THE IMPACT OF CAPITAL STRUCTURE ON THE ACTIVITIES OF BUSINESSES

DURING THE COVID-19 PANDEMIC

I. ABSTRACT
This study aims to find out how decisions on the capital structure of companies affect
the activities of companies in the industrial sector in Indonesia during the covid-19
period. This study also compared how decisions were made about the company's
capital structure in the first and second years of the Covid-19 outbreak. The sample
used in this study is industrial sector companies in Indonesia and provides complete
data. The dependent variable used in this study is the company's performance including
Earnings per Share, Return on Assets, Return on Equity, and Net Profit Margin. The
independent variable used here is the capital structure, which consists of the ratio of
Debt, Equity and Debt Equity. The average value of the net profit margin of industrial
companies was -0.028 in the first year of Covid-19, and the average net profit margin
value was -0.075 in the second year of covid-19, the rage value of this net profit margin
rose to 0.019. In the second year, the company has begun to adapt and gain profits
again. The results of this study show that debt and equity affected earnings per share
between 2020-2021 and 2000. Meanwhile, in 2021, only equity affected earnings per
share. The Debt-to-Equity ratio creates a negative impact on return on assets, return on
equity, and net profit margins in 2020-2021 and 2021. Meanwhile, in 2020, the debt-to-
equity ratio only affected the return on equity. During the economic crisis, in this case,
the Covid-19 pandemic, the capital structure affected the company's activities.

