INTRODUCTION

Capital structure refers to the exact combination of debt and equity

used to finance a company's assets and operations, according to the CFA

Institute's website. Equity is a more expensive, permanent source of financing

with greater financial flexibility from a business standpoint. Debt, on the

other hand, is a less expensive, finite-to-maturity capital source that legally

binds the company to fix promised cash outflows while also requiring the

corporation to refinance at an unknown cost at some point in the future.

The financial model under capital structure is depicted in the diagram

below, which was created using data gathered from a variety of sources. The

masterand has identified these sources as valid data controllers and has put

them together to create a structural model that depicts the key variables in

the capital structure. The first piece of literature published by Mangesti

Rahayu, et al. (2020) is entitled The Reciprocal Relationship between

Profitability and Capital Structure and its Impact on the Corporate Values of

Manufacturing Companies in Indonesia. The purpose of this article was to

look at the reciprocal relationship between profitability and capital structure,

as well as its effects on the corporate values of Indonesian manufacturing

enterprises. Profitability has a negative substantial influence on capital

structure, demonstrating that profitability is a determining factor in

corporate capital structure, according to the data. The data suggest that as

profitability improves in terms of return on investment, return on equity, and

net profit margin, the amount of debt in the capital structures of

manufacturing companies listed on the BEI or Indonesia Stock Exchange

decreases. Another paper collected by the masterand is Qayyum and

Noreen's (2019) study, which looked into the impact of capital structure on

the profitability of Pakistan's Islamic and Conventional Banks. The capital

structures of both types of banks were comparable, except for the size of the

banks, which differed greatly. Furthermore, both conventional and Islamic

banks' capital structures were adversely connected with ROA. The capital

structure of both conventional and Islamic banks, on the other hand, was

positively connected with ROE. Furthermore, for both Islamic and traditional

banks, two explanatory variables were positively connected with EPS, while

two were negatively correlated. Finally, Singh and Bagga (2019) used a panel

data analysis to investigate the impact of capital structure on profitability.

According to the correlations, the debt ratio has a negative impact on ROA

and ROE, although shareholders' equity is directly related to both

performance indicators. Furthermore, the findings of this study are beneficial

to investors, lenders, and corporations. It will also assist financial managers in

determining their ideal capital structure to enhance the firm's worth. The

subsequent study could be industry-specific or focus on a larger range of

companies.
 RETURN ON ASSETS
CAPITAL (Qayyum & Noreen, 2019;
STRUCTURE Singh & Bagga, 2019 PROFITABILITY
(Mangesti (Mangesti Rahayu,
Rahayu, et al., et al., 2020;
2020; Qayyum Qayyum &
& Noreen, 2019; Noreen, 2019;
Singh & Bagga, Singh & Bagga,
RETURN ON EQUITY
2019) 2019)
(Mangesti Rahayu, et al.,
2020; Qayyum & Noreen,
2019; Singh & Bagga,
2019)

Figure 1: Framework of the Model

Research Journal Researchers Year of Abstract Key Points of the
Publication Paper

The Reciprocal Mangesti Rahayu, January 2020 Purpose: The purpose - Profitability has a
Relationship Sri, and Saifi, of this paper is to negative significant
between Muhammad investigate the impact on capital
Profitability and Suhadak structure, implying
reciprocal relationship
Capital Structure that profitability is a
between profitability
and its Impact on deciding element
the Corporate and capital structure in corporate capital
Values of and its impacts on the structure.
Manufacturing corporate values of - The data suggests
Companies in manufacturing that as profitability
Indonesia companies in improves in terms
of return on
Indonesia.
Link: investment, return
https://www.emeral Design/methodology/ on equity, and net
d.com/insight/cont approach This profit margin, the
ent/doi/10.1108/IJPP research is share of debt in the
M-05-2018-0196/ quantitative research capital structures of
full/html using the general manufacturing
structural component companies listed
on the BEI
analysis as the analysis
(Indonesian Stock
tool. This research Exchange)
involved a number of decreases.
manufacturing
companies registered
on the Indonesia Stock
Exchange from 2008
to 2015. Findings
Profitability has a
negative significant
influence on capital
structure, indicating
that profitability is a
determining factor in
the corporate capital
structure. This finding
also implies that the
improvement in
profitability in the
forms of return on
investment, return on
equity and net profit
margin triggers a
decrease in the
proportion of debt
within the capital
structures of
manufacturing
companies registered
in BEI or Indonesia
Stock Exchange.
Originality/value
Previous research only
addressed the one-
way correlation
between profitability
and capital structure,
whereas this research
measured the two-
way correlation and
reciprocal relationship
at the same time. This
research measured
the influences of
profitability and capital
structure on the
corporate value, in
order to find a
consistent finding that
has not been yet
obtained in previous
research. This research
also attempted to find
out whether the use of
the same variables
within different times
and settings (in
Indonesia) leads to
different results. The
inconsistent findings
also motivate the
 researcher to re-
explore the reciprocal
influence of corporate
profitability on
corporate capital
structure and its effect
on corporate value.

