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direct empirical research effort. In the absence of a theory that provides a testable hypothesis, then the empirical results should be evaluated for quality and are just hoping that emerged a pattern of a large number of empirical results. Such conditions lead to the perception of a less elegant in the positioning of the failure prediction research topic because it has no reference to the basic theory when compared to other topics in financial management. This study tried to establish a buffer pole theoretical prediction of the failure to capitalize on the neo-classical theory of capital structure as a starting point. Thus this theory then follow an alternative approach that compared the model that has been well-known Merton option pricing theory is based and then elaborated into a model of VMR. Origin of capital structure that underlies the theory fails to pay on one hand there is the model that connects to the fall risk assessment company claims. Elaboration of the last 2 can be found in Scott (1981). On the other hand, this theory is also included in the model of optimal capital structure, developed in his resurrection irrelevancy theorem Modigliani-Miller (Modigliani and Miller, 1958, 1963), Baxter (1967), Kraus and Litzenberger (1973), Scott (1976) , and Kim (1978). In doing so, the whole model of optimal capital structure using fail-pay conditions in the derivation of optimal capital structure. These conditions fail to capture the essence of the decision-payment: occurs when the value of various cash flows available to companies is not sufficient to repay its debt obligations. Based on this, resulting ownership theory on optimal capital structure in its comparative balance is the basis for empirical analysis. Strangely, this model is rarely, if if, re-written and clearly states the possibility of corporate failure and its characteristics, namely: how the model is influenced by the determinants of optimal capital structures. Since the early eighties, this theoretical research line seems completely better with the default options based theory. Based on the short description above, this research aims to clarify the capacity of the concept of capital structure theory as a predictor of the probability of failure of the company.
where is a random variable representing the company's cash flow before interest and taxes (EBIT) and R is the payment of creditors. is assumed to be normally distributed with mean x and standard deviation x. If at the end of the period, if the condition of b, the owners of the shares are protected by limited liability and do not receive anything. Furthermore, they receive cash flow after taxes and interest. Value at the end of the period, Ye are: Ye = 0 if <b (2.2) Ye = (1 - ) () if b Where is the corporate tax rate. For risk-neutral investors balance of equity, Ve is the discounted present value at risk free rate, the expectations of Ye:
Ve =
E (Ye) (1 + r )
(1 ) ( R) ( )d
b
(1 + r )
(2.3)
Where r is the risk free rate. Value of creditors at the end of the period, YD obtained the same way. If bankruptcy occurs, the company transferred to creditors, which means they receive the cash flows minus the cost of failure. Limited value to avoid their obligation to accept a negative cash flow. So the value of debt at the end of the period are: Yd = 0 if 0 Yd = ( ) If 0 < <B (2.4) Yd = R if b (b = R) where B () is the total failure cost as a function of the cash flow . The debt balance is the present value of expected Yd:
Vd =
( B( )) ( )d + R(1 F )
0
(1 + r )
(2.5)
b
f ( )d .
density function, the probability of failure will always have a value between 0 and 1. Total enterprise value is obtained by adding the Ve and Vd, which after rearranging terms, are:
.V =
f ( )d f ( )d B ( ) f ( )d + R(1 F )
0 b 0
(1 + r )
( 2 .6 )
Optimal capital structure and debt capacity is obtained by differentiating V and V d with reference to R: V (1 F ) B ( R ) f ( R ) = R (1 + r ) Vd (1 F ) B ( R ) f ( R ) = R (1 + r ) ( 2 .7 )
( 2.8)
where B (R) and f (R) is the cost function and the probability of failure and failure cash flows, both evaluated at the point of optimal capital structure. By setting equation 2.8 equal
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to zero, giving creditors a maximum amount of debt that will be soluble or corporate debt capacity. Equation 2.7 is set equal to zero, providing a number of debt that maximizes firm value that is optimal capital structure. This can be shown that for normally distributed cash flows in the second order conditions for equations 2.7 and 2.8 are fulfilled. Because the corporate tax rate , has a value between 0 and 1, the amount of debt in the optimal capital structure is smaller than the amount of the debt will be liquidated creditors. This means that equation 2.8 does not limit the amount of debt that can be received by the company that is an optimal capital structure, debt capacity is reached before . Formulation of return equation 2.7 gives the following equation:
(1 F )
(1 + r )
B ( R) f ( R ) (1 + r )
( 2 .9 )
The left side of the equation represents the current value of tax savings at the margin, while on the right side represents the current value at the margin the cost of failure. Thus capital structure is reached when a profit margin equal to the cost of debt financing margin. A more extensive discussion and further detail calculations can be seen in Van der Wijst (1989).
