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P-ISSN: 2964-0121
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DEBT TO EQUITY RATIO (DER) AND FIRM SIZE TOWARD FIRM VALUE :
THE MEDIATING ROLE OF RETURN ON ASSET
Elly Lestari
Faculty of Economics, Universitas Tribhuwana Tunggadewi, Malang, Indonesia
lestariellz@yahoo.co.id
ABSTRACT
Abstract: This “research delves into the critical aspects of company sustainability Debt to Equity Ratio and Firm
Size and their consequential impact on company value. The focus is on scrutinizing the interplay of these elements
on Firm Value through the lens of Return On Assets within Manufacturing Companies listed on the Indonesian
Stock Exchange. The research encompasses manufacturing companies with Corporate Governance reports up to
2018, with a meticulous exclusion of those lacking routine publication during the observation period from 2012 to
2018. The study adopts a saturated sample approach, including all 14 eligible companies, resulting in a robust set
of 98 observations. The anticipated outcomes seek to elucidate the intricate dynamics influencing Firm Value,
specifically examining the roles of Debt to Equity Ratio, Firm Size, and Return On Assets. Methodologically, path
analysis is the chosen tool for data examination. The findings highlight the direct impact of Debt to Equity Ratio
and Firm Size on Firm Value, with an additional revelation that Firm Value is not only directly influenced but also
mediated by Return On Assets, particularly in the context of Firm Size within Manufacturing Companies on the
Indonesian Stock” Exchange. This research reveals a crucial discovery: Firm Value is influenced not only by the
Debt to Equity Ratio and Firm Size, but also by the mediating effect of Return On Assets in Manufacturing
Companies listed on the Indonesian Stock Exchange. Essentially, the complex interactions of these interconnected
components provide a complete understanding of the complicated forces that determine the value of these
organizations.
Keywords: Return On Asset; Debt to Equity Ratio; Firm Size; Firm Value.
INTRODUCTION
Company value, “a crucial metric in the eyes of investors, serves as a gauge for a company's
success, frequently intertwined with its share prices. A soaring company value not only propels
share prices skyward but also instills market confidence, casting a positive light not just on
current performance but on future prospects. This holds immense significance for investors, as an
ascending company value signals a parallel increase in shareholder prosperity (Brigham &
Houston, 2011; Carrai, 2021). The informational landscape, especially pertaining to financial
factors, significantly shapes the estimation of company value (Tandelilin, 2010). Financial
reports stand out as the primary wellspring of information guiding investment and credit
decisions, wielding the power to sway markets and businesses (Delavallade & Godlonton, 2023;
Eniola, 2021; Lev & Gu, 2016). However, investors exhibit nuanced responses to the company's
book value as portrayed in financial statements. Diverging from the figures in financial
statements, investors perceive company value distinctively. Share prices, debt levels, and total
assets emerge as pivotal factors, orchestrating the ascent or descent of company value (Buckley &
Tian, 2017; Chung & Pruitt, 1994). These variables form the intricate tapestry that investors
carefully navigate in their pursuit of understanding and predicting a company's worth in the”
market.
The Debt “to Equity Ratio is a pivotal metric employed to assess the balance between a company's
debt and equity holdings. As outlined by (Kasmir, 2012), this ratio functions as a gauge of the company's
own or owned capital deployed as collateral against debts owed to creditors. A higher ratio indicates a
diminished level of confidence from banks in extending credit, as the associated risks are perceived as
substantial. Interestingly, this scenario doesn't pose a drawback for company owners; in fact, a lower
value in this ratio signifies that the company is earmarking a significant capital reserve, presumably for
strategic investment purposes (Kasmir, 2012). This dynamic showcases the intricate relationship between
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
1096 Return: Study of Management, Economic And Business, 2 (11), November 2023
the Debt to Equity Ratio, credit accessibility, and the strategic financial decisions made by the company
and” its stakeholders.
The utilization of debt for investment purposes holds repercussions for the profits a company stands
to gain. “A notable impact arises from the obligation to allocate a portion of these earnings to service the
interest on the debt procured from creditors. This phenomenon finds support in prior research, as
evidenced by studies conducted by (Hartono, 2008) and (Purwitasari & Septiani, 2013), both asserting a
significant negative correlation between the debt-to-equity ratio and return on assets (ROA). Essentially,
heavy reliance on debt influences stock returns available to investors. Elevated levels of debt translate into
reduced company profits, with a portion earmarked for servicing interest and principal on the debt
(Nelson & Simshauser, 2013). This unfavorable financial scenario prompts a negative investor response,
dissuading potential investments and contributing to a decline in share prices, rendering shares less
marketable. The interconnected dynamics of debt, profitability, and investor sentiment underscore the
delicate balance companies must navigate in their financial” strategies (Zhang & Watson IV, 2020).
