THE EFFECT OF CAPITAL STRUCTURE AND AGENCY COST TOWARDS PROFITABILITY

Abstract

This research examines the effect of the capital structure and agency costs on the firm’s profitability of LQ45 Indonesian firms in the Indonesian Stock Exchange (IDX) from 2013 to 2017, regressed by panel data. The sample used is 24 out of 627 listed companies in IDX. The Capital structure is proxied by long term debt (LD), short term debt (SD) and equity (EQ) ratios. The agency cost (AC) is used by dividing operating expenses over annual sales. The Firms' profitability is approached by return on assets (ROA) and return on equity (ROE). The size of firms (SIZE) and growth of sales (GROW) are used as control variables. The finding shows that the Indonesian firms use more equity than debt financing. The LD has a negatively significant influence on ROA and a significant positive correlation on ROE. At the same time, the SD has a significant positive impact on both ROA and ROE. The EQ and AC have insignificant positive effects on ROA and ROE. The SIZE has an insignificant negative effect on ROA while a positive insignificant on ROE. Furthermore, the GROW has a positive influence on ROA and a negative impact on ROE, but both are insignificant.