Determinants of Firm Performance Based on Investment Opportunities and Capital Structure
DOI:
https://doi.org/10.54518/rh.5.3.2025.606Keywords:
Capital Structure, Firm Performance, Investment Opportunity Set, ManufacturingAbstract
This research investigates the impact of the Investment Opportunity Set (IOS) and capital structure on the performance of manufacturing firms in Indonesia. It explores how these two factors influence the enhancement of firm performance. A quantitative method was applied, utilizing secondary data sourced from the financial reports of manufacturing companies listed on the Indonesia Stock Exchange (IDX) during the 2019–2023 period, selected through purposive sampling. The data were analyzed using the Partial Least Squares - Structural Equation Modeling (PLS-SEM) approach. The findings reveal that both IOS and capital structure significantly affect firm performance. The study enriches the discourse on agency and signaling theories while offering managerial insights for optimizing capital structure and formulating strategic investment decisions to improve business competitiveness and operational efficiency. Additionally, it emphasizes the necessity of aligning financial policies with potential growth to foster sustainable value for stakeholders. Furthermore, it highlights the importance of aligning financial strategies with growth opportunities to ensure long-term value creation for stakeholders.
Downloads
References
Aaker, D. A., & Jacobson, R. (1987). The role of risk in explaining differences in profitability. Academy of Management Journal, 30(2), 277–296.
Afonso, A., Gomes, P., & Taamouti, A. (2014). Sovereign credit ratings, market volatility, and financial gains. Computational Statistics & Data Analysis, 76, 20–33.
Alipour, M., Mohammadi, M. F. S., & Derakhshan, H. (2015). Determinants of capital structure: an empirical study of firms in Iran. International Journal of Law and Management, 57(1), 53–83.
Al‐Najjar, B., & Hussainey, K. (2011). Revisiting the capital‐structure puzzle: UK evidence. The Journal of Risk Finance, 12(4), 329–338.
Al-Najjar, B., & Kilincarslan, E. (2018). Revisiting firm-specific determinants of dividend policy: Evidence from Turkey. Economic Issues, 23(1), 132-145.
Bates, T. W., Becher, D. A., & Lemmon, M. L. (2008). Board classification and managerial entrenchment: Evidence from the market for corporate control. Journal of Financial Economics, 87(3), 656–677.
Bhushan, R. (1989). Collection of information about publicly traded firms: Theory and evidence. Journal of Accounting and Economics, 11(2–3), 183–206.
Chadha, S., & Sharma, A. K. (2015). Capital structure and firm performance: Empirical evidence from India. Vision, 19(4), 295-302.
Cho, M.-H. (1998). Ownership structure, investment, and the corporate value: an empirical analysis. Journal of Financial Economics, 47(1), 103–121.
Dasilas, A., & Papasyriopoulos, N. (2015). Corporate governance, credit ratings and the capital structure of Greek SME and large listed firms. Small Business Economics, 45, 215–244.
Detthamrong, U., Chancharat, N., & Vithessonthi, C. (2017). Corporate governance, capital structure and firm performance: Evidence from Thailand. Research in International Business and Finance, 42, 689–709.
Ehie, I. C., & Olibe, K. (2010). The effect of R&D investment on firm value: An examination of US manufacturing and service industries. International Journal of Production Economics, 128(1), 127–135.
Felício, J. A., Ivashkovskaya, I., Rodrigues, R., & Stepanova, A. (2014). Corporate governance and performance in the largest European listed banks during the financial crisis. Innovar, 24(53), 83-98.
Felimban, R., Floros, C., & Nguyen, A.-N. (2018). The impact of dividend announcements on share price and trading volume: Empirical evidence from the Gulf Cooperation Council (GCC) countries. Journal of Economic Studies, 45(2), 210-230.
Feng, L. (2005). Do investor sophistication and trading experience eliminate behavioral biases in financial markets? Review of Finance, 9(3), 305–351.
Galant, A., & Cadez, S. (2017). Corporate social responsibility and financial performance relationship: a review of measurement approaches. Economic research-Ekonomska istraživanja, 30(1), 676-693.
Gaver, J. J., & Gaver, K. M. (1993). Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Accounting and Economics, 16(1–3), 125–160.
Harada, K., & Nguyen, P. (2011). Ownership concentration and dividend policy in Japan. Managerial Finance, 37(4), 362–379.
Harris, C., & Roark, S. (2019). Cash flow risk and capital structure decisions. Finance Research Letters, 29, 393–397.
Huang, D., & Chan, R. C. K. (2018). On ‘Land Finance’in urban China: theory and practice. Habitat International, 75, 96–104.