( 2.10)
where all variables have been described previously. Equations of 2:10 reflect the consequences of default probabilities on the decision to maximization of corporate value by using the capital structure as an instrument. Probability of fail-variable pay is not itself a goal (to be minimized or optimized) or directs instruments. Probability of fail-paid of course indirectly manipulated by selecting the level of R. In the equation the probability of fail-paid 2:10 depending on the level of taxes, the cost of failure and the ownership distribution of cash flows. To analyze the model, further comparative static calculations. This shows the influence on the probability of fail-paid, F to changes in variables in the model. Comparative static model calculations described below where some more detail added:
( 2.11)
Because f (R), corporate tax rates, the cost of failure, the variance of cash flows and the first derivation of the costs of failure are all positive, (2.11) will be negative if x R. And another sign depends on the relative sizes of other variables and cannot be determined definitively. This means that the effect of leverage on the probability of fail-paid cannot be definitively determined, and in a range that can be definitively determined because of the two contradictory effects on the prediction of conventional wisdom
Both the cost of failure, i.e., f (R) and , the corporate tax rate is positive. This means an increase in tax rates would increase the probability of fail-pay. This makes the debt more attractive funding margin, will lead to greater amount of debt in the optimal capital structure and the probability of fail-pay is higher.
because f(R) and are both positive, then the equation of 2:13 will be negative. Where an increase in the cost of failure would make debt financing less attractive margins, this will lead to increasingly small amount of debt in the optimal capital structure and will reduce the probability of fail-pay.
d. Changes in the standard deviation of cash flows will affect the probability of default
as follows:
F = x
B( R)
f x
f ( R) B( R) 1 ( R x ) 2 3x x
(2.14)
Though the equation looks a little complex 2:14, f (R), B (R), and x, all three are positive. So the equation in the square portion will determine the sign in equation 2.14 and limited only in:
(2:15)
Hence the standard deviations on static comparative cash flow depend on: whether the difference between the expectations of earnings and debt obligations is greater or smaller than the standard deviation of earnings.
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f ( R) B( R)
2 x
Because f (R), the cost of the failure of B (R), the tax rate and cash flow all positive variant, 2:16 equals sign, depending on the relationship between the size of the expected cash flows and debt. Static comparisons on the probability of failure-paid models are summarized in Table 1 below:
Expected Effects on F
Positive or not specified Positive. Negative Positive or Negative Positive or Negative
A very interesting aspect of table 1 that is not only the capital structure or distribution of cash flow ownership (expectation and variance) has a direct influence on the probability of failpay. Compared with conclusion that can be achieved in the comparative static analysis concerning the optimal capital structure model (probability of default has an ambiguous effect on optimal capital structure, cf. Van der Wijst, 1989). It is challenging the conventional wisdom fails to pay the increased probability, ceteris paribus, with variants of cash flow and leverage, and decrease with the expected cash flows. Therefore, it is not logical to make assumptions about R, x,and x is brought all the comparative static in line with conventional wisdom. If the leverage and the expected cash flows have the effect of conventional policies, it must be assumed that x <R, but this will give a variant of negative cash flow effect, contrary to conventional policies. Further research is needed to determine whether the ambiguity that comes from extreme end of the distribution or the central area. We can only formulate research hypotheses for the tax rates and the cost of failure is hypothesized to have positive responses and negative effects on the probability of fail-pay.
METHODOLOGY Data Collection Method The population in this study are all companies registered at the Indonesian Stock Exchange. The sampling method judgment sampling, ie sample selection based on certain criteria. These criteria are the issuers of the following industry types: a) basic and chemical industries; b) miscellaneous; c) the consumer goods industry; d) the trade industry. companies whose shares are always listed and actively traded on the Indonesian Stock Exchange (BEI) at least since 2002 and always presenting financial information during the observation period (Siagian, 2000). Data used in this research is secondary data for the period 2002-2006, obtained fromwww.jsx.co.id , Empirical model and variable proxies In the initial classification in the category of non-failing and failing, this study uses assumptions that have been widely used in corporate failure prediction of the previous literature. The assumption is a binary variable 9, each worth 1 (non-fail) if the requirements of conditions are met, and 0 (failed) if reverse:
Profit before minority interest in net income of subsidiaries, positive; Operating cash flow, positive; Changes in ROA, positive; Operating cash flow exceeding earnings before minority interest in net income of subsidiaries; Changes in leverage (long-term debt / total assets) is negative; Changes in liquidity, positive; Changes in gross margin ratio (1 - COGS / sales) is positive; Changes in turnover (sales / total assets) is positive; The Company had operating cash flow positive from the sale of shares.
