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Profitability Determinants of Manufacturing Firms in Indonesia

Author

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  • Didik Susilo
  • Sugeng Wahyudi
  • Irene Rini Demi Pangestuti

Abstract

Purpose: The purpose of this study is to explore the most significant profitability determinants of the manufacturing companies in Indonesia. Design/Methodology/Approach: Several independent variables examined for their influence on profitability were working capital, firm size, firm growth, capital structure, and non-debt tax shields. The sample of this study were manufacturing firms listed on the Indonesia Stock Exchange from 2010 to 2017. The number of samples were 350 manufacturing companies. Findings: The results of this study indicate that working capital, firm size and firm growth were positively related to profitability. Meanwhile, capital structure and non-debt tax shield did not affect profitability. The findings of this study were consistent with the pecking order theory and the financial agency theory. Practical implications: This study implies that managers need to adjust their investment needs with the profitability that has been achieved and the total assets of the company, and to maximize the value of the company by managing current assets so that the rate of the return on marginal investment is equal to or greater than the cost of capital used to finance the current assets. Furthermore, financial managers must be able to determine essential investment objectives by maximizing the use of assets and fixed assets which are expected to make the company to enjoy the sales growth in the future. Originality/Value: Although this study organically builds upon recent studies about the firms’ profitability, it conducted in the new administrative setting in Indonesia, which is the Widodo’s administration. Widodo’s administration supports the manufacturing industry to be able to compete globally.

Suggested Citation

  • Didik Susilo & Sugeng Wahyudi & Irene Rini Demi Pangestuti, 2020. "Profitability Determinants of Manufacturing Firms in Indonesia," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 53-64.
    • Handle: RePEc:ers:ijebaa:v:viii:y:2020:i:2:p:53-64
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    More about this item

    Keywords

    Profitability; manufacturing company; working capital; firm size; firm growth.;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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