E-Journal of Tourism Vol.10. No.1. (2023): 13-21 http://ojs.unud.ac.id/index.php/eot 13 e-ISSN 2407-392X. p-ISSN 2541-0857 The Effect of Firm Size and Sales Growth on The Capital Structure and Financial Performance of The Tourism Industry in Indonesia Ida Ayu Putri Widawati* Master Applied of Tourism Program, Bali Tourism Polytechnic *Corresponding Author: putri7widawati@gmail.com DOI: https://doi.org/10.24922/eot.v10i1.97496 Article Info Submitted: January 30th 2023 Accepted: March 5th 2023 Published: March 30th 2023 Abstract The purpose of this study is to examine the effect of firm size and sales growth on the capital structure on the tourism industry and the effect of firm size, sales growth, and capital structure on the financial performance of a firm in the tourism industry that is listed on the Indonesia Stock Ex- change (IDX). The sampling technique used a purposive sampling method for the tourism industry companies based on the determined cri- teria; 21 tourism industry companies that were listed on the Indonesia Stock Exchange in the 2013–2016 period were selected as samples. This research applies a classic assumption test and the multiple regression analysis technique using statistic test on Statistical Package for Social Science (SPSS) version 20. The results of the analysis indicate that firm size has a positive influence on a firm's financial performance; mean- while, the capital structure has a negative effect on financial performance. Sales growth was found to not have any influence on the financial perfor- mance. Similarly, firm size and sales growth did not have any effect on the capital structure. Keywords: firm size; sales growth; capital structure; financial perfor- mance. INTRODUCTION Background The growth of the business environ- ment and the more intense competition in the business society require a firm to be able to develop its business. In the effort to develop such a business, besides by con- ducting operation performance evaluation, marketing, and product development, the firm shall pay attention to the financial or capital aspect to fund its development. The capital structure is a funding composition through equity and debt fund raising (Mo- digliani and Miller, 1963). The option of the capital structure is a variation of the two funding categories and varies in each firm. In a relatively new firm, funding sources generally rely on retained earnings and depreciation (Myers and Majluf, 1984). When the firm is settled or its posi- tion in the industry is strong enough, the business owners typically start thinking of conducting business expansion. In that pe- riod, the firm will incur a significant ex- pansion cost. Therefore, debt fund raising can be a strategic alternative. A firm with a high growth rate cer- tainly requires funding in a large amount to cover firm operational activity. Such funds http://ojs.unud.ac.id/index.php/eot E-Journal of Tourism Vol.10. No.1. (2023): 13-21 http://ojs.unud.ac.id/index.php/eot 14 e-ISSN 2407-392X. p-ISSN 2541-0857 requirement can be covered by one of the firm's external fund sources, which offer debt. Leverage is an important factor that affects profitability because leverage can be used by a firm to increase its capital in the effort to increase profit (Singapurwoko, 2011). Firm size, whether big or small, can be measured from the level of sales vol- ume, number of permanent employees, and the assets value; however, in this study, firm size is measured using the firm value, which also has a potential correlation with the amount of debt in a firm's capital struc- ture. Barclay et al. (2003) found that firm size positively affects leverage. The larger the firm size, the higher the chance of the firm to decide to fund itself using debt. Ja- celly Cespedes et al. (2010) and Margaritis et al. (2010) found that ownership concen- tration positively affects leverage; more concentrated share ownership will result in a larger amount of debt in the capital struc- ture. A large firm typically has a higher asset value and wide asset diversification so that the firm will generate large profits. It is in accordance with the statement that a large firm gives promise of a better finan- cial performance (Lin, 2006). Financial performance is a result or an achievement of a firm in managing finance effectively and efficiently. Calisir et al. (2010) also found that firm size positively affects a firm performance in the information and communication technology sector in Tur- key. By contrast, Huang (2002) found that there was no effect of firm size on the per- formance of Taiwan firms located in China. Similarly, Talebria et al. (2010) found no effect of firm size on the perfor- mance of companies listed in the Tehran Stock Exchange. A firm of a large economic scale has more capability in the effort to expand its market share and to diversify its products; therefore, it requires larger funding, and such funding requirement can be covered by adding a debt amount (leverage). Bar- clay et al. (2003) found that firm size has a positive effect on leverage. The larger the firm size, the higher the chance of the de- cision to use debt funding. The success of a firm in conducting promotion can increase sales of the product provided, like a tourism firm such as a ho- tel conducting promotion continually, im- proving the quality of product and service