FINANCIAL LEVERAGE EFFECT ON PROFITABILITY OF INDONESIAN LISTED MANUFACTURING COMPANIES (PERIOD 2010-2015)

Rijanto, Olivia (2018) FINANCIAL LEVERAGE EFFECT ON PROFITABILITY OF INDONESIAN LISTED MANUFACTURING COMPANIES (PERIOD 2010-2015). S1 thesis, UAJY.

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Abstract

Research about financial leverage effect on profitability of companies in emerging countries has been done before, some of them are: Abor (2005), Ebaid (2009), Dawar (2014), Sheikh and Wang (2013) and Githire (2015). Results were mixed and open for further exploration. This study uses return on equity (ROE) as proxy for profitability. Short-term debt to equity ratio (SDE) and long-term debt to equity ratio (LDE) are used as proxies for financial leverage; each component were calculated together on multiple regression model with two control variables. Asset tangibility (TANG) and company size (SIZE) are used as control variables. Heteroscedasticity and autocorrelation were detected and rectified accordingly. Results from multiple regression analysis shows that SDE and LDE have significant positive effect on ROE after autocorrelation rectification with Generalized Least Square Autoregressive process of order 1 (GLS AR1). The results suggest that listed manufacturing companies in Indonesia are over-leveraged and should be cautious of the trade-off between tax shield and financial distress from high amount of debts. On the other hand, it is possible that the management of the company perform more prudently under the pressure of high debts which results on positive outcome for the company.

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