Impact of Capital Qayyum, Noor, and September 2019 This study has two - The capital
Structure on Noreen, Umara. main purposes; first, it structures of both
Profitability: A examines the effect of types of banks were
Comparative Study capital structure on comparable, except
of Islamic and the profitability of for the size of the
Conventional Islamic and banks, which
Banks of Pakistan conventional banks; differed greatly.
second, it determines - Both conventional
Links:https:// whether the capital and Islamic banks'
www.koreascience.or. structure of Islamic capital structures
kr/article/ and conventional were adversely
JAKO20191565823419 banks is the same or connected with
5.page not. A sample of ten ROA. The capital
banks was taken over structure of both
the period 2006-2016. conventional and
Independent samples Islamic banks, on
T-test was used for the other hand, was
finding the positively
comparison between connected with
the capital structure of ROE.
Islamic and
conventional banks - Furthermore, for
while for assessing the both Islamic and
impact of capital traditional banks,
structure on two explanatory
profitability, regression variables were
analysis (Fixed effects positively
model) was used. connected with
Results showed that EPS, while two
the capital structure of were negatively
both types of banks correlated.
was similar except for
bank size which
differed significantly.
Moreover, ROA was
negatively correlated
to the capital structure
of both conventional
and Islamic banks. In
contrast, ROE was
positively correlated to
the capital structure of
both conventional and
Islamic banks. In
addition to that, two
explanatory variables
were positively
correlated while two
were negatively
correlated to EPS for
both Islamic and
conventional banks.
This study proves the
 existence of
prominent theories of
capital structure
(pecking order theory
and trade-off theory)
for both conventional
and Islamic banks in
Pakistan and also
validates the
economies of scale.

The Effect of Singh, Narinder, 2019 One of the most - The relationship
Capital Structure and Bagga Mahima perplexing issues between capital
on Profitability: An faced by finance structure and
Empirical Panel profitability was
managers is knowing
Data Study investigated using
about the effect of
four different
Link: capital structure on regression models.
https://journals.sag the profitability of the - The researchers
epub.com/doi/pdf/1 firm. Many studies came to the
0.1177/227868211882 have been carried out conclusion that
3312#:~:text=The to examine the effect capital structure
%20optimal has a considerable
of capital structure on
%20capital favorable impact
%20structure the profitability of on a company's
%20exists,importan firms, but most of profitability.
t%20(Tailab%2C them belong to other
%202014). parts of the world, and
only a few studies have
been conducted in
India. Thus, the
present study has
been undertaken to
evaluate the effect of
capital structure on
the profitability of Nifty
50 companies listed on
the National Stock
Exchange of India
from 2008 to 2017. The
data has been
analyzed by using
descriptive statistics,
correlation, and
multiple panel data
regression models.
Four different
regression models
have been used to
study the relationship
between capital
structure and
profitability. In these
models, we study the
individual effect of
total debt and total
equity ratios on
profitability, that is,
ROA and ROE. All four
models have been
tested with pooled
OLS, fixed effects, and
random effects. We
conclude that there is
a significant positive
impact of capital
structure on a firm’s
profitability.