The magnitude of a company holds substantial sway over the returns yielded from investments or
stock holdings, as highlighted in research by (Tudje, 2016) and (Munte, 2009), which acknowledge that
there is a substantial and positive association between the size of the company and the returns on the
stock.This suggests that the size of a firm plays an essential part in determining the profits that investors
may anticipate to get in each period of time. However, it is important to note that different researchers
have come to contradictory conclusions in studies by (Erik & Amanah, 2016) and (Nadiyah & Suryono,
2017), indicating that company size doesn't exert a significant positive influence on stock returns. These
divergent outcomes emphasize the nuanced nature of factors impacting stock performance and underline
the importance of considering multiple perspectives and methodologies in understanding the complex
interplay between company size and investment” outcomes (Parast, 2022).
When considering an investment in a company, investors typically have very high expectations for
the value of that firm (Polzin et al., 2019). In order to live up to these expectations, you need to have an
in-depth knowledge of the elements that might affect the worth of your firm. "This study focuses on
manufacturing businesses that are listed on the Indonesia Stock Exchange, and it pays particular attention
to three factors that have an impact on the value of a company (Imamah et al., 2019). The Debt to Equity
Ratio (DER) and the size of the firm are the factors under investigation, with the Return on Assets (ROA)
serving as a moderator. Previous studies have shown that the Debt to Equity Ratio (DER) and the size of
the firm are two of the most important aspects that determine the value of a company. This pick was
made with that knowledge in mind. discrepancies were found in prior research, notably in the link
between the debt-to-equity ratio, firm size, and company value (Prasad et al., 2022). These discrepancies
inspired the introduction of ROA as an intervening variable in the analysis. The decision to use ROA as
an intervening variable stems from the fact that it has an impact in both directions (Koufteros et al., 2014).
This allows it to handle the complexity that are seen in the interplay between the debt-to-equity ratio,
business size, and company value.
The research is appropriately titled "The Influence of Debt to Equity Ratio (DER) and Company
Size as Mediated by Return on Assets (ROA) on Firm Value" in light of "these considerations," which
are outlined in the previous sentence. This inquiry attempts to provide a comprehensive knowledge of the
complex forces that shape firm value, providing investors useful insights that will assist them in
navigating the complexity of the market.
Debt to Equity Ratio dan Return On Asset
The "Debt to Equity Ratio," often known as a solvency ratio, is an important indicator that
determines the degree to which a company's assets are funded by debt.. Companies relying on debt
financing stand to benefit from reduced debt interest in the calculation of taxable income. This, in turn,
diminishes the proportion of the tax burden, allowing for a greater share of net profit or elevated
profitability.Insights gleaned from research conducted by (Lindayani & Dewi, 2016), as well as a study
by Marusya and Magantar (2016), a consensus has been reached that the Debt to Equity Ratio (DER) has
a positive and significant effect on the Return on Assets (ROA).
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
Return: Study of Management Economic And Business, 2 (11), November 2023 1097
H
1
: Debt to equity ratio has a significant effect on the return on” asset.
Firm Size dan Return On Asset
The “size of a company wields a substantial influence on the perception it garners. A larger
business tends to boast a more substantial asset portfolio, coupled with enhanced production capabilities
compared to its competitors. This robust infrastructure positions the company to harness significant profit
potential. (Pagano & Schivardi, 2001) aptly note that a company's expansive size contributes to
heightened productivity, ultimately maximizing profit generation. Support for this perspective is found in
the research conducted by (Singapurwoko & El-Wahid, 2011), underscoring the impact of company size
on earnings. Their findings suggest that a larger company size serves as a catalyst for substantial increases
in production, translating into amplified profits. This aligns with the observations of (Lawrence et al.,
2004) and (Babalola & Abiodun, 2013), who assert that company size, as measured by total assets and
sales volume, exerts a significant positive effect on profitability. These cumulative insights underscore the
pivotal role that the scale and capacity of a company play in shaping its financial success and overall”
profitability.
H
2
: Firm size has a significant effect on the return” on assets
Debt to Equity Ratio and Firm Value
(Kasmir, 2014) provides valuable insights into the Debt to Equity Ratio (DER), “presenting it as
a number that is essential for determining how much debt a firm has in comparison to how
much equity it has. This ratio, which is obtained by comparing all kinds of debt, including
current liabilities, with the total equity, aims to clarify the amount to which funds are sourced
from creditors and firm owners. Current liabilities are included in this comparison. In essence, it
discloses the whole amount of the owner's capital that has been pledged as collateral for the
loans. When viewed through the lens of a financial institution or creditor, a higher DER
indicates a bigger risk, which results in a situation that is less beneficial. Conversely, for
companies, a larger ratio is often perceived as favorable. A high DER indicates increased
funding from creditors, while a low ratio signals a higher proportion of owner-provided funding,
enhancing the safety net in the face of potential losses or asset depreciation. Beyond its role in
financial structure, the DER offers broader insights into a company's financial feasibility and
risks. In the realm of investor decisions, the DER holds sway over company value. Investors
often lean towards companies with higher DER values, interpreting them as indicators of lower
financial risk. This aligns with the findings of (Rompas, 2013), who asserts that the DER
variable, in a limited sense, has a constructive effect that has a major impact on the value of the
company. This highlights the complex nature of the link that exists between a firm's debt-to-
equity structure and the value that the company is believed to possess in the eyes of investors.
