J. Basic. Appl. Sci. Res., 2(11)11917-11923, 2012 © 2012, TextRoad Publication ISSN 2090-4304 Journal of Basic and Applied Scientific Research www.textroad.com *Corresponding Author: Andy Setiabudi, Faculty of Economy, University of Airlangga, Surabaya of Indonesia. Email: Andy.Setiabudi@sampoerna.com The Effect of Company Fundamental Factor to the Firm Leverage Andy Setiabudi*, Dian Agustia University of Airlangga, Surabaya, East Java, Indonesia ABSTRACT This paper intended to study the influenced factors of company due to the firm leverage. Purposive sampling method was used to collect data in the period of 2005-2009. There were 44 firms that fulfill the criteria. Data of this research were analyzed by using path analysis method. Results showed that profitability, firm size, asset tangibility, inflation rate had positive influence to the firm leverage. For the other variables with exception the Gross Domestic Brute (GDP) Growth had negative influence to the firm leverage. The results can give the contribution of developing capital structure theory in agency problem and these can use as fundamental base in making decision by manager to act the disciplinary for optimizing the prosperity of stock share owner and holder. Keywords: profitability, sales growth, firm size, asset tangibility, liquidity, GDP growth, inflation rate, interest rate, leverage. INTRODUCTION Every company is demanded to be able to reach the goal of firm and every reaching of company goal can increase the value of company. The value size of company is the whole number between market value of debt and market value of equity which is illustrated in the pie model or the pie model itself [1]. The increasing of company value is as an illustration on prosperity increasing of the shareholder through the devident which is payed and the increasing of share rate. Trade-off theory predicted that in finding the relation between capital structure and company value there was optimal debt ratio [2]. The usage of credit will increase company value until the certain limitation of leverage (optimal leverage), and then the usage of credit will decrease company value because the usage of credit after optimal leverage will cause the bigger bankcrupty cost. Based on this theory, the big companies generally have a small trend to be bankrupt, so that are easier to obtain the credit from bank than the small one. The structure of asset is as an important issue for company because good or bad of asset structure will has a direct effect to the financial structure of a company. Optimal asset structure can change in time. There are some factors which influence asset structure such as long run viability, managerial conservatism, lender and rating agency attitudes, reserved borrowing capacity and financing flexibility, control asset structure, growth rate, profitability, and tax [3]. Fundamental factor is a factor in outside of asset market which will influence the incoming share rate. Analysis of share rate based on the fundamental factors are principal because the base reason that causes the moving of share rate is the anticipation about the changing in income or profit [4]. The fundamental factors are very wide and complex, they are not only including internal company (basic financial) but they also includes external company (basic economy). Fundamental analysis includes the analysis of economy and industry, evaluation of individual company by using devident and profitability evaluation model or asset evaluation model, and financial report like trend and ratio analysis [4]. Based on the description as above, fundamental factors can be differentiated into internal and external fundamental factor. The changes in external factors like inflation, interest rate, kurs, and economic growth will influence the market or systematic risk [5] as well as the internal fundamental factors which are as company performance that is predicted as profitability, selling growth, company size, asset tangibility, and liquidity. The objective of this study was to evaluate the influenced factors due to the firm leverage. This study conducted in 44 firms by using secondary data. The expectation of this study was to contribute the develpment of capital structure theory in agency problem. MATERIALS AND METHODS This study used secondary data from Bursa Efek Indonesia (BEI) and data of share rate from Indonesia Securities Market Directory (ISMD) of Asset Market Data Centre (Pusat Data Pasar Modal-PDPM), Faculty of Economy, and University of Airlangga in the tear of 2005 until 2009 for the companies which move in manufacture. 11917