Many variables in the theoretical model based on expectations of future values can not be measured directly, therefore the empirical proxies used variables derived from accounting data that are available. Proxy variables used in the analysis are:
Debt: DTA Tax: TAX / EBIT Expected Cash Flow (x), CF = (net profit + Beban) / total assets Standard deviation of cash flows (x): Failure Cost B (x): approximated by firm size (ln (sales))
Because this transformation of variables is directly from the accounting figures do not require a lot of discussion about it. Cash flow and leverage variables are included in the analysis without explicit or explicit hypotheses about their influence. Tax rates are hypothesized to relate positively to the probability of fail-pay. The cost of failure is usually assumed to be related to the size of the company upside down, ie the cost of failure as part of the value of a
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company that reduces the size of the company. Inside this research model, the cost of failure to negatively affect the probability of fail-pay, so this leads to the hypothesis bahawa company size is positively related to the probability of fail-pay. Engineering Analysis and Model Analysis Dependent variables used in this study is the failure of the company which is a condition of categorical variables: 0 for firms syang failure and 1 for non-failed firms. Independent variables used in this study is the ratio of debt finance, tax, cash flow expectations, the standard deviation of cash flows, and the cost of failure Hypothesis Testing In a research to see whether the independent variable X affect variable Y in the form of categories, logistic model used was:
P (Y = 1 X 1 , X 2 , K , X k ) = P ( X ) = 1 1+ e
( + iXi )
or logit P (X) = + i X i where Y = 1 if the event is observed as the dependent variable and the variable X i as independent variables. Simultaneous Test Logistic Regression Model To test significance / suitability of statistical models used Hosmer and Lemeshow test the hypothesis: Ho = There is no real difference between the classification prediction and classification of observation. Ha = There are real differences between the prediction and classification classification observations. Ho refused to criteria established if with the test criteria: Partial Test Ho = no significant regression coefficient Ha = Coefficient significant regression. Ho refused to criteria established if
DISCUSSION
Tabel 2. Simultaneous Results Sampel Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Whole 0.000 0.363 0.866 0.296 0.500 0.283 0.347 0.197 0.558 Misc.Ind 0.005 0.274 0.978 0.118 0.021 0.554 0.154 0.291 0.389 Basic & Chemical Ind. 0.638 0.708 0.582 0.038 0.083 0.703 0.550 0.217 0.466 Consumer Goods 0.337 0.745 0.496 0.201 0.885 0.726 0.389 0.261 0.089 Trade 0.000 0.856 0.634 0.142 0.240 0.170 0.414 0.650 0.286
Detailed discussion will be based on the results of simultaneous significance test of the model in mendikriminasi sample. Based on aggregate data sample, only two models that proved to be significant regarding the use of the concept of capital structure to corporate failure prediction, model 1 (sig.H & L = 0000) and model 8 (sig.H & L = 0044). While for samples of different industries; model 1 (sig.H & L = 0005) and model 5 (sig.H & L = 0021). In the basic industries and the chemical only 4 models (sig.H & L = 0038) is significant, as well as the trade industry, only model 1 (sig.H & L = 0000), which proved significant. While for the consumer goods industry that there is no single model has significant influence, this may mean that the concept of capital structure has no significant in identifying the failure of the company.
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Sampel Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9
Table 3.. Nagelkerke Coefficient Basic & Consumer Whole Misc.Ind Chemical Goods Ind. 32.85% 66.07% 73.53% 41.00% 8.80% 27.88% 4.84% 34.48% 1.34% 10.67% 3.07% 10.05% 3.73% 9.70% 17.53% 1.36% 4.91% 11.15% 10.53% 7.26% 8.78% 21.08% 9.34% 15.85% 4.69% 11.94% 7.44% 12.43% 2.28% 26.23% 6.73% 7.68% 6.59% 23.00% 1.21% 13.33%
Trade 64.15% 13.58% 1.59% 11.78% 4.50% 8.72% 3.14% 2.31% 6.38%
Based on the value of Nagelkerke coefficient can be known ability to explain variations in capital structure concept model is formed. According to the table can be seen that model 1 has the highest value of both industrial classification or among existing models. In aggregate data, the range of values ranging from 1.34% nagelkerke -32.85%. In this value range of different industries 9.7% -66.07%. On the basis of industrial and chemical coefficients ranged from 1.21%, -73.53%, for the consumer goods industries 1.36% -41%. Last on the trade industry, Nagelkerke value range between 1.59% -64.15%. Tabel 4. Classification Model (%)
Sampel Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Whole 82.37 72.12 67.81 64.75 72.30 58.09 59.71 62.59 65.29 Misc.Ind 87.50 74.04 75.96 70.19 82.69 69.23 71.15 75.96 69.23 Basic & Chemical Ind. 88.13 72.50 64.38 68.13 71.25 60.63 65.00 65.63 66.88 Consumer Goods 84.82 83.93 69.64 58.93 81.25 61.61 62.50 63.39 58.93 Trade 92.22 70.56 66.67 66.67 62.22 58.89 56.11 57.78 64.44
Table 4 contains data that formed the model of classification power. This classification power is the ability of the model in correctly classifying the samples used in research. Viewed either industry or the number of approaches existing models, it is known that the model 1 superior to both. This means the use of criteria of profit before minority interests in subsidiaries' net income as an initial classification of failures with the concept of corporate capital structure has adequate reliability statistics . But when viewed under the industry approach, the maximum value of the classification power of all models which have formed in various industries (although the significance of simultaneous only model 1 and model 5).
