DETERMINANTS OF CAPITAL STRUCTURE AND ITS IMPLICATIONS FOR FINANCIAL PERFORMANCE OF CONSTRUCTION SERVICE COMPANIES

Abstract

This study examines the factors affecting capital structure and its implications for construction companies in Indonesian Stock Exchange within the period of 2007-2012. This study applies panel data regression model on construction service companies in Indonesia Stock Exchange. Based on estimation of the determinants of capital structure, the results show that firm size, asset utilization, growth opportunities, liquidity and asset tangibility significantly affect capital structure. On the next stage, which is the estimation of the determinants of financial performance, the results indicate that capital structure, asset utilization,  growth opportunities and liquidity significantly affect financial performance of the company. This research brings a theoretical implication, that is, in making capital structure decision, construction service companies tend to apply Trade-Off Theory rather than Pecking Order Theory, whereas leverage has a positive effect toward financial performance. This means that the companies will use debt in order to maximize their financial performance. Meanwhile, the managerial implication of this research is that capital structure is an important aspect in maximizing financial performance of construction service companies, without neglecting the conditions of the companies, such as asset utilization, growth opportunities and liquidity aspect.