Effect of Solvency on Capital Structure

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c. Effect of Solvency on Capital Structure

When a company has a high solvency, these companies have to lower the cost of financial difficulties. So for companies that have high solvency, tax shield effects must be invaluable. As a result, from the point of view tax shield effects and low distress costs, theoretically, a high solvency company can borrow more and has a high debt ratio Tsuji, 2013. From the standpoint of agency costs Jensen suggests companies that have high solvency, the tendency to face the problem of free cash flow is severe and should have more debt must be disciplined by debt. So according to the agency theory, the ideal relationship between the companys solvency and debt ratios must be positive Tsuji, 2013, d. Effect of Firm Size on Capital Structure The size of the company describes the companys assets. Large companies, has total assets greater. Companies with total assets of large, enabling the company to obtain external funding. That is because the confidence of creditors and investors increased in companies with total assets were great. A large company has total assets were great. In every operation of a company, a large company that has a lot of funding needs that need to be channeled to support its operations. The larger the company, the greater the external funding needed. Conversely, the smaller the company the less external funding needed by the company Nugrahani Sampurno, 2012. 48

B. Previous Research

Research conducted Kajananthan, 2013 with the title of research Liquidity and Capital Structure: Special reference to Sri Lanka Telecom Plc indicates that liquidity has a significant impact on the debt to equity in the capital structure. Chikashi Tsuji 2013 with the title of research Corporate Solvency and Capital Structure: The Case of the Electric Appliances Industry Firms of the Tokyo Stock Exchange shows that there is a negative relationship between the companys solvency capital structure of Electric Appliances Industry Firms of the Tokyo Stock Exchange. In the study conducted by Devi Yovin and Ni Putu Santi Suryantini 2012 with the title of Factors Influencing Capital Structure Of Foods And Beverages At Company Listed on the Indonesian Stock Exchange indicates that the variable asset structure and size of the company and significant positive effect on the capital structure, while profitability has negative and significant effect on the capital structure with the value t count t table.