H
3
: Debt to equity ratio has a significant effect on firm” value
Firm Size and Firm Value
Company “size stands out as a pivotal variable influencing company value. The sheer size
of a company, encompassing total assets, sales turnover, and the workforce, offers a tangible
reflection of its scale and magnitude. A larger company size not only signifies substantial
growth but also facilitates smoother entry into the capital market. The allure of a robust and
expansive company tends to capture investors' interest, attracting capital and fostering positive
prospects that, in turn, contribute to an increase in the company's value. While research on the
correlation between company size and company value has produced mixed results in various
countries, including Vietnam and Kenya, there's a prevailing trend that supports the positive
relationship. Studies, such as the one cited by (Huang, 2010) and (Mule et al., 2015),
demonstrate that company size is positively associated with company value, as measured by
metrics like Enterprise Value (EV), Tobin's Q, or share price. This alignment reinforces the
notion that a larger company size often translates into enhanced value, making it a crucial factor
for investors and stakeholders to consider when evaluating a company's” potential.
H
4
: Firm size has a significant effect on firm” value.
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
1098 Return: Study of Management, Economic And Business, 2 (11), November 2023
Return On Assets and Firm Value
Profitability “serves as a litmus test for a company's adeptness at generating profits through
its assets, capital, and sales. According to (Heri, 2016), this ratio provides a measure of the
company's prowess in securing optimal profits, reflecting the effectiveness of management in
minimizing costs without impeding operational efficiency. The obtained profits, a result of
astute financial management, significantly impact the company's value. In this research,
profitability is proxied by Return on Assets (ROA). As per (Heri, 2016) and (Harrison Jr et al.,
2013), ROA gauges the contribution of assets to net profit generation, illustrating how efficiently
a company utilizes its assets to benefit both creditors and shareholders. A high ROA implies
substantial profit yield per unit of invested fund, whereas a lower ROA indicates a less
favorable” return.
The “impact of ROA extends to company value. (Nurhayati, 2013) and (Frederik et al.,
2015) affirm a positive correlation between profitability (ROA) and company value. A high
ROA not only signifies efficient asset utilization but also paints a promising picture of future
growth prospects. This, in turn, influences investors to augment their demand for shares,
propelling an increase in company value. This intricate interplay underscores the pivotal role of
profitability in shaping a company's financial landscape and market” perception.
H
5
: Return on assets has a significant effect on firm” value.
Debt to Equity Ratio and Firm Value through Return On Assets
The "Debt to Equity ratio," often known as a solvency ratio, is an essential component in
establishing the degree to which a company's assets are funded by debt. Companies relying
more heavily on debt financing can benefit from reduced debt interest in taxable income
calculations, thereby decreasing the proportion of the tax burden and potentially increasing net
profit and overall profitability (Sartono, 2014). Research findings by (Lindayani & Dewi, 2016),
as well as studies conducted by (Marusya & Magantar, 2016), affirm that the Debt to Equity Ratio
(DER) exerts a positive and significant influence on Return on Assets (ROA). ROA, in turn, is a
key component of profitability, which measures a company's ability to generate profits through
effective use of assets, capital, and sales. As described by (Heri, 2016), profitability is crucial
for financial performance and reflects successful management in achieving optimal profits
without compromising operational efficiency. The magnitude of the profits that were acquired
has a considerable influence on the value of the firm, as it provides an indication of how well
the company is able to optimize the functioning of its assets.
In this study, “Return on Assets (ROA) is used as a proxy for profitability. ROA, as
explained by (Heri, 2016) and (Harrison Jr et al., 2013), measures the contribution of assets to
the generation of net profit, which provides insight into the effectiveness with which a firm
makes use of its assets to produce profits for both its creditors and its shareholders. The research
provides evidence for the hypothesis that there is a positive association between ROA and firm
value conducted by (Nurhayati, 2013) and (Frederik et al., 2015). A high ROA, reflecting
substantial profit generation from each invested fund, influences investors to increase demand
for shares, thereby contributing to an increase in company value. This interconnected
relationship emphasizes the integral role of solvency and profitability ratios in shaping a
company's financial landscape and market” perception.
H
6
: Increase in debt to equity ratio will be able to increase firm value through increasing return
on” assets.
