Non-Linear Effects of Leverage on Firm Value: Moderating Role of Size and Liquidity
DOI:
https://doi.org/10.35591/wahana.v29i2.994Keywords:
Accounting-Based Firm Value, Firm Size, Leverage, Liquidity, Non-Linear RelationshipAbstract
This study investigates the non-linear relationship between leverage and accounting-based firm value, as well as the moderating effects of firm size and liquidity. Based on trade-off theory, leverage is hypothesized to exhibit an inverted U-shaped relationship with performance. The analysis utilizes a balanced panel of 65 consumer goods non-cyclical firms listed on the Indonesia Stock Exchange from 2022 to 2024 (195 firm-year observations), with data compiled directly from audited financial statements and standardized reporting units. Fixed-effects estimation with firm-clustered standard errors, employing ROA and ROE as performance indicators, shows no statistically significant inverted U-shaped relationship between leverage and accounting-based firm value: the quadratic leverage terms are insignificant for both performance measures, and the estimated turning points lie well outside the observed data range. The principal finding is a significant negative linear effect of leverage on ROA. Neither firm size nor liquidity significantly moderates this relationship. Robustness checks using an alternative leverage proxy (DAR) reveal an increasingly steep negative effect at higher debt ratios. The evidence suggests that financing behavior during the observation period is more consistent with pecking order theory than with the interior optimum predicted by trade-off theory, plausibly reflecting the predominance of debt costs over benefits during the high interest rate period of 2022–2024. Consequently, managers of primary consumer goods firms are advised to exercise caution when increasing debt, as additional leverage tends to reduce profitability under elevated funding costs.
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