Page 68 - SUSTAINABILITY ISSUES & COVID-19

Following the measurements used by Cappa et al. (2019) that the degree of vertical integration (VI) is calculated
based on the ratio between gross profit and total sales. The score range between 0-1. The higher the score shows that
companies are increasingly integrated.
The degree of diversification (DVR) is measured using the Herfindhal index modification (Cappa et al., 2019), with the
formula as below :

Sales is sales per segment owned by the company. Getting closer to one shows the company is becoming perfectly
it
diversified.
The degree of internationalization (ITL) is measured based on the ratio between the value of export sales to total sales
(Pacheco, 2016). The closer one shows the more active the company is in internationalizing.

CEO overconfidence (OVC) uses a dummy variable where 0 states the company has a normal CEO and 1 if the company
has CEO overconfidence. There are three criteria used to classify CEOs with overconfidence. The investment rate is
higher than the median of similar industries (Vivian & Xu, 2018), the value acquisition and merger is higher than the
median of similar industries, and growth in yield dividend equal to zero (Schrand & Zechman, 2012). For companies that
meet two of the three criteria, the company’s CEO is classified as overconfidence.

There are six control variables used in research. The company’s growth (GRW) variable measured by the ratio of
asset growth.companies that have high growth rates will limit the use of debt Belkhir et al.(2016), Ramli et al. (2019).
Profitability (ROA) as measured by the ratio of net income to total assets. The high profitability shows the company has
high available internal funds and a smaller need for external funding. Supported by the results of research conducted
by Joveer (2013), Matemilola (2019). Asset structure (STA) is measured by the ratio between fixed assets and total assets.
A company with a high value of tangible assets tends to have higher debt. Tangible assets can be used by companies
as collateral thereby increasing the company’s credibility in the eyes of creditors. (Ramli et al.,2019; Vo, 2017; and Sun
et al., 2016). Size (SZE) of assets measured by the natural log of total assets. companies that have high asset values will
have easier access to funding through debt. Therefore, there is a positive correlation between the value of assets and
the level of debt (Sun et al., 2016; Belkhir et al., 2016).

In addition to the internal factors of the company as explained earlier, external factors that shape the business
environment can also influence corporate decisions regarding capital structure. The increasing economic growth (GDP)
will make the expectations of company performance in the form of profitability will also increase so that demand for
and external will be reduced (Ramli et al., 2019). Likewise with the inflation rate (IFL), when inflation rises it will result in
increased debt costs, consequently the level of debt will decrease.

There are two models used in this study. The first model is to analyze the effect of the three corporate strategies on the
capital structure or to test hypotheses 1,2 & 3.

TLTDERit = β0 + β1VIit + β2DVRit + β3ITLit + β4GRWit + β5ROAit β6SZEit + β7STAit + β8GDPit + β9IFLit
+ εit

While the second model is used to test hypotheses 4,5 & 6 that show the moderation role of the CEO overconfidence
variable.

TLTDERit = β0 + β1VIit + β2DVRit + β3ITLit + β4GRWit + β5ROAit β6SZEit + β7STAit + β8GDPit + β9IFLit +
β10OVCit + β11OVC*VIit + β12OVC*DVRit + β13OVC*ITLit + εit

In this study, there is an additional test, which is testing the two models in every country partially. Since every country
has different characteristics especially in the culture, so it might have different results in every country. Hopefully, the
result could give more specific results regarding how the association of corporates strategies with its capital structure
and the role of CEO overconfidence could be different in every country.

International Conference on Sustainability 67
(5 Sustainability Practitioner Conference)
Th