Keywords: capital structure, solid performance, covid-19, economic crisis

II. INTRODUCE
The economic crisis has affected countries around the world, including Indonesia.
America, Europe, and other countries also experienced a crisis in 2008. Indonesia
experienced a crisis in 1998. No less companies go bankrupt, one of which is because
they have to pay large debts of the company. And now Indonesia is experiencing
economic problems due to the Covid-19 pandemic.
The Covid-19 pandemic that hit the world at the end of 2019 and Indonesia in
March 2020 caused changes in the economic sector and various sectors. Changes in
these different sectors have caused many companies to have problems with their
finances. Discussions about finances are always related to the capital structure of the
company. So, the study of the company's finances discusses the financial structure of
the company more. The capital structure of the company is the amount of debt and
equity (Manurung, 2021: 241). In times of crisis, companies must choose the right
capital component to provide maximum benefits to the company. The choice of
capital structure can affect the performance of the company (Waimarie al., 2016;
Basit & Hassan, 2017; Salim & Yadav, 2012; and Vă tavu, 2015).
This study is important because it adds knowledge, especially when the country is
experiencing an economic crisis. Companies must be able to choose the right capital
structure so that they are not increasingly burdened by crisis conditions. This study
aims to examine the influence of capital structure decisions on the performance of
industrial companies in Indonesia during 2020-2021. In addition, this study also
looked at whether there were differences in the effect of the capital structure on the
company's operations during the first and second years of Covid-19.
III. LITERATURE REVIEW
Capital structure decisions that affect the performance of the company are very
important in the company. There are several theories that explain this relationship.
The theories related to the choice of capital structure in enterprises are diverse,
namely Modigliani and Miller theory, trade-off theory, Pecking command theory and
market time theory. Many scholars have tried to find empirical evidence to support
these theories over the years.
Modigliani and Miller Theory: The most basic theory for capital structure may be
the one explained by Modigliani and Miller (1958); Modigliani and Miller (1963).
Assuming that the corporate income tax rate is zero, the authors (Modigliani and
Miller, 1958) argue that capital structure is irrelevant to firm’s value or the firm has
there is no way to increase its value by changing the capital structure. By introducing
corporate income tax into the research model, Modigliani, and Miller (1963)
concluded that the value of companies, which have more debt in their capital
structures, is equal to the value mark of debt-free companies in their capital
structures plus what is known as the "tax shield." In summary, Modigliani and Miller
(1963) show that capital structure influences the firm’s market value.
The Theory of Trade-Offs: To complete Modigliani and Miller's theory (1963),
some of the later studies have included financial exhaustion and agency costs, for
example, Kraus and Lichtenberger (1973); Jensen and Meckling (1976) formally
addressed the theory of trade-offs by concluding that the market value of a debt-free
company is equal to the value of a debt-free company plus the value of the tax
shield minus the current value of bankruptcy costs. bankruptcy cases. In conclusion,
this theory suggests that there exists an optimal capital structure for enterprises, in
which the benefits of the tax shield best compensate for losses from debts, such as
financial exhaustion and agency costs.
Pec King Order Theory: Pecking Order Theory explains the financial decisions of
business managers. Due to the need for capital, enterprises set the order of priority
for their funds: first they use internal capital (for example, internal funds, retained
income), followed by loans (for example, debt securities), and finally, and new equity.
This is the result of information asymmetry between the company owner and
external investors. While the owner is fully aware of firm’s financial situation,
external investors are poorly are informed, and therefore, they are always skeptical
of the completeness and truthfulness of the information provided by the company
owner. As a result, companies often pay higher costs for external financing. The
pecking order theory states that internal capital will always be preferred for loans,
and the use of internal capital will reduce the dependence of enterprises on external
parties, increasing financial autonomy and reducing internal information leakage.
Various studies on the influence of the capital structure on the performance of the
company have actually been conducted before. Some use data in different industrial
sector sizes (Nasimi & Nasimi, 2018; Ullah et al., 2017; Braik & Messar, 2018; Le &
Phan, 2017; Abdullah& Tursoy, 2019; H Abdullah & Tursoy, 2021; Islami & Iqbal,
2022) and some use of country-scale data (Ramli et al., 2018; Riaz et al., 2022; Le &
Phan, 2017).
The performance of an organization is very sensitive to the type of capital
structure adopted by the company. Nasimi & Nasimi (2018) and Ullah et al. (2017)
conducted an experiment on Pakistani textile industry companies and found that if a
company manages the appropriate capital structure, it can improve the company's
financial performance. Braik & Messar (2018), employed 15 banks listed on the
Amman Jordan Stock Exchange (ASE) between 2002 and 2015. The results show a
significant positive impact of capital on the bank's operations as a whole. This implies
that jordanian banks profitably rely more on debt as their main source. Ramli et al.
(2018), used companies in Malaysia and Indonesia from 1990 to 2010. The results
showed that only the Malaysian sample had a significant positive correlation
between solid leverage and solid financial performance. Malaysian companies use
external finance instead of internal funding to improve performance.
The Covid-19 pandemic has caused an economic crisis, not only in Indonesia but
also in the world. According to Khodavandloo et al. (2017), the global financial crisis
provides an opportunity to consider the effect of the crisis on the relationship
between the apital c structure and the performance of the company (2007-2009).
Research shows that leverage had a strong negative impact on the activities of
companies during the economic crisis of 2007-2009 in trading and service companies
in Malaysia. According to Akgü n &Memiş Karataş (2020), in Europe, the capital
structure also had a negative impact on the company's activities during the economic
crisis of 2008.
This study is different from others, in which it looks at the effects of capital
structures on a company's operations in conditions of economic crisis due to the
covid-19 outbreak, specifically in 2020-2021. This research model refers to the
model carried out by (Basit & Hassan (2017); Nasimi & Nasimi (2018)) but made a
few modifications.
IV. Hypothesis
Various studies regarding the influence of the capital structure on the performance
of the company have been conducted before. Some use industry scale data and some
use country scale data and some even compare between different countries. This
study uses sector industry data by taking the years 2020 and 2021 when there was
an economic crisis due to the Covid-19 case. The hypotheses of this study are:
Q1: The capital structure affects the company's performance during the Covid-19
pandemic.
Q2: The capital structure affects the company's performance in the first and second
years of the Covid-19 pandemic.
V. METHODOLOGY
5.1 Research design
This study uses a model that has been carried out by Basit & Hassan (2017) and
has been slightly revised. In Basit & Hassan (2017), the capital structure used is debt
and equity. The performance of the company is increased by size, earnings per
share, return on assets, return on equity and marketing. In this study, we slightly
modified the variables used. The capital structure is driven by the ratio of debt,
equity and debt to equity. The company's performance is driven by earning per
share, return on assets, return on equity a net profit margin nd. The data used in this
study are data for 2020 and 2021, where the Covid-19 pandemic is currently
occurring.
The basic research model follows equation 1, and the basic research design can be
seen in Figure 1. Variable Y is the performance of the company, and X is the capital
structure. The company's performance used in this study is Earnings per Share,
Return on Assets, Return on Equity, and Net Return. While the capital structure used
in the study is debt, equity and Debt Equity Ratio. The model of this fundamental
equation evolved into equations 2, 3, 4 and 5. The study design can be seen in Figure
2.
Y = b0 + b1X + e .......... (1)
Figure 1. Research design
EPS = β0 + β1 Debt + β2 Equity + β3 DER + ε .......... (2)
ROA = θ0 + θ1 Ofbt + θ2 Equity + θ3 DER + ε .......... (3)
ROE = α0 + α1 Ofbt + α2 Equity + α3DER + ε.......... (4)
NPM = γ0 + γ1 Debt + γ2Equity + γ3DER + ε.......... (5)
Figure 2. The impact of the capital structure on the activities of
companies

