The influence of profitability on firm value with capital structure as the mediator and firm size and industry as moderators

The influences of profitability and leverage on firm value have long been critical with regard to financial decision making. The greater the profitability of a firm, the more assignable profit there is, and the higher is the value of the company. Profitability thus has a significantly positive influence on firm value. The pecking order theory holds that highly profitable corporations are not over-dependent on external funds, and thus profitability has a significantly negative influence on leverage. However, when the leverage increases, both agency and bankruptcy costs increase rapidly as a result. Since leverage generally has a markedly negative influence on firm value, leverage becomes the mediator variable in the influence of profitability on firm value. In addition, two moderator variables exist in the research (cid:16) industry type and firm size. It is noted that when industry type the acts as a moderator variable, it interferes with the relationship between profitability and leverage. When firm size is the moderator variable, it also interfere the relationship between profitability and leverage. The moderating effect happens in the first stage.