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Partial Test Results Discussion partial test results are based on the model simultaneously significant, namely: the whole industry (model 1); miscellaneous industry (model 1 and model 5); basic industry and chemicals (model 4) and; trade industry (model 1).
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Model 5. Nagelkerke values for model 5 at 0.1115, which means the variability of the dependent variable can be explained by the variability of the independent variables of 11.15%. Overall, this model has a power classification of 82.69%. Based on these Nagelkarke value can be said that the use of income before minority interest in net income of subsidiaries that are used as an initial discriminator used is not sufficient to produce the ability to explain variations in corporate failures that will occur in a variety of industrial issuers, although the model which has formed the classification power high. Partially, only the cost of failure (BX), which has a significant negative effect on the probability of failure of the company. By using the approach as an indication of the failure of changes in corporate leverage, the higher the resulting predictions of failure costs, ceteris paribus firms actually reduce the probability of failure. Based approach to leverage changes, the power that formed the classification model correctly classifies issuers failed at 5.26% and non-failed company at 100% or in the aggregate have amounted to 82.69% classification power.
CONCLUSIONS AND RECOMMENDATIONS Based on the nine approaches that are used as initial classification model, the criterion of profit before minority interest in net income of subsidiaries proved superior in identifying the probability of failure of the issuer associated with its capital structure. From the empirical calculation, partial cash flow variables are proved to have a flexible effect (negative and positive). Similarly, other variables of capital structure also has no effect on the probability of a certain absolute failure. Implementation of the concept of objective industry data showed some variation in the capital structure of listed companies, which indirectly characterize the characteristics of the industry itself. This is the potential positive and negative signs on each coefficient of the variable capital structure. Although empirically impressed contradiction with the spirit of the theory of capital structure, it does not mean that theory does not apply in Indonesia because the results of statistical calculations using the simplification of the fact that much there, on the other hand theoretical concepts are still not sufficient research in the use of assumptions. So for further research can be developed theoretical concepts on the company's capital structure and other relevant proxy as a predictor of corporate failure, for example: the distribution of information which is assumed to be proxies of all market participants the same as what the internal issuers, how big is happening asymmetric information, corporate actions undertaken in communicating the quality and value of the company, and others.
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Table 5. Partial Test of Aggregate Industries - Model 1 Independent Variables B DTA -2.00403 TxEBIT 0.010984 CF 6.309301 STDEV_CF 1.6E-06 Bx 0.378749 Constant -3.59989 Sig. Hosmer & Lemeshow Test Nagelkerke 0.328491 Power Classification Observations Failed 97 Non-Failed 361 Total 458 Sig. 0000 0508 0000 0311 0000 0001 0000 % 54.19 95.76 82.37
Table 6. Partial Test Models Miscellaneous Industry Model 1 Independent B Variables DTA -2.31 TxEBIT 0:44 CF 32.08 STDEV_CF 0:00 BX 0:07 Constant -1.13 Model 5 Sig. Independent Variables DTA TxEBIT CF STDEV_CF Bx Constant B Sig. 0208 0044 0814 0476 0420 0143 0021 % 5:26 100.00 82.69
0168 -1.61 0428 -0.45 0000 0.78 0115 0:00 0835 -0.22 0802 5:17 Sig. Hosmer & Lemeshow Test 0005 Sig. Hosmer & Lemeshow Test Nagelkerke 0.6606 Nagelkerke 0.1115302 Power Power % Classification Observations Classification Observations Failed 41 87.23 Failed 1 Non-Failed 50 87.72 Non-Failed 85 Total 91 87.50 Total 86
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Table 7. Partial Test of Basic Industry Model 4 Independent B Sig. Variables DTA 0:48 0445 TxEBIT 0:02 0863 CF -6.96 0005 STDEV_CF -0.00001 0110 Bx 0:16 0433 Constant -0.98 0712 Sig. Hosmer & Lemeshow Test 0038 Nagelkerke 0.17533 Power % Classification Observations Failed 13 25.00 Non-Failed 96 88.89 Total 109 68.13
Table 8. Partial Test of Trade Industry Model 1. Independent B Variables DTA 0:27 TxEBIT 0:01 CF 35.07 STDEV_CF 0:00 Bx 0:27 Constant -3.30 Sig. Hosmer & Lemeshow Test Nagelkerke 0.6415 Power Classification Observations Failed 39 Non-Failed 12 Total 51
Sig. 0745 0450 0000 0639 0085 0092 0000 % 76.47 98.45 92.22
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