to increase the room occupancy rate and then be able to increase other sales such as food and beverage sales. Thies and Klock (1992) found that the increase of sales will result in a decrease of debt usage. Increase of sales increases cash inflow; therefore, the requirement of more debt will decrease. Thus, a decrease in sales will make it diffi- cult to obtain funding from debt because the economic condition (market) will be undesirable (subdued). Sales growth will affect firm perfor- mance. If the sales growth decreases, it will result in a decrease of firm profit. Sales are the most important element in evaluating firm profitability and the key indicator on firm activity (Andrayani, 2013). Sales growth can be defined as an increase in the number of sales from year to year or time to time (Kennedy and friends, 2013). Sales growth indicates strategic success for the firm, because the sales growth rate is re- flected by an increase in the firm's market share, which will affect the increase of sales from the firm and thus increase firm profitability (Pagano and Schiavardi, 2003). The positive and significant effect of sales growth on profitability was demonstrated by research conducted by Hastuti (2010), Jang and Park (2011), Han- sen and Juniarti (2014), and Iqbal and Zhuquan (2015). Meanwhile, Sunarto and Budi (2009), Nugroho (2011), Santoso and Juniarti (2014), and Sari et al. found differ- ent results, that is, sales growth has a neg- ative effect and does not have a significant effect on firm profitability. http://ojs.unud.ac.id/index.php/eot E-Journal of Tourism Vol.10. No.1. (2023): 13-21 http://ojs.unud.ac.id/index.php/eot 15 e-ISSN 2407-392X. p-ISSN 2541-0857 Financial performance indicates the success of a company in making a profit. Brigham and Houston (2001) stated that fi- nancial leverage was an alternative that can be used to increase the profit margin. Debt usage in investment as additional funding to fund a firm asset is expected to increase firm profit, because a productive asset was used to obtain profit. However, dividend distribution to equity holders becomes larger (Brigham and Houston, 2001), but the larger usage of leverage results in higher interest rates (Brigham and Gapen- ski, 1997). If interest rates were too high while operation profit was not large enough to cover the interest rates, then a firm's performance will decrease. By con- trast, the interest rate is a tax reduction that can increase firm value (Brigham and Gapenski, 1997). In this case, debt can in- crease performance. If the firm whose re- quire fund adding number of equity, then there is no tax reduction because equity rates do not reduce tax. Correlation be- tween leverage and firm profit has been studied by a number of researchers, such as Bouresli (2001) and Lin (2010), who found that the ratio of debt to the number of assets negatively affects firm performance, but Calisir et al. (2010) found a positive effect. Previous research mostly examined the manufacturing industry, whereas this re- search examines the tourism industry, which has different characteristics from those of the manufacturing industry. The tourism industry is very vulner- able to global issues such as security is- sues, disease issues, and global economic conditions and the asset structure that most of them have. It is a fixed asset and is an industry that requires a relatively large workforce. The tourism business fluctuates seasonally. In restaurant services, for ex- ample, the funds for the procurement of raw materials are converted into products so that they take a relatively short time and returns to cash. Although the tourism and manufacturing industries offer products according to consumer expectations, the tourism industry requires distribution channels that are faster than those of man- ufacturing companies. This situation cer- tainly implies that factors that influence the capital structure and financial performance of this industry are different from factors that influence those of the manufacturing industry. From previous research, it appears that the results of the study are still not con- sistent, as there are still contradictory re- sults. In Indonesia, generally put less atten- tion to capital structure composition; as long as they obtain trust from a bank, they will add more debt although the ratio of the debt proportion compared to owned capital is not sufficient. Therefore, it is important to analyze whether the large or small size of a firm and the firm's capability to in- crease sales, reflected by capability to compete in market, affect the firm's capital structure and profit obtained. The purpose of this study is to examine the effect of firm size and sales growth on the capital struc- ture and the effect of firm size, sales growth, and capital structure on the finan- cial performance of firms in the tourism in- dustry that are listed on the Indonesia Stock Exchange (IDX). Research Objectives The purpose of this study is to exam- ine the effect of firm size and sales growth on the capital structure and the effect of firm size, sales growth, and capital struc- ture on the financial performance of firms in the tourism industry that are listed on the Indonesia Stock Exchange (IDX). LITERATURE REVIEW Financial Performance Profitability is one of the indicators used to measure a firm's performance. Profitability