Firm Size and Firm Value through Return On Assets
The size “of a company plays a pivotal role in shaping its perception and potential for financial
success. A larger business, often accompanied by a substantial asset portfolio and enhanced production
capacity, holds the promise of significant profit generation. According to (Pagano & Schivardi, 2001), a
company's size directly influences its growth productivity, paving the way for maximized profits. This
perspective is reinforced by the findings of (Singapurwoko & El-Wahid, 2011), suggesting that a larger
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
Return: Study of Management Economic And Business, 2 (11), November 2023 1099
company size correlates with increased production, thereby contributing to higher profits. Research
conducted by (Lawrence et al., 2004) and (Babalola & Abiodun, 2013) affirms that company size
positively influences profitability, with total assets and sales volume serving as significant” indicators.
Profitability, “as highlighted by (Heri, 2016), is a key metric showcasing a company's ability to
generate profits from its business activities. The maximization of earnings is dependent on both effective
management and the reduction of costs, but they must not come at the expense of operational operations.
The magnitude of the company's profit has a direct influence on its worth and provides insight into the
company's capacity to make the most of its assets. In this line of investigation, the Return on Assets
(ROA) ratio serves as a stand-in for profitability. As explained by (Heri, 2016) and (Harrison Jr et al.,
2013), ROA reflects the contribution of assets to net profit, measuring how effectively a company uses its
assets to generate profits for creditors and shareholders. A high ROA, indicating substantial profit
generation from each invested fund, influences investors to increase demand for shares, contributing to an
increase in company value. This positive correlation between profitability (ROA) and company value is
supported by the research conducted by (Nurhayati, 2013) and (Frederik et al., 2015). It underscores the
intricate relationship between company size, profitability, and overall financial success in the eyes of
investors” and stakeholders.
H
7
: Increasing firm size will be able to increase firm value through increasing return on” assets.
Figure 1 The Conceptual Research Framework
RESEARCH METHOD
The purpose of this "research" is to "explore and elucidate the intricate relationship
between Debt to Equity Ratio (DER), company size, Return on Assets (ROA), and company
value”. The scope of this study encompasses manufacturing companies that have released
Corporate Governance reports up to the year 2018. It's noteworthy that some companies deviate
from routine publication during the observation period spanning from 2012 to 2018. In order to
ensure a comprehensive understanding, the research adopts stringent population criteria,
focusing on companies that haven't published Corporate Governance Reports for a maximum of
one year. This selection process yields a population of 14 companies, forming a saturated
sample with a robust dataset comprising 98 observations. The anticipated outcomes of this
research aim to shed light on the intricate dynamics at play, elucidating how company value is
influenced by the interplay of DER, company size, and ROA. By delving into these factors, the
research seeks to offer valuable insights into the financial landscape of manufacturing
companies, providing a nuanced understanding of the factors shaping their value on the
Indonesia Stock” Exchange.
In this study, “the chosen method for data analysis is path analysis. This analytical approach
serves to unravel the intricate web of relationships between variables. The primary objective of
path analysis is to discern both the direct and indirect influences-unraveling the intricate
interplay among a set of independent variables on the dependent variable. The path coefficients
on each diagram illuminate the strength and direction of these causal relationships, providing a
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
1100 Return: Study of Management, Economic And Business, 2 (11), November 2023
comprehensive understanding of the dynamics at play (Marmaya et al., 2018). The assessment of
the causal linkages between variables that have been specified by theoretical underpinnings is
made easier by path analysis, which is simply an extension of multiple regression analysis. The
method employs regression analysis to delineate these relationships within a model, enabling a
deeper exploration of the patterns of connection among three or more variables. Through the
utilization of path analysis, the purpose of this study is to not only identify but also quantify the
causal links between the Debt to Equity Ratio (DER), company size, Return on Assets (ROA)
(Susnita, 2022), and company value. This will contribute to a deeper comprehension of the
impact that these factors have collectively on manufacturing companies that are listed on the
Indonesia Stock Exchange.
RESULT AND DISCUSSION
Descriptive Test
Descriptive tests “serve as a valuable tool in unraveling the overarching characteristics of
the observed research data. In this specific study, descriptive tests are used in order to define the
intricacies of company value, Return on Assets (ROA), Debt to Equity Ratio (DER), and
business size. This entails investigating important metrics including the average value (mean),
the standard deviation (SD), the lowest value (min), and the highest value" (max).
Table 1 Descriptive Test Result
Minumum
Maximum
Mean
Debt to Equity Ratio
98
.1535
1.9638
.886436
Firm Size
98
30.06
32.49
.63674
Return on Assets
98
.01
.20
.05039
Firm Value
98
2.00
3.93
.52469
Valid N (listwise)
98
The "results of the debt to equity ratio description acquired from 14 firms between the
years of 2012 and 2018 obtained an average of 0.886 with a standard deviation of 0.511, and the
lowest value was 0.154 and the highest value was" 1.964."
