The Impact of Capital Structure on Firm Performance: Covid 19 Case

Abstract

This study investigates the influence of capital structure on the performance of non-financial sector companies listed on the Indonesia Stock Exchange (IDX) over the period 2017-2021. The primary aim is to determine the effects of various capital structure components, including total debt ratio, long-term debt ratio, liquidity, firm size, firm growth, and firm age on the financial performance, measured by Return on Assets (ROA), of these companies. Additionally, the study examines the impact of the COVID-19 pandemic on corporate performance. The analysis reveals that total debt ratio and long-term debt ratio have a significant negative impact on ROA, supporting the pecking order theory which suggests that companies prefer internal financing due to lower costs and reduced information asymmetry. Conversely, liquidity, firm size, and firm growth exhibit a significant positive effect on ROA, indicating that higher liquidity and larger firm size enhance a company's ability to invest and grow, thereby improving performance. The results also show that firm age positively influences ROA, as older firms benefit from experience and efficiency gains. Furthermore, the COVID-19 pandemic has a significant negative effect on corporate performance, underscoring the financial challenges posed by the crisis. The findings contribute to the existing literature by providing empirical evidence on the relationship between capital structure and firm performance in the context of Indonesian non-financial companies. The study highlights the importance of optimal capital structure management to enhance firm performance and offers insights for managers and investors in making informed financial decisions.