Profitability and Firm Value: The Role of Industry Competition, Market Value of Equity, and Debt Levels

Dany Adi Saputra and Doddy Setiawan

A chapter in Macroeconomic Risk and Growth in the Southeast Asian Countries: Insight from Indonesia, 2023, vol. 33A, pp 127-139 from Emerald Group Publishing Limited

Abstract: This study examines the role of industry competition, market capitalization, and debt levels in the relationship between profitability and firm value (FV). The sample included companies listed on the Indonesia Stock Exchange (IDX) in the manufacturing sector in 2017–2019. This study provides empirical evidence that the high level of industrial competition (IC), low level of market capitalization (market value of equity, MVE), and high levels of debt (debt-to-assets ratio, DAR) weaken the effect of profitability as measured by return on assets (ROA) on FV as measured by Tobin’s Q. Profitability is not even related to FV for firms facing high industry competition. In addition, profitability only has a marginal positive relationship with FV for firms with relatively small market capitalizations. These findings suggest that the relationship between profitability and FV is not monotonous but is influenced by the level of industry competence, market capitalization, and debt.

Keywords: Industry competition; market capitalization; debt level; profitability; firm value; Indonesia Stock Exchange; G2; G32; G31 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:isetez:s1571-03862023000033a009

DOI: 10.1108/S1571-03862023000033A009

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