Husnah, H., Suparman, S., & Rauf, R. A. (2023). The role of business credit on SME performance, regional economic output, and unemployment. Research Horizon, 3(3), 151-163.
Iturriaga, F. J. L., & Crisóstomo, V. L. (2010). Do leverage, dividend payout, and ownership concentration influence firms’ value creation? An analysis of Brazilian firms. Emerging Markets Finance and Trade, 46(3), 80–94.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329.
Kallapur, S., & Trombley, M. A. (1999). The association between investment opportunity set proxies and realized growth. Journal of Business Finance & Accounting, 26(3‐4), 505–519.
Kuncová, M., Hedija, V., & Fiala, R. (2016). Firm size as a determinant of firm performance: The case of swine raising. Agris on-line Papers in Economics and Informatics, 8(3), 77-89.
Leksono, A. W., & Vhalery, R. (2018). The Effect of Good Corporate Governance Mechanism and Financial Performance on Firm Value of Banking Sector Listed on Indonesia Stock Exchange (BEI) Period of 2012–2016. International Journal of Innovative Science and Reasearch Technology, 3(9), 535–540.
Melitz, M. J., & Ottaviano, G. I. P. (2008). Market size, trade, and productivity. The Review of Economic Studies, 75(1), 295–316.
Miller, M. H., & Modigliani, F. (1963). Dividend policy and market valuation: a reply. The Journal of Business, 36(1), 116–119.
Moradi, A., & Paulet, E. (2019). The firm-specific determinants of capital structure–An empirical analysis of firms before and during the Euro Crisis. Research in International Business and Finance, 47, 150–161.
Muniandy, B., & Hillier, J. (2015). Board independence, investment opportunity set and performance of South African firms. Pacific Basin Finance Journal, 35(6), 108–124.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147–175.
Myers, S. C. (1984). Finance theory and financial strategy. Interfaces, 14(1), 126–137.
Ramli, N. A., Latan, H., & Solovida, G. T. (2019). Determinants of capital structure and firm financial performance—A PLS-SEM approach: Evidence from Malaysia and Indonesia. The Quarterly Review of Economics and Finance, 71, 148–160.
Sharma, R. K., & Bakshi, A. (2019). An evident prescience of determinants of dividend policy of Indian real estate companies: An empirical analysis using co-integration regression and generalised method of moments. Journal of Financial Management of Property and Construction, 24(3), 358–384.
Sheikh, N. A., & Wang, Z. (2013). The impact of capital structure on performance: An empirical study of non-financial listed firms in Pakistan. International Journal of Commerce and Management, 23(4), 354-368.
Smith Jr, C. W., & Watts, R. L. (1992). The investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Financial Economics, 32(3), 263–292.
Sofat, R., & Singh, S. (2017). Determinants of capital structure: an empirical study of manufacturing firms in India. International Journal of Law and Management, 59(6), 1029–1045.
Sun, J., Lan, G., & Ma, Z. (2014). Investment opportunity set, board independence, and firm performance: The impact of the Sarbanes-Oxley Act. Managerial Finance, 40(5), 454-468.
Supriono, S. (2022). Analysis of the effect of return on equity, debt-to-equity, net profit margin on price-to-earnings Ratio. Economic and Business Horizon, 1(1), 9-23.
Tambunan, M. E., & Samaria, A. (2025). The Role of Profitability, Leverage, and Corporate Social Responsibility in Corporate Tax Aggressiveness. Economic and Business Horizon, 4(1), 13-19.
Tarek Al-Kayed, L., Raihan Syed Mohd Zain, S., & Duasa, J. (2014). The relationship between capital structure and performance of Islamic banks. Journal of Islamic Accounting and Business Research, 5(2), 158-181.
Vithessonthi, C., & Tongurai, J. (2015). The effect of firm size on the leverage–performance relationship during the financial crisis of 2007–2009. Journal of Multinational Financial Management, 29, 1–29.
Vu, M.-C., Phan, T. T., & Le, N. T. (2018). Relationship between board ownership structure and firm financial performance in transitional economy: The case of Vietnam. Research in International Business and Finance, 45(2), 512–528.
Zhou, H., Owusu-Ansah, S., & Maggina, A. (2018). Board of directors, audit committee, and firm performance: Evidence from Greece. Journal of international accounting, auditing and taxation, 31(2), 20-36.
Downloads
Published
How to Cite
License
Copyright (c) 2025 Muhammad, Intan Lifinda Ayuning Putri, Langgeng Setyono
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