of a firm indicates the firm's capability to obtain profit in a certain http://ojs.unud.ac.id/index.php/eot E-Journal of Tourism Vol.10. No.1. (2023): 13-21 http://ojs.unud.ac.id/index.php/eot 16 e-ISSN 2407-392X. p-ISSN 2541-0857 period in sales rates, asset rates, and certain capital shares (Niresh, J. et al., 2014). The indicator used to measure a firm's profita- bility rate in this study is return on asset (ROA). Several reasons can be put forward by researchers for why ROA is chosen (Horne & Wachowicz, 2009): (1) It is com- prehensive, can be used to measure the ef- ficiency of capital use, product efficiency, and sales efficiency. (2) If a company has industry data, ROA can be used to measure industry ratios, so that it can be compared with other companies. (3) ROA can be used to measure the profitability of each product of the company. (4) ROA can be used as a control function and a planning function. (5) ROA can be used to measure the efficiency of the performance of each division. Firm Size The size of the company can be measured by the size of the sales volume, the number of workers it has, and its asset value; however, in this study, the size of the company is measured using the compa- ny's value. Barclay et al. (2003) found that firm size has a positive effect on leverage. Wimelda and Marlina (2013) and Rahman and Trianni (2013) stated that company size has a positive effect on a company's capital structure. The larger the company size, the more likely the decision to finance using debt. Large companies that have large economies of scale have more ability to expand the market, diversify their prod- ucts so that they need more funds, and cover the need for these funds by increas- ing the amount of debt (leverage). The higher the sales growth, the higher the company's profitability or finan- cial performance. Sales growth has an im- portant role in working capital manage- ment. By knowing how much its sales growth is, a company can predict how much profit it will make (Livia, 2013). Brigham and Houston (2001: 39) stated that company profits can be increased by stabilizing the company's sales value. Large companies are more promising with respect to good performance (Lin, 2006). Lin (2006) and Wright et al. (2009) found that firm size has a positive effect on per- formance. Calisir et al. (2010) also found a positive effect of firm size on the perfor- mance of companies in the information and communication technology sector in Tur- key. H1: Firm size has a positive effect on lev- erage. H2: Firm size has a positive effect on fi- nancial performance. Sales Growth Companies with high growth cer- tainly require large funds to finance their company's operational activities. The need for these funds can be met using one of the external sources of funds, namely debt. When the sales growth rate is positive, companies tend to take debt to increase their production and sales capacity (Priam- bodo et al., 2014). By contrast, sales growth also has an impact on company performance. If sales growth decreases, it will have an impact on decreasing company profits. Sales are the most important element in assessment of the profitability of a company and are the main indicator of company activities (An- drayani, 2013). Sales growth can be de- fined as an increase in the number of sales from year to year or from time to time (Kennedy et al., 2013). Sales growth indi- cates a very strategic success for a com- pany because it is marked by an increase in market share, which has an impact on in- creasing sales of the company, thus in- creasing the profitability of the company (Pagano and Schivardi, 2003). The positive and significant effect of sales growth on profitability is evidenced by the results of research by Hastuti (2010), Jang and Park http://ojs.unud.ac.id/index.php/eot E-Journal of Tourism Vol.10. No.1. (2023): 13-21 http://ojs.unud.ac.id/index.php/eot 17 e-ISSN 2407-392X. p-ISSN 2541-0857 (2011), Hansen and Juniarti (2014), and Iq- bal and Zhuquan (2015). H3: Sales growth has a positive effect on leverage. H4: Sales growth has a positive effect on financial performance. Leverage If related to firm value, in certain limit, debt usage will increase firm value through the larger savings on revenue tax compared to distress cost and agent fee. By contrast, in a certain limit, debt usage will decrease firm value, because of the imbal- ance between profit from revenue tax sav- ings and the amount of distress cost and agent fee (Brigham and Gapenski, 1997). Modigliani and Miller's (1963) con- ceptual framework (mainstream) stated that if the source of capital is debt, it is im- portant for management to consider the cost of debt compared to the benefits of the debt (trade-off theory). With the increase in debt, the company obtains funds to be able to develop its business so that it can obtain additional profits. The capital structure in this study is measured using the amount of debt in its capital structure (leverage) such as the debt-to-equity ratio or the ratio of debt to total capital owned by the company. Lev- erage is one of the important factors that affect profitability because leverage can be used by companies to increase their capital in an effort to increase profits (Singapur- woko, 2011). H5: Leverage has a positive effect on fi- nancial performance. METHODS The population