  • Didik Susilo & Sugeng Wahyudi & Irene Rini Demi Pangestuti, 2020. "Profitability Determinants of Manufacturing Firms in Indonesia," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 53-64.
    • Handle: RePEc:ers:ijebaa:v:viii:y:2020:i:2:p:53-64
    as

    Download full text from publisher

    File URL: https://www.ijeba.com/journal/443/download
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fama, Eugene F. & French, Kenneth R., 2017. "International tests of a five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 123(3), pages 441-463.
    2. D. Balios & N. Daskalakis & N. Eriotis & D. Vasiliou, 2016. "SMEs capital structure determinants during severe economic crisis: The case of Greece," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1145535-114, December.
    3. Stefan Hirsch & Monika Hartmann, 2014. "Persistence of firm-level profitability in the European dairy processing industry," Agricultural Economics, International Association of Agricultural Economists, vol. 45(S1), pages 53-63, November.
    4. Vithessonthi, Chaiporn & Tongurai, Jittima, 2015. "The effect of firm size on the leverage–performance relationship during the financial crisis of 2007–2009," Journal of Multinational Financial Management, Elsevier, vol. 29(C), pages 1-29.
    5. Battaglia, Francesca & Gallo, Angela, 2015. "Risk governance and Asian bank performance: An empirical investigation over the financial crisis," Emerging Markets Review, Elsevier, vol. 25(C), pages 53-68.
    6. Andrew B. Abel, 2018. "Optimal Debt and Profitability in the Trade†Off Theory," Journal of Finance, American Finance Association, vol. 73(1), pages 95-143, February.
    7. R. Rupeika-Apoga & S.H. Zaidi & Y.E. Thalassinos & E.I. Thalassinos, 2018. "Bank Stability: The Case of Nordic and Non-Nordic Banks in Latvia," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 39-55.
    8. Claudio Borio & Leonardo Gambacorta & Boris Hofmann, 2017. "The influence of monetary policy on bank profitability," International Finance, Wiley Blackwell, vol. 20(1), pages 48-63, March.
    9. Kharisya Ayu Effendi & Disman Disman, 2017. "Liquidity Risk: Comparison between Islamic and Conventional Banking," European Research Studies Journal, European Research Studies Journal, vol. 0(2A), pages 308-318.
    10. Muhammad Aqil & Rizwan Raheem Ahmed & Jolita Vveinhardt & Dalia Streimikiene, 2019. "Factors Influencing the Profitability of Heavy Vehicle Industry: A Case of Pakistan," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 15(1), pages 61-72.
    11. Eleftherios I. Thalassinos & Erginbay Ugurlu & Yusuf Muratoglu, 2015. "Comparison of Forecasting Volatility in the Czech Republic Stock Market," Applied Economics and Finance, Redfame publishing, vol. 2(1), pages 11-18, February.
    12. Odongo Kodongo & Thabang Mokoaleli-Mokoteli & Leonard N. Maina, 2015. "Capital Structure, Profitability And Firm Value: Panel Evidence Of Listed Firms In Kenya," The African Finance Journal, Africagrowth Institute, vol. 17(1), pages 1-20.
    13. Gaganis, Chrysovalantis & Liu, Liuling & Pasiouras, Fotios, 2015. "Regulations, profitability, and risk-adjusted returns of European insurers: An empirical investigation," Journal of Financial Stability, Elsevier, vol. 18(C), pages 55-77.
    14. repec:ers:journl:v:vi:y:2018:i:2:p:39-55 is not listed on IDEAS
    15. Darush Yazdanfar & Peter Öhman, 2015. "Debt financing and firm performance: an empirical study based on Swedish data," Journal of Risk Finance, Emerald Group Publishing, vol. 16(1), pages 102-118, January.
    16. Zélia Serrasqueiro & Ana Caetano, 2015. "Trade-Off Theory versus Pecking Order Theory: capital structure decisions in a peripheral region of Portugal," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(2), pages 445-466, April.
    17. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    18. Sydler, Renato & Haefliger, Stefan & Pruksa, Robert, 2014. "Measuring intellectual capital with financial figures: Can we predict firm profitability?," European Management Journal, Elsevier, vol. 32(2), pages 244-259.
    19. repec:ers:journl:v:vi:y:2018:i:2:p:92-100 is not listed on IDEAS
    20. Chang, Chingfu & Lee, Alice C. & Lee, Cheng F., 2009. "Determinants of capital structure choice: A structural equation modeling approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 197-213, May.
    21. R. Bratamanggala, 2018. "Factors Affecting Earning Per Share: The Case of Indonesia," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 92-100.
    22. Ukaegbu, Ben, 2014. "The significance of working capital management in determining firm profitability: Evidence from developing economies in Africa," Research in International Business and Finance, Elsevier, vol. 31(C), pages 1-16.
    23. Sugeng Wahyudi & Fernando Goklas & Maria Rio Rita & Hersugondo Hersugondo & Rio Dhani Laksana, 2019. "The Determinants of Corporate Hedging Policy: A Case Study from Indonesia," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 113-129.
    24. Godfred Adjapong Afrifa, 2016. "Net working capital, cash flow and performance of UK SMEs," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 15(1), pages 21-44, February.