The findings of the study "results of the firm size description obtained from 14
companies from 2012 to 2018 obtained an average of 31.134 with a standard deviation of 0.637,
and the lowest value was 30.06 and the highest value was" 32.49.
The "results of the description of return on assets obtained from 14 companies from
2012 to 2018 obtained an average of 0.094 with a standard deviation of 0.050, and the lowest
value was 0.01 and the highest value was" 0.20. These findings were based on data collected
over the course of six years, from 2012 to 2018.
The findings of the "results of the firm value description obtained from 14 companies
from 2012 to 2018 obtained an average of 3.121 with a standard deviation of 0.525, and the
lowest value was 2.00 and the highest value was" 3.93.
Classic Assumption Test
It is essential to run the data through several traditional assumption tests before "delving
into the path analysis to test the research hypothesis." These tests have one overall purpose, and
that is to guarantee that the independent variable, which acts as an estimator of the dependent
variable, continues to maintain its objectivity. The normality test, the heteroscedasticity test, the
multicollinearity test, and the autocorrelation test are the four tests that are included in the set of
classical assumption tests.
1. Residual Normality Test
The purpose of the "normality test" is to determine whether or not the confounding
factors or residual variables in the regression model have a normal distribution. The
Kolmogorov-Smirnov test was utilized so that the normality assumption could be validated.
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
Return: Study of Management Economic And Business, 2 (11), November 2023 1101
Table 2 Normality Test Results
N
98
98
Normal Parameters
a,b
Mean
.0000000
.0000000
Std. Deviation
.75689520
.77454631
Most Extreme Differences
Absolute
.059
.078
Positive
.059
.049
Negative
-.059
-.078
Test Statistic
.059
.078
Asymp. Sig. (2-tailed)
.200
c,d
.150
c
a. Test distribution is Normal.
b. Calculated from data.
c. Lilliefors Significance Correction.
d. This is a lower bound of the true significance.
Source: Research Data Processed (2023)
The residual normality test was conducted using the Kolmogorov-Smirnov test. The
obtained significance values (p) for the first and second equations were 0.200 and 0.150,
respectively. Since these values were greater than 0.05 (p > 0.05), it can be concluded that the
residuals were normally distributed and the normality assumption was satisfied.
2. Heteroscedasticity Test
The heteroscedasticity test is conducted to see whether there is a difference in variance
among the residuals of different observations in the regression model. The Glejser test is used
to assess the heteroscedasticity assumption.
Table 3 Heteroscedasticity Test Results
Model
t
Sig.
1
(Constant)
12,218
,000
Debt to Equity Ratio
-.505
.615
Firm Size
-.476
.635
a. Dependent Variable: Absolute Resudual 1
2
(Constant)
15.958
.000
Debt to Equity Ratio
-.015
.988
Firm Size
-1.307
.194
Return On Asset
-.490
.625
a. Dependent Variable: Absolute Resudual 2
The Glejser test was conducted to assess heteroscedasticity in the model. The findings
indicated that the significance value for each independent variable was more than 0.05 (p > 0.05),
suggesting that no heteroscedasticity issues were detected. Therefore, the assumption of
heteroscedasticity was satisfied.
3. Multicollinearity Test
The purpose of the multicollinearity test is to determine whether the path model has
identified any association among the independent variables. The Variance Inflation Factor (VIF)
test was used to assess the multicollinearity assumption.
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
1102 Return: Study of Management, Economic And Business, 2 (11), November 2023
Table 4 Multicollinearity Test
VIF Test
a
Model
Collinearity Statistics
Tolerance
VIF
1
Debt to Equity Ratio
.930
1.075
Firm Size
.930
1.075
a. Dependent Variable: Return On Asset
2
Debt to Equity Ratio
.868
1.152
Firm Size
.612
1.634
Return On Asset
.573
1.746
a. Dependent Variable: Firm Value
Source: Processed Research Data (2023)
The results of the multicollinearity test, conducted using the VIF test, indicated that the
VIF of each independent variable in each equation was below 10 (VIF < 10). This implies that
there were no issues of multicollinearity in the model, thus confirming that the multicollinearity
assumption was satisfied.
4. Autocorrelation Test
The autocorrelation test is conducted to see if there is a connection between the
mistakes in period t and the errors in the prior period t-1 in the linear regression model. The
Durbin-Watson (DW) test is used to assess the autocorrelation assumption.
Table 5 Autocorrelation Test
DW Test
b
Model
Durbin-Watson
1
1.911
a
a. Predictors: (Constant), Firm Size, Debt to Equity
Ratio
b. Dependent Variable: Return On Asset
2
2.390
a
a. Predictors: (Constant), Return On Asset, Debt to
Equity Ratio, Firm Size
b. Dependent Variable: Firm Value
The autocorrelation assumption test, specifically the Durbin-Watson test, yielded a
Durbin-Watson (DW) value of 1.911 for equation 1 and 2.390 for equation 2. The dU value
was 1.713, whereas the 4-dU value was 2.287. The findings indicate that the DW value falls
between the range of dU values and 4-dU values (dU < DW < 4-dU), suggesting the absence of
any autocorrelation issues and confirming that the autocorrelation assumption was satisfied.
