The Effect of Leverage on Company Value in Consumer Goods Industry Companies

Kristian Chandra (), Farah Margaretha, Yosephina Endang Purba and Febria Nalurita
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Kristian Chandra: Universitas Trisakti, Magister Management, Faculty of Business and Economics
Farah Margaretha: Universitas Trisakti, Magister Management, Faculty of Business and Economics
Yosephina Endang Purba: Universitas Trisakti, Magister Management, Faculty of Business and Economics
Febria Nalurita: Universitas Trisakti, Magister Management, Faculty of Business and Economics

A chapter in Proceedings of the International Conference on Entrepreneurship, Leadership and Business Innovation (ICELBI 2022), 2023, pp 380-387 from Springer

Abstract: Abstract The industrial sector, including consumer goods, is currently one of the sectors contributing significantly to Indonesia's economic growth. To compete with similar companies, managers must make the right decisions, most notably financial ones. The companies are expected to choose the best option of resources to be funded to achieve the right balance between cost efficiency and maximizing the firm value that will increase earnings for the shareholders. Leverage plays an essential role in maximizing firm value. This research mainly analyzes the relationship between working financial leverage and firm value for a sample of 30 Indonesian Stock Exchange-listed companies from the consumer goods sector. In addition, this research also examines the relationship between the control variable (profitability, working capital management, sales growth, inflation, interest coverage ratio, and firm size) and firm value, along with the impact of profitability on the leverage-firm value relationship. The data analysis method used is panel data regression analysis. The tests used are the Chow Test, Hausman Test, Lagrange Multiplier Test, Classic Assumption Test ( Normality et al.), T-test, and F-Test. The results show as follows: (1) if we consider the control variable simultaneously, the leverage is significantly positively related to the firm value before reaching the firm's optimal capital structure. (2) still, with the consideration of the control variable simultaneously and with the moderation of profitability, leverage is significantly negatively related to the firm value, or it means that after reaching high profitability, an increase in leverage will reduce the firm value. This research implies that the results/findings can provide insight into the finance managers, investors, and financial institutions or lenders' decisions related to leverage about the firm value.

Keywords: Financial Leverage; Firm Size; Firm Value; Profitability; Working Capital (search for similar items in EconPapers)
Date: 2023
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DOI: 10.2991/978-94-6463-350-4_37

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