of this study was 25 tourism industry firms listed on the IDX (Bursa Efek Indonesia) from 2013 to 2016. From this population, the sample was se- lected using the purposive sampling method using the following criteria: (1) published consistent financial statement from 2013 to 2016 and (2) have debt. All tourism industry firms that met such crite- ria, 21 companies, were taken as the re- search sample. Data collection techniques are obtained through secondary data col- lection in the form of annual reports of companies including the tourism industry listed on the IDX from 2013 to 2016. Data were analyzed using double regression analysis. Research model: Lev = b01 + b11 × [ Size] + b12 × [SGr] + e1 Pro = b01 + b11 × [ Size] + b12 × [SGr] + b13 × [Lev] + e1 Lev = Leverage Pro = Profitability b01 = Intercept b11, b12, b13, = Parameters e1 = Error term RESULT AND DISCUSSION Result Table 1. Hypothesis Test Result Variable Regression Coefficient T value Sig. 1 (Con- stant) .289 −1.107 .272 Size .018 1.866 .066 SGr .010 −0.461 .646 a. Dependent Variable: Leverage; Source: Data analysis results Table 2. Hypothesis Test Result Variable Regression Coefficient T value Sig. 1 (Con- stant) .37.625 −3.113 0.003 Size 1.727 3.928 .000 SGr Leverage .544 −8.521 .533 −3.017 .596 0.003 b. Dependent variable: Profitability; Source: Data analysis result http://ojs.unud.ac.id/index.php/eot E-Journal of Tourism Vol.10. No.1. (2023): 13-21 http://ojs.unud.ac.id/index.php/eot 18 e-ISSN 2407-392X. p-ISSN 2541-0857 Lev = 0.289 + 0.018 [Size] + 0.010 [SGr] + e1 Pro =1727 + 0.544 [Size] + 0.544 [SGr]- 8.521 [Lev] + e1 To prove the first hypothesis, that is, size has a positive effect on leverage, the regression coefficient significance is tested using the student’s t-test. The t value was calculated using the Statistical Package for Social Science (SPSS) version 20 for Win- dows program. The t value of the firm size variable (Size) is 1.866 with a significance of 0.066, which is greater than α = 0.05, meaning that size does not have a signifi- cant effect on leverage. So, H1 is rejected. Table X indicates that the t value of the firm size variable (Size) is 3.928 with a sig- nificance of 0.000, less than α = 0.05, meaning that size has a significant effect on profitability. Thus, H2 is accepted. The greater the size of the company, the more positive is its effect on the level of profita- bility generated by the company. To test the third hypothesis, that is, sales growth (SGr) has an effect on lever- age, the regression coefficient significance was tested using the t-test. The table above indicates that the t value of the sales growth variable (SGr) is −0.461 with a signifi- cance of 0.646, which is greater than α = 0.05, meaning that H3 is rejected; thus, sales growth has no significant effect on leverage. To test the fourth hypothesis, that is, sales growth (SGr) has a positive effect on profitability, the regression coefficient sig- nificance test was carried out using the t- test. The table above indicates that the t value of the company growth variable (size) is 0.533 with a significance of 0.596, which is greater than α = 0.05, meaning that the null hypothesis, that is, sales growth has no significant effect on profita- bility, is accepted. This does not support the alternative hypothesis developed (H4), that sales growth has a positive effect on profitability. To prove the fifth hypothesis, that leverage (capital structure) has a positive effect on financial performance (profitabil- ity), the regression coefficient significance was tested using the t-test. The t value was calculated using the SPSS version 20 for Windows program. The table above indi- cates that the t value of the leverage varia- ble is −3.017 with a significance of 0.003, less than α = 0.05, meaning that leverage has a significant negative effect on finan- cial performance, inversely proportional to H5, that leverage has a positive effect on financial performance; thus, H5 is rejected or not supported empirically. Discussion The foregoing result of regression analysis indicates that none of the two var- iables whose effect on leverage was ana- lyzed, firm size and firm growth rate (SGr), had a significant effect. In this case, large or small firms in the tourism industry did not effect on decision whether it will add firm debt, which the bigger firm did not warrant that the firm increase the amount of debt. This occurred because a larger firm possibly has better cash flow; therefore, such a company does not need larger fund- ing through debt. As increase of sales did not increase leverage, increase of sales did not require capital to increase the company's produc- tion capacity, because of the nature of the tourism industry, that is, businesses that provide the hospitality service are domi- nated by physical assets such as buildings and other fixed assets. In this case, an in- crease in sales of the service provided rel- atively did not require funding to cover the increase of service requirement and thus increase such sales; these aspects distin- guished the tourism industry and the man- ufacturing industry from other industries. In the manufacturing industry, increasing sales can affect leverage on source require- ment to increase production. The results of this study are supported by Abdulkader et http://ojs.unud.ac.id/index.php/eot E-Journal