Path Analysis
The path analysis in this research is separated into three essential components, each
contributing to a detailed comprehension of the connections between Debt to Equity Ratio
(DER), company size, Return on Assets (ROA), and firm value, with a specific focus on ROA
as the mediating element. The study examines three main components: firstly, it investigates
the direct impact of the debt to equity ratio and firm size on return on assets; secondly, it
explores the direct influence of the debt to equity ratio, firm size, and return on assets on firm
value; and finally, it examines the indirect effect of the debt to equity ratio and firm size on firm
value through return on assets acting as a mediating variable.
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
Return: Study of Management Economic And Business, 2 (11), November 2023 1103
Table 6 Direct Influence of Debt to Equity ratio and Firm Size on Return On Assets
Model Summary
Model
R
R Square
Adjusted R
Square
Std. Error of the
Estimate
1
.654
a
.427
.415
.76482102
a. Predictors: (Constant), Firm Size, Debt to Equity Ratio
Coefficients
a
Model
Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
2.343E-15
.077
.000
1.000
Debt to Equity Ratio
.210
.081
.210
2.611
.010
Firm Size
.566
.081
.566
7.029
.000
a. Dependent Variable: Return On Asset
The “results of path analysis to test the influence of debt to equity ratio and firm size on return on
assets obtained the following path” equation.
Return on assets = 0.210 Debt to Equity Ratio + 0.566 Firm Size” + e
1
In part 1 of the analysis, it was found that the debt to equity ratio has a direct impact on
the return on assets. The path coefficient for this relationship is 0.210, and the significance
value (p) is 0.010 (p < 0.05). This indicates that the debt to equity ratio has a significant and
positive effect on the return on assets. In other words, as the debt to equity ratio increases, the
return on assets also increases.
The size of a business has a substantial positive impact on its return on assets, as shown
by a path coefficient of 0.566 and a significance value (p) of 0.000 (p < 0.05). This implies that
an increase in firm size leads to better return on assets. The greater the value of return on
assets, the more pronounced its impact becomes.
The R Square score of 0.427 indicates that 42.7 percent of the variation in return on assets can
be explained by the direct effect of the debt to equity ratio and business size.
Table 7 Direct Influence of Debt to Equity Ratio, Firm Size and Return on Assets towards Firm Value
Model Summary
Model
R
R Square
Adjusted R
Square
Std. Error of the
Estimate
1
.633
a
.400
.381
.78680902
a. Predictors: (Constant), Return On Asset, Debt to Equity Ratio,
Firm Size
Coefficients
a
Model
Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
1.129E-15
.079
.000
1.000
Debt to Equity Ratio
.259
.086
.259
3.017
.003
Firm Size
.214
.102
.214
2.100
.038
Return On Asset
.330
.106
.330
3.124
.002
a. Dependent Variable: Firm Value
The equation generated using the path analysis to examine the impact of debt to equity ratio,
company size, and return on assets on firm value is as follows:
Firm “value = 0.259 Debt to Equity Ratio + 0.214 Firm Size + 0.330 Return on assets” + e
2
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
1104 Return: Study of Management, Economic And Business, 2 (11), November 2023
The analysis in section 2 demonstrates that the debt to equity ratio has a direct impact
on firm value, with a path coefficient of 0.259 and a significance value (p) of 0.003 (p < 0.05).
Therefore, it can be concluded that the debt to equity ratio has a significant positive effect on
firm value. This implies that as the debt to equity ratio increases, the firm value will also
increase significantly.
The study found that firm size has a direct and significant positive influence on firm
value. The path coefficient for this relationship is 0.214, with a significance value (p) of 0.038
(p < 0.05). This means that as the firm size increases, the influence on firm value becomes more
significant.
The study found that there is a direct relationship between return on assets and firm
value. The path coefficient for this relationship was 0.330, with a significance value (p) of 0.002
(p < 0.05). This means that return on assets has a significant positive impact on firm value,
indicating that higher return on assets leads to higher firm value.
The coefficient of determination for the direct effect of firm size and return on assets on
firm value yielded a R Square value of 0.400. This indicates that 40.0 percent of the variation in
firm value can be accounted for by firm size and return on assets.
