Building a Model to Assess Signaling Theory in Its Correlation between Capital Structure and Firm Value

Abstract

This research aims to assess empirical models developed from signaling theory, where Debt Equity Ratio will improve Firm Value through the mediation of Total Asset Turnover and Earnings Growth as intervening variables. The samples were firms that belonged to the LQ-45 index during 2005-2018. It was because the stocks incorporated in the LQ-45 have a good growth prospect, therefore, the firms used debts because they fund their business development. 2018 was the limit of the research period to eliminate abnormal data potential because of covid-19. A partial Least Square was used for data analysis. The interesting research finding was based on mediation examination and it was proven that Earnings Growth mediated Total Asset Turnover on the Firm Value. However, Debt Equity Ratio was not proven to significantly improve the Firm's Value through the mediation of Total Asset Turnover and Earnings Growth. The research finding even strengthened the theory that Earnings Growth has a negative effect on Firm Value..

Keywords: Firm Value; Total Asset Turnover; Earnings Growth; Debt Equity Ratio; Signaling Theory.

DOI: 10.7176/EJBM/14-22-06

Publication date: November 30^th 2022