The impact of ownership structure on corporate governance ...
THE IMPACT OF OWNERSHIP STRUCTURE AND CORPORATE GOVERNANCE ...
Transcript of THE IMPACT OF OWNERSHIP STRUCTURE AND CORPORATE GOVERNANCE ...
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
40
THE IMPACT OF OWNERSHIP STRUCTURE AND CORPORATE
GOVERNANCE ON PROFITABILITY AND FIRM VALUE
Gabriella Ryna Joanne
Prodi Akuntansi Universitas Pelita Harapan
Melinda Haryanto
Prodi Akuntansi Universitas Pelita Harapan
ABSTRACT
This research aims to analyze the impact of ownership structure and corporate
governance on profitability and firm value. The profitability and firm value, which
are the dependent variables in this study, will be calculated using ROA (Return on
Assets) and Tobin’s Q. Ownership structure and corporate governance as the
independent variables consist of institutional and government ownership, board
size, independent board member, and type of auditor with size of firm, debt ratio,
dividends yield, and age of company as the control variables.
The samples that are used in this research are the 24 consumer goods industry
companies that are listed in the Indonesia Stock Exchange. The technique that is
used in this research is multiple regression analysis.
The result of this research shows that there is a significant positive influence of
type of auditor on ROA (Return on Assets) and Tobin’s Q. Moreover, institutional
ownership and board size has a negative significant influence on ROA and
Tobin’s Q. While, government ownership and independent board member has a
negative but insignificant impact on ROA and Tobin’s Q.
Keywords: ROA, Tobin’s Q, Institutional Ownership, Government Ownership,
Board Size, Independent Board Member, Type of Auditor, Size of Firm, Debt
Ratio, Dividends Yield, Age of Company
INTRODUCTION
The financial crisis, which destroyed the economy conditions of Indonesia,
is caused by a number of reasons. According to Hanazaki and Liu (2007) there is
a relationship between corporate governance and the economic disaster that
happened. Corporate governance in relation to the protection of the rights of the
minority shareholders had a major influence in the exchange rate deprecation and
the decrease in stock market in 1997-1998 (Johnson, 2000).
Moreover according to Husnan (2000) the financial crisis occurred due to high
concentration of corporate ownership especially companies controlled by families
have led to poor financing and investment practices. Studies conducted by World
Bank and the Asian Development Bank also indicate that one of the causes of the
recession in Indonesia and other countries is due to poor corporate governance
implementation (Lukviarman, 2004).
Indonesia's government provides a strong encouragement to the
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
41
implementation of Good corporate governance. The evidence from the
government's concern can be seen from the establishment of various regulations
that governs Good corporate governance implementation. Starting from the
creation of the National Committee on Corporate Governance Policy (KNKCG)
through Decree of the Coordinating Minister of Economy Number: KEP / 31 /
M.EKUIN / 08/1999. Then followed by the establishment of the National
Committee on Governance Policy (KNKG) as a substitute for KNKCG through
Decree of the Coordinating Minister for Economic Affairs Number: KEP / 49 /
M.EKON / 11/2004. Subsequently, the issuance of Surat Edaran Ketua Bapepam
Nomor Se-03/PM/2000 that explains that every enterprise should has an audit
committee.
Several overseas studies have attempted to analyze the implications of
corporate governance on the sustainability of a company which most of them
produced diverse conclusions. Topal and Dogan (2014) explained that return on
assets increases and the risk of financial failure decreases as the board size grows.
On the other hand, different result is reported by Vo and Phan (2013). Their
empirical evidence showed board size contributes negatively to firm’s
performance, this happened due to a “gap of power” culture in Vietnamese
companies. Hence they concluded that when board size increases, delegation
would be reduced.
Qasim (2014) indicate significant positive impact of corporate governance
on firm performance except for audit quality. Thus, companies with well-
maintained corporate governance mechanisms are perceived positively by the
financial market participants, which are reflected on companies’ stock market
prices. A research conducted by Alfaraih et. al (2012) found a positive
relationship between institutional ownership and firm performance. On the
contrary, the findings suggest a negative relationship between government
ownership and firm performance, indicