Does Profitability Drive Firm Value through Capital Structure? An Empirical Test of the Pecking Order Theory in Healthcare Firms
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Abstract
This research investigates how capital structure functions as a mediator between profitability and firm value, drawing on data from 24 healthcare firms listed on the Indonesia Stock Exchange across four years, yielding 96 observations in total. A pooled OLS approach was applied to assess the general associations among the three variables profitability, capital structure, and firm value without accounting for differences across firms or over time. Findings reveal that profitability positively influences firm value, yet it negatively affects capital structure, a pattern consistent with the Pecking Order Theory (POT), where firms lean toward internal funds rather than external debt. Capital structure itself is found to negatively impact firm value, implying that companies carrying heavier debt loads tend to be valued lower by the market. In addition, the analysis confirms that capital structure serves as a significant mediating variable linking profitability to firm value. Collectively, these results reinforce the applicability of POT within the healthcare industry of an emerging economy and underscore how retained earnings remain the preferred funding source for firms in this sector. What sets this study apart is its focus on the mediating function of capital structure specifically within Indonesia's healthcare industry.
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