Institutional Ownership and Profitability Drive Construction Firm Value, Exchange Rate Pressures Weigh

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FORMOSA NEWS

A 2026 study by Waluyo Jati of the Faculty of Economics and Business at Universitas Pamulang finds that profitability and institutional ownership significantly increase the value of Indonesian construction firms, while exchange rate depreciation and high leverage reduce it. The research, published in the International Journal of Finance and Business Management, analyzes companies listed on the Indonesia Stock Exchange between 2007 and 2024. The findings matter for investors, corporate managers, and policymakers navigating infrastructure expansion and currency volatility in emerging markets.

Waluyo Jati’s research provides a long-term financial map of Indonesia’s construction sector, a strategic industry that expanded rapidly after 2014 amid large-scale infrastructure development. Construction companies operate in a capital-intensive environment where debt financing is common and exposure to the rupiah–US dollar exchange rate can significantly affect costs and financial risk. Understanding how profitability, ownership structure, and macroeconomic variables shape firm value is critical for market stability and investment decisions.

Why Construction Firms Matter

The construction sector plays a central role in national development, supporting transportation networks, toll roads, public facilities, and industrial zones. Since infrastructure policy has become a major pillar of Indonesia’s economic strategy, construction firms have experienced rapid growth, rising capital needs, and fluctuating market valuations.

However, expansion often relies on debt. At the same time, many firms face currency risks because projects, equipment, or loans may be denominated in foreign currencies. Investors closely monitor financial ratios such as leverage and profitability to determine whether companies can manage risk while delivering growth.

Waluyo Jati of Universitas Pamulang highlights that firm value reflects investor confidence in both internal performance and external economic conditions. In emerging markets like Indonesia, those two forces are deeply interconnected.

How the Research Was Conducted

The study examines nine publicly listed construction companies over an 18-year period, producing 162 firm-year observations. Financial data were collected from annual reports published by companies and from official records of the Indonesia Stock Exchange. Exchange rate data were sourced from Bank Indonesia.

The research combines three analytical approaches:

• Panel data regression to test direct relationships among profitability, institutional ownership, exchange rates, capital structure, and firm value.
• Structural Equation Modeling (SEM-PLS) to evaluate mediation effects.
• Interpretive Structural Modeling (ISM) through expert discussions to validate quantitative findings.

Firm value was measured using Price to Book Value (PBV). Capital structure was measured using the Debt-to-Equity Ratio (DER). Profitability was captured by Return on Equity (ROE). Institutional ownership was calculated as the percentage of shares held by institutions, and exchange rate exposure was measured using the annual average rupiah–US dollar rate.

This integrated design strengthens the reliability of the conclusions.

Key Findings

Waluyo Jati reports several clear results:

1.  Profitability increases firm value.
   Companies with higher ROE consistently show higher market valuation. Strong earnings send positive signals to investors about growth prospects.
2.  Institutional ownership boosts firm value.
   Firms with greater institutional shareholding tend to have stronger governance and higher investor confidence.
3. Exchange rate depreciation reduces firm value.
   When the rupiah weakens against the US dollar, construction firms experience higher financial pressure, which lowers valuation.
4. Profitability increases leverage.
   More profitable firms tend to use more debt, likely to finance expansion projects.
5.  Institutional ownership reduces leverage.
   Institutional investors encourage more conservative debt policies.
6.  Exchange rate depreciation leads firms to reduce leverage.
   Companies respond to currency risk by lowering debt exposure.
7.  Higher leverage reduces firm value.
   Excessive debt increases perceived financial risk and negatively affects market valuation.

Importantly, capital structure acts as a significant mediating factor. Profitability, institutional ownership, and exchange rate movements influence firm value both directly and indirectly through leverage decisions.

All tested relationships were statistically significant across analytical methods.

Real-World Implications

The findings carry several practical implications.

For corporate managers, profitability alone is not enough. While higher earnings increase borrowing capacity, excessive leverage can erode market confidence. Financial strategy must balance growth ambitions with risk management.

For institutional investors, the study confirms their governance role. Waluyo Jati of Universitas Pamulang emphasizes that institutional ownership strengthens monitoring and reduces agency conflicts. Strong oversight improves financing discipline and enhances firm value.

For policymakers, exchange rate stability is crucial for infrastructure-dependent industries. Currency volatility not only affects operational costs but also influences financing behavior and stock market performance. Stable macroeconomic policy can indirectly support corporate valuation.

For investors, the message is clear: evaluate construction firms not only by profit performance but also by debt levels and ownership structure.

As Waluyo Jati notes in his analysis, capital structure functions as a transmission channel through which internal performance and macroeconomic shocks shape market valuation. In other words, how companies finance themselves determines how the market interprets both opportunity and risk.

Broader Academic Contribution

The research integrates multiple financial theories, including signaling theory, agency theory, trade-off theory, pecking order theory, and hedging theory. The results suggest that Indonesian construction firms adopt adaptive financial strategies rather than strictly following one theoretical model.

The study also supports the view that emerging capital markets adjust gradually to macroeconomic and political changes. Market valuation reflects not only firm fundamentals but also shifts in policy direction and currency dynamics.

By combining quantitative models with expert validation, Waluyo Jati provides a comprehensive framework for understanding firm value in infrastructure-driven economies.

Author Profile

Waluyo Jati is a lecturer at the Faculty of Economics and Business, Universitas Pamulang. His research focuses on corporate finance, capital structure, corporate governance, and financial performance in emerging markets. He actively studies the interaction between macroeconomic conditions and firm valuation in Indonesia’s capital market.

Source

Article Title: Institutional Ownership, Profitability, and Exchange Rate as Determinants of Firm Value with Capital Structure as an Intervening Variable (Empirical Study of Construction Companies Listed on the Indonesia Stock Exchange, 2007–2024)
Journal: International Journal of Finance and Business Management (IJFBM)
Year: 2026
DOI: https://doi.org/10.59890/ijfbm.v4i1.182