Do shields drive value? Capital structure as a mediator in Indonesia’s stock market

Abstract

This study investigates how firm-level characteristics shape capital structure (leverage) and firm value in Indonesian manufacturing firms by analyzing 2040 firm-year observations from 136 publicly listed companies over the period 2010–2024. Employing a two-stage panel regression with mediation analysis, the study estimates both direct associations and indirect transmission effects operating through capital structure. The results indicate that debt tax shields, asset tangibility, profitability, receivables and business risk are positively associated with leverage, while leverage itself is strongly associated with higher firm value. Mediation tests reveal that capital structure fully channels the effect of growth and partially transmits the influence of non-debt tax shields, asset tangibility, profitability, business risk and receivables on firm value. In contrast, firm size, uniqueness and inventory are valued directly by the market rather than through leverage decisions. These findings suggest that capital structure in Indonesia functions as a selective transmission mechanism, whereby only certain firm attributes are converted into value through financing choices. By highlighting this selective mediation in an emerging-market setting, the study emphasizes the importance of collateral quality, targeted tax incentives and disciplined credit assessment in supporting sustainable value creation.