    25. Mateev, Miroslav & Poutziouris, Panikkos & Ivanov, Konstantin, 2013. "On the determinants of SME capital structure in Central and Eastern Europe: A dynamic panel analysis," Research in International Business and Finance, Elsevier, vol. 27(1), pages 28-51.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Charalampos Basdekis & Apostolos Christopoulos & Evgenios Gakias & Ioannis Katsampoxakis, 2023. "The Effect of ECB Unconventional Monetary Policy on Firms’ Performance during the Global Financial Crisis," JRFM, MDPI, vol. 16(5), pages 1-20, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Akhmadi Akhmadi & Dabela Yunia & Robiyanto Robiyanto, 2020. "The Role of Profitability in the Effect of Company Growth on the Debt Policy," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 267-274, July.
    2. M. Belén Guercio & Lisana B. Martinez & Aurelio F. Bariviera, 2019. "SME Steeplechase: When Obtaining Money Is Harder Than Innovating," IJFS, MDPI, vol. 7(2), pages 1-14, May.
    3. Enrico Santarelli & Hien Thu Tran, 2018. "The interaction of institutional quality and human capital in shaping the dynamics of capital structure in Vietnam," WIDER Working Paper Series wp-2018-66, World Institute for Development Economic Research (UNU-WIDER).
    4. Berggrun, Luis & Cardona, Emilio & Lizarzaburu, Edmundo, 2020. "Firm profitability and expected stock returns: Evidence from Latin America," Research in International Business and Finance, Elsevier, vol. 51(C).
    5. Thi Hong Hoang & Călin Gurău & Amine Lahiani & Thuy-Luu Seran, 2018. "Do crises impact capital structure? A study of French micro-enterprises," Small Business Economics, Springer, vol. 50(1), pages 181-199, January.
    6. Elif Acar & Gamze Vural & Emin Hüseyin Çetenak, 2020. "Evidence for Financial Hierarchy Theory in Capital Structure Decisions: Data from BIST Companies," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 34(1), pages 29-50.
    7. Kai Quan Zhang & Hsing Hung Chen, 2017. "Environmental Performance and Financing Decisions Impact on Sustainable Financial Development of Chinese Environmental Protection Enterprises," Sustainability, MDPI, vol. 9(12), pages 1-14, December.
    8. Martinez Cillero, Maria & Lawless, Martina & O'Toole, Conor, 2019. "The determinants of SME capital structure across the lifecycle," Papers WP614, Economic and Social Research Institute (ESRI).
    9. David G. Kenchington, 2019. "Does a change in dividend tax rates in the U.S. affect equity prices of non-U.S. stocks?," Review of Accounting Studies, Springer, vol. 24(2), pages 593-628, June.
    10. Firman Jatnika & Nury Effendi & Erie Febrian & Mokhamad Anwar, 2019. "Determinants of Business Models Innovation of Islamic Bank in Indonesia," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 64-82.
    11. Wahal, Sunil, 2019. "The profitability and investment premium: Pre-1963 evidence," Journal of Financial Economics, Elsevier, vol. 131(2), pages 362-377.
    12. Enrico Santarelli & Hien Thu Tran, 2018. "The interaction of institutional quality and human capital in shaping the dynamics of capital structure in Vietnam," WIDER Working Paper Series 66, World Institute for Development Economic Research (UNU-WIDER).
    13. Silvia Andr?s Gonz?lez-Moralejo & Mildrey Garc?a Cort?s & Juan Francisco L?pez Miquel, 2021. "Are small and medium-size food industry firms profitable? Explaining differences in their performance: The case of the Valencia Region," Economia agro-alimentare, FrancoAngeli Editore, vol. 23(1), pages 1-24.
    14. Akhtaruzzaman, Md & Chiah, Mardy & Docherty, Paul & Zhong, Angel, 2021. "Betting against bank profitability," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 304-323.
    15. Liebi, Luca J., 2022. "Is there a value premium in cryptoasset markets?," Economic Modelling, Elsevier, vol. 109(C).
    16. Maya Sari, 2019. "Firm Size as Moderator to Capital Structure-Its Determinants Relations," GATR Journals jfbr163, Global Academy of Training and Research (GATR) Enterprise.
    17. Bofinger, Peter & Schnabel, Isabel & Feld, Lars P. & Schmidt, Christoph M. & Wieland, Volker, 2015. "Zukunftsfähigkeit in den Mittelpunkt. Jahresgutachten 2015/16 [Focus on Future Viability. Annual Report 2015/16]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201516, February.
    18. Thi van Hoang & Călin Gurău & Amine Lahiani & Thuy-Luu Seran, 2017. "Do crises impact capital structure? A study of French micro-enterprises," Post-Print hal-03608784, HAL.
    19. Güler ARAS & İlhan ÇAM & Bilal ZAVALSIZ & Serkan KESKİN, 2018. "Fama-French Çok Faktör Varlık Fiyatlama Modellerinin Performanslarının Karşılaştırılması: Borsa İstanbul Üzerine Bir Uygulama," Istanbul Business Research, Istanbul University Business School, vol. 47(2), pages 183-207, November.
    20. Şahin, Baki Cem & Danışoğlu, Seza, 2022. "Ambiguity and asset pricing: An empirical investigation for an emerging market," International Review of Financial Analysis, Elsevier, vol. 84(C).

    More about this item

    Keywords

    Profitability; manufacturing company; working capital; firm size; firm growth.;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ers:ijebaa:v:viii:y:2020:i:2:p:53-64. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marios Agiomavritis (email available below). General contact details of provider: https://ijeba.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.