This study will also compare the influence of the capital structure on the
company's performance in the first year of the Covid-19 epidemic with the second
year of the Covid-19 outbreak.
5.2 Research methods
This study will look at the influence of capital selection decisions on the activities
of companies in the industrial sector in Indonesia during the first and second years of
the Covid-19 case. The independent variables used are Debt, Equity, and Debt-to-
Equity Ratio (DER). While the dependent variable used is the company's
performance, namely Earnings per Share (EPS), Return on Assets (ROA), Return on
Equity (ROE), and Net Return (NPM). This study will also look at how capital
structure decisions affected the company's operations at the beginning of Covid-19
(in 2020) and the second year of Covid-19 (in 2021).
This study will look at how capital selection decisions affect the performance of
companies in the industrial sector. This study was processed using the eviews
program, using the Usual Minimum Square (OLS), Fixed Effects (FE), and Random
Effects Model. Then, from the three models, the most suitable one was selected using
the Chou test, the Hausman test, and the Lagrange Multiplier (LM) test. The data
processing results generated a stochastic effects model used in this study.
Table 1. Variable definition
Not Variable Devinisi ·
 1 EPS Earnings per share is profit per share.
2 ROA Return on assets is the profit from the assets used by the
company.
3 ROE Return on equity is the return on equity.
4 NPM · The net profit margin is the percentage of net profit.
5 Debt Debt is the total amount of debt owed by the company.
6 Equity Equity is the amount of capital from a stock.
7 EVERY The debt-to-equity ratio is the ratio between the total debt
and the capital of the company.

5.3 Data collection methods

The data used in this study are secondary data. The data is taken from the
annual reports of industrial companies obtained from IDX, namely for 2020
and 2021.
Population and sampling
This study uses data from companies that have been listing shares since covid-19
started in Indonesia, specifically in 2020 and also in 2021. The companies used are
industrial sector companies. The data used is dashboard data, which includes a
combination of years (2020 and 2021) and a combination of companies in the
industrial sector. There are 55 companies engaged in the industry registered in
Indonesia. There are 41 companies with complete data for 2020 and 2021. So, the
total number of data is 82.
VI. RESULTS AND DISCUSSION
A summary of the data used in this study can be seen in table 2. During covid-19,
company debt in the industrial sector averaged
7.097 trillion rupiah. In the second year of Covid-19, the capital of companies in
the debt-derived industrial sector rose from an initial average of 7.044 trillion rupiah
to 7.150 trillion rupiah. Capital from shares, on average, also increased, from 8.719
trillion rupiah to 9.799 billion. The average capital of companies in the industrial
sector is 9.259 trillion rupiah. The average debt-to-equity ratio is 1,772. The debt-
to-equity ratio also saw an increase from 1,691 to 1,852. This shows that in the first
and second years of Covid-19, the capital structure of companies in the industrial
sector uses more capital from stocks than from debt.