Table 8 Indirect Influence of Debt to Equty Ratio, Firm Size on Firm Value through Return On Assets
Coefficients
a
Model
Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
Debt to Equity Ratio
.069
.036
.069
1.934
.056
Firm Size
.187
.066
.187
2.820
.006
a. Intervening Variable: Return On Asset
b. Dependent Variable: Firm Value
The analysis in section 3 reveals that the debt to equity ratio has an indirect impact on
firm value through return on assets. The path coefficient is 0.069 with a significance value (p) of
0.056 (p > 0.05). This indicates that the debt to equity ratio has a positive but not significant
influence on firm value through return on assets. In other words, an increase in the debt to
equity ratio will lead to a higher return on assets value, but it will not have a significant effect
on increasing the firm value. To clarify, the return on assets does not act as a mediator for the
impact of the debt to equity ratio on the value of a corporation.
The size of a firm indirectly affects its value through the return on assets, with a path
coefficient of 0.187 and a significance value (p) of 0.006 (p < 0.05). This indicates that firm size
has a significant positive impact on firm value through return on assets. In other words, as the
firm size increases, the return on assets and consequently the firm value also increase. Put
simply, the impact of company size on firm value is moderated by return on assets, and this
moderation is characterized as partial mediation.
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
Return: Study of Management Economic And Business, 2 (11), November 2023 1105
Figure 2
Path Diagram
The correlation between the debt-to-equity ratio, business size, and return on assets is
crucial in establishing the value of a corporation. An important finding is that both the debt-to-
equity ratio and business size have a direct influence on return on assets. This suggests that as
the firm size grows, the return on assets also rises. Moreover, the combination of debt-to-equity
ratio, firm size, and return on assets has a significant impact on the value of a company. More
precisely, a rise in the size of a company and its return on assets are directly related to an
increase in the total worth of the company. Furthermore, the relationship between the size of a
company and its value is influenced by the return on assets. A larger company not only directly
leads to a better return on assets, but also indirectly adds to a bigger overall worth of the
company.
Table 9 Summary of Hypothesis Test Results
No
Influence
Coef.
Track
T
p
Informationx
1
The ratio of debt to equity to return on
assets
0.210
2.611
0.010
Significant
2
Firm size on return on assets
0.566
2.611
0.000
Significant
3
Debt to equity ratio to firm value
0.259
3.017
0.003
Significant
4
Firm size to firm value
0.214
2.100
0.038
Significant
5
Return on assets to firm value
0.330
3.124
0.002
Significant
6
Debt to equity ratio to firm value
through return on assets
0.069
1.934
0.056
Not significant
7
Firm size on firm value through return
on assets
0.187
2.820
0.006
Significant
Hypothesis 1: “Effect of Debt to Equity Ratio on Return on” Assets.
The test findings yielded a path coefficient of 0.210 and a significance value (p) of 0.010
(p < 0.05). This indicates that the Ha hypothesis, which states that the debt to equity ratio has an
impact on return on assets, is accepted. The results of this research are supported by the results of the
study by (Lindayani & Dewi, 2016) and the study conducted by (Marusya & Magantar, 2016) which
stated that The Debt to Equity Ratio (DER) positively and significantly impacted Return on Assets
(ROA).
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
1106 Return: Study of Management, Economic And Business, 2 (11), November 2023
Hypothesis 2: “Influence of Firm Size on Return On” Assets.
The test findings yielded a path coefficient of 0.566 and a significance value (p) of 0.000
(p < 0.05), indicating that the Ha hypothesis, which posits an impact of business size on return
on assets, is accepted. The results of this research are supported by research conducted by
(Singapurwoko & El-Wahid, 2011) concluding that company size influences the profits earned by the
company. A company's big size promotes a substantial boost in output, leading to increased profitability.
These results are also supported by research conducted by (Lawrence et al., 2004) and (Babalola &
Abiodun, 2013) regarding the effect of company size on profitability. The study findings indicate that the
size of a firm, as determined by its total assets and sales volume, has a significant and beneficial impact
on its profitability. However, in research conducted by (Fiala & Hedija, 2015), the study findings
indicated that the size of a firm has a detrimental and substantial impact on its growth, namely in terms of
corporate income.
Hypothesis 3: “Effect of Debt to Equity Ratio on Firm” Value.
The test findings yielded a path coefficient of 0.259 and a significance value (p) of 0.003
(p < 0.05). This indicates that the Ha hypothesis, which posits an impact of the debt to equity
ratio on company value, is accepted. This is in accordance with research conducted by (Rompas,
2013), which states that The Debt to Equity Ratio (DER) variable has a partly positive and
considerable impact on the value of the company.
Hypothesis 4: “Influence of Firm Size on Firm” Value.
The test findings yielded a path coefficient of 0.214 and a significance value (p) of 0.038
(p < 0.05). This indicates that the Ha hypothesis, which states that company size has an impact
on firm value, is accepted. Studies investigating the correlation between the size of a firm and
its worth have been conducted in several nations, with inconclusive findings, including Vietnam
and Kenya. The study findings indicate a positive correlation between the size of a firm and its
worth, as assessed by metrics like as Enterprise worth (EV), Tobin's Q, or share price” (Huang,
2010; Mule et al., 2015).