of Tourism Vol.10. No.1. (2023): 13-21 http://ojs.unud.ac.id/index.php/eot 19 e-ISSN 2407-392X. p-ISSN 2541-0857 al., (2005), who found that firm size does not have a significant effect on leverage. Ghassan al Thaleb et al. (2010) found that size had no effect on leverage. Effects on three variables such as firm size, the firm growth rate (SGr), and leverage on obtained profitability rate. Found that size has positive effect on the firm profitability rate; the larger the firm size, the higher the firm's capability to make profit. This supports hypothesis and previous research results, such as those of research conducted by Lin (2006) and Wright et al. (2009), who found that firm size has a positive effect on performance. Sales growth in this study did not have a significant effect on firm profitability; this could be, first, because the change in sales was not sufficiently high and thus did not result in an increase in firm profitability. Second, marginal cost expended could have approached marginal revenue, and the profit, thus, did not change much. This research result supports previous research that was conducted by Sunarto and Budi (2009), Nugroho (2011), Santoso and Juniarti (2014), and Sari et al. (), who found the same result, that sales growth has no significant effect on company profitability. Leverage was found to have a signif- icant negative effect on firm profitability; this means that higher leverage will result in a decrease in a firm's financial perfor- mance. This result can be explained by the phenomenon that the amount of firm lever- age on average exceeds the equity value, indicating the firm's encumbrance on debt incurred that is already an encumbrance, which, therefore, does not allow an in- crease in firm profit because of the large amount of interest. This research result supports previous research that was con- ducted by Bouresli (2001) and Lin (2010), who found that the ratio of debt to total as- sets has a negative effect on firm perfor- mance. CONCLUSION Characteristics of companies in the tourism industry in Indonesia do not spe- cifically influence the companies' decision to take on debt in positioning their capital structure in terms of company size and sales growth. This is because the character- istics of the tourism industry that conducts hotel service business activities are domi- nated by physical assets such as buildings and other fixed assets. Meanwhile, the size of a tourism company has a role in driving the company's performance as seen from the size of the company's profitability, where the larger the company's size, the greater the company's ability to earn a profit. Then, sales growth is not significant in affecting the company's profitability be- cause the change in sales may not be high enough, so it does not result in an increase in company profitability. The second possibility is that the marginal cost incurred is probably so close to the marginal revenue such that the profit does not change much. On the side where sales growth cannot increase high profita- bility, the company is not brave in making debt decisions. This is because the higher the leverage, the lower the company's fi- nancial performance. The amount of lever- age that exceeds the total equity value in- dicates that the company is burdening the amount of debt it has incurred so that it cannot increase its profit because of a large amount of interest. In accordance with the result and limitation of research which was previ- ously presented, future research can be suggested based on the results of the pre- sent study, which evaluated effects of dif- ferent factors on a firm's capital structure and profitability rate and found that the variables did not have significant effects; it is an open call for other researchers to study it further. In accordance with knowledge development, knowledge of factors that affect capital structure and http://ojs.unud.ac.id/index.php/eot E-Journal of Tourism Vol.10. No.1. (2023): 13-21 http://ojs.unud.ac.id/index.php/eot 20 e-ISSN 2407-392X. p-ISSN 2541-0857 profitability is developing; therefore, to en- rich the financial management study, simi- lar research with the addition of a tested variable effect on the debt structure (lever- age) capable of broadening research results should be conducted to advance previous research. This study only analyzed and pre- dicted effects of firm size and sales growth on leverage; in addition, effects of firm size, sales growth, and leverage on firm profitability in firms in the tourism indus- try that are listed on the IDX over the 2014–2016 period. In future research, other variables can be studied to determine whether they affect leverage and profitabil- ity itself ACKNOWLEDGEMENT I would like to express my deep grat- itude to Professor Bambang Purwanto for comments and helpful suggestions. Profes- sor Yasraf my research supervisors, for their patient guidance, enthusiastic encour- agement, and useful critiques of this re- search work REFERENCES Andrayani, Ni Putu Devi. 2013. Pengaruh Pertumbuhan Penjualan, Ukuran Perus- ahaan, dan Tangibility Assets Terhadap Struktur Modal pada Perusahaan Asur- ansi yang Terdaftar di Bursa Efek Indo- nesia. Skripsi. Sarjana Jurusan Mana- jemen Fakultas Ekonomi dan Bisnis Universitas Udayana Bali. Barclay M.J. Marxs L.M. 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