The company's performance is reflected in the fact that earnings per share rose in
the second year of covid-19, initially at 48,221 rupiah to 145,686 rupiah. The rate of
return on assets in the second year of Covid-19 cases rose from 0.003 to 0.039. The
average return on equity for the first and second years of covid-19 was -0.009. In
2000, the average Return on Equity was -0.044, and in 2021 it increased by 0.026.
The average NPM of companies in the industrial sector in the first year of Covid-19
was negative, which meant that the company incurs a loss. Meanwhile, in its second
year, NMP's average number of Covid-19 cases rose to 0.019, meaning the average
company has begun to adapt, grow and make a profit. However, the average NPM in
2020 and 2021 still showed a negative value of -0.028.
Table 2. Descriptive statistics

DEBT EQUITY EVERY EPS ROA ROE NPM

In 2020 and 2021
Average 7.097 9.259 1.772 96.954 0.021 -0.009 -0.028
Median 0.579 0.714 0.700 12.715 0.020 0.035 0.030
Maximal 152.663 209.556 16.330 2794.260 0.310 0.520 0.400
Minimum 0.007 0.028 0.080 - -0.170 -0.930 -1.100
2006.660
Developer 23.990 32.954 2.919 482.412 0.077 0.227 0.248
Std.
2020
Average 7.044 8.719 1.691 48.221 0.003 -0.044 -0.075

Median 0.579 0.744 0.660 5.890 0.010 0.010 0.020

Maximal 146.239 195.025 16.330 1908.160 0.200 0.340 0.350

Minimum 0.007 0.028 0.080 - -0.170 -0.930 -1.100

2006.660
Developer 23.649 31.829 2.719 481.735 0.074 0.215 0.279
Std.
2021
 Average 7.150 9.799 1.852 145.686 0.039 0.026 0.019

Median 0.579 0.685 0.720 20.710 0.030 0.050 0.060

Maximal 152.663 209.556 16.330 2794.260 0.310 0.520 0.400

Minimum 0.010 0.035 0.080 -443.010 -0.110 -0.930 -0.540

Developer 24.620 34.431 3.137 484.069 0.077 0.235 0.205
Std.

Debt and Equity in trillion rupiah, EPS in rupiah, DER, ROA, ROE and NPM.

Table 3, answering the first hypothesis, considers the influence of the capital
structure of companies in the industrial sector on the performance of the company.
This test was carried out based on data from the first and second years of Covid-19
cases occurring in industrial panies in Indonesia. In the table, the numbers shown
show the coefficient values, while the numbers in brackets indicate important values.
The company's capital derived from debt has a negative impact on earnings per
share. Meanwhile, equity has a positive effect on earnings per share during Covid-19,
meaning that companies with larger equity ratios will generate higher earnings per
share.
The Debt-to-Equity ratio has a negative impact on Return on Assets. The higher the
debt, the smaller the profit from the management of the company's assets. The value
of return on equity is also strongly influenced by the Debt-to-Equity Ratio. The
average debt-to-equity ratio is 1,772, indicating that the company's average capital
derived from debt is about 1.8 times greater than equity. The value of the debt-to-
equity ratio has a negative impact on the Return on Equity. The Debt-to-Equity ratio
also has a negative impact on net profit margins.
Table 3. The influence of the capital structure on the company's
performance in 2020 and 2021
EPS ROA ROE NPM
Debt -40.030 (0.015) -0.003 0.002 -0.009
**
(0.334) (0.689) (0.285)
Equity 33.706 0.002 -0.001 0.008
(0.005) *** (0.299) (0.734) (0.227)
 E/E 1.405 -0.008 -0.062 -0.023
(0.943) (0.039) ** (0.000) *** (0.055) *
R2 · 0.165 0.092 0.498 0.097
* Means significantly less than 10%
**Means significantly less than 5%
***Means significantly less than 1%