Hypothesis 5: “Effect of Return on Assets on Firm Value. ”
The test findings yielded a path coefficient of 0.330 and a significance value (p) of 0.002
(p < 0.05). This indicates that the Ha hypothesis, which states that there is a relationship
between return on assets and company value, is supported. This research is supported by
previous research conducted by (Nurhayati, 2013) and (Frederik et al., 2015), profitability
(ROA) has a positive effect on company value (firm value). ”
Hypothesis 6: Influence of Debt to Equity Ratio on Firm Value through Return on” Assets
The test findings yielded a path coefficient of 0.069 and a significance value (p) of 0.056
(p>0.05). This indicates that the null hypothesis (Ho) is accepted, suggesting that there is no
discernible impact of the debt to equity ratio on company value via return on assets. This study
finds support in the findings of (Lindayani & Dewi, 2016) and the research conducted by (Marusya
& Magantar, 2016), It is confirmed that the Debt to Equity Ratio (DER) has a substantial and
favorable impact on Return on Assets (ROA). Profitability is a crucial measure of a company's
capacity to create profits from its assets, capital, and sales. As described by (Heri, 2016),
Profitability ratios provide a method to evaluate a company's financial performance, indicating
the effectiveness of its management in achieving maximum profits. Efficient management not
only reduces expenses without impeding operational operations, but also guarantees that the
profits generated enhance the total worth of the organization.
The “study proxies profitability through Return on Assets (ROA), in line with (Heri,
2016) ROA is a statistic that measures the effectiveness of assets in generating net profit.
According to (Harrison Jr et al., 2013), Return on assets (ROA) quantifies the effectiveness of a
firm in using its assets to create profits for both creditors and shareholders. A high Return on
Assets (ROA) signifies a significant amount of net profit generated per unit of total assets,
Debt To Equity Ratio (DER) and Firm Size Toward Firm Value : The Mediating Role of Return on Asset
Return: Study of Management Economic And Business, 2 (11), November 2023 1107
which has a direct impact on the overall worth of the organization. Significantly, a strong
return on assets (ROA) is an influential criterion for investors, as it indicates attractive
opportunities for development. This aligns with previous research by (Nurhayati, 2013) and
(Frederik et al., 2015), There is evidence supporting a direct relationship between profitability,
as measured by return on assets (ROA), and the worth of a business, often known as firm value.
The conclusion is evident: a company's capacity to generate substantial profits from its assets
enhances investor trust and leads to a rise in the value of the business.
Hypothesis 7: “Influence of firm size on firm value through return on” assets.
The test findings show a path coefficient of 0.187, which is statistically significant with a
p-value of 0.006 (p< 0.05), therefore providing evidence in favor of the alternative hypothesis
(Ha). This research confirms the influence of business size on company value via an analysis
of the return on assets. These findings align with (Singapurwoko & El-Wahid, 2011) research, The
size of a corporation is believed to have a direct impact on its profitability, since larger
organizations have a tendency to create higher profits by promoting increased production.
Similar conclusions are drawn from studies by (Lawrence et al., 2004) and (Babalola & Abiodun,
2013), Emphasizing the positive influence of company size, as measured by total assets and
sales volume, on profitability.
Profitability, defined as the ability of a corporation to create profits from its assets, capital,
and sales, is of great importance. As (Heri, 2016) notes, The profitability ratio is a quantitative
measure used to assess a company's capacity to generate maximum earnings while effectively
controlling expenses. The enhanced efficiency, while maintaining operating operations, leads
to increased profitability, therefore impacting the company's overall worth. The company's
strong profitability is a clear indication of excellent management performance, which is a
positive sign for its future possibilities.
The return on assets (ROA) is used as a proxy for profitability in this research. (Heri, 2016)
defines ROA as a ratio illustrating the asset's contribution to net profit. According to (Harrison
Jr et al., 2013), Return on assets (ROA) quantifies the efficiency of a firm in using its assets to
create profits for both creditors and shareholders. A high return on assets (ROA) indicates a
higher level of profitability for each unit of invested capital, which has a significant influence on
the total worth of the organization. This aligns with previous research by (Nurhayati, 2013) and
(Frederik et al., 2015), affirming the positive correlation between profitability (ROA) and
company value (Firm Value). The implication is clear: a company's ability to earn significant
profits from its assets enhances investor confidence, leading to an increased demand for shares
and, consequently, an augmented firm” value.
CONCLUSION
This research reveals a crucial discovery: Firm Value is influenced not only by the Debt to Equity
Ratio and Firm Size, but also by the mediating effect of Return On Assets in Manufacturing Companies
listed on the Indonesian Stock Exchange. Essentially, the complex interactions of these interconnected
components provide a complete understanding of the complicated forces that determine the value of these
organizations.
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