The Mediating Role of Firm’s Performance on The Relationship between Free Cash Flow and Capital Structure

Abstract

This study aims to examine the effect of Firm’s performance as an intervening in the influence of the free cash flow on the capital structure. As well as the direct effect of Firm’s performance and free cash flow on the capital structure. This study uses a path analysis model and polling data from on 22 companies of various industrial subsectors on the Indonesia Stock Exchange (IDX), over a period of 10 years (2009 to 2018). The results show that although free cash flow does not directly affect the capital structure, it is proven that profitability affects the capital structure and can mediate the effect of free cash flow on capital structure. These findings support agency theory, that management prefers to use free cash flow to make investments, so that fluctuations in the free cash flow will affect the financial performance, this condition will ultimately affect the capital structure.

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