Table 4. answering questions from hypothesis 2. In the table, the numbers shown
show the coefficient values, while the numbers in brackets show the meaningful
values. In the first year (2020) of Covid-19, the company's equity and debt greatly
affected Earning per share. Debt has a negative impact, while equity has a positive
impact on Earnings per Share. Meanwhile, in the second year of Covid-19, only Equity
had a positive impact on Earnings Per Share. In the first year of Covid-19, no
independent variables were used in this study that affected Return on Assets. The
average value of ROA in the first year is 0.003. This suggests that during an economic
crisis, the return on assets is not affected by the capital structure, but by how the
company manages the existing assets. Whereas in the second year, the Debt-to-
Equity ratio has a negative impact on Return on Assets.
In the first and second years of Covid-19 cases, the Rate of Return on Equity is
affected by the Debt-to-Equity ratio. In the first year of the Covid-19 case, the Net
Profit Margin was not affected by the independent variables used in this study. The
average value of the Net Profit Margin shows a value of -0.075. This indicates that
the average industrial company in Indonesia suffers losses. Meanwhile, in the second
year of Covid-19, the Net Profit Margin value is affected by the Debt-to-Equity Ratio.
This value has a negative effect on the Net Profit Margin. In the second year of the
Covid-19 case, the average industrial pany com has received back its profit, which is
0.019.
Table 4. Comparison of the influence of the capital structure on the company's
performance in 2020 and 2021
Year EPS ROA ROE NPM ·
2020 Debt -66.042 -0.004 0.000 -0.008
(0.009) *** (0.291) (0.987) (0.603)
 Equity 53.561 0.003 0.000 0.007
(0.005) *** (0.254) (0.937) (0.524)
E/E 5.920 -0.005 -0.058 -0.018
(0.824) (0.225) (0.000) *** (0.291)
R2 0.264 0.113 0.564 0.080
2021 Debt -30.124 -0.001 0.005 -0.009
(0.131) (0.710) (0.446) (0.253)
Equity 26.229 0.001 -0.004 0.007
(0.069) ** (.701) (0.442) (0.224)
E/E 1.396 -0.008 -0.0612 -0.022
(0.956) (0.061) * (.000) *** (0.037) **
R2 0.184 0.125 0.620 0.214
* Means significantly less than 10%
**Means significantly less than 5%
***Means significantly less than 1%

VII. FINISH
Covid-19 has caused significant changes in different sectors. Indonesian industrial
companies, on average, suffer losses in the first and second of COVID-19. The
average value of the Net Profit Margin of Industrial Companies is -0.028. in the first
year of covid-19, the average Net Profit Margin value was -0.075. In the second year
of covid-19, the average value of the Net Profit Margin increased to 0.019.
The results of this study show that debt and equity affected Earnings per share in
2020-2021 and 2000. Meanwhile, in 2021, only equity affected Earnings per Share.
Debt has a negative impact, while equity has a positive effect on Earnings per share.
The Debt-to-Equity ratio has a negative impact on Return on Assets, Return on
Equity, and Margin Net Profit in 2020-2021 and 2021. Meanwhile, in 2020, the debt-
to-equity ratio only affected the return on equity.
In the second year of Covid-19, the average value of the dependent and
independent variables used increases. Even the company's net profit margin, which
initially lost in the first year of Covid-19, was profitable in its second year. In the
second year of covid-19, the company was able to adapt to the situation. In addition,
this also shows good cooperation in handling Covid-19 from various parties. Starting
with the government, health services, the community and others involved in covid-
19. Leaving the company in the second year of the covid-19 period can improve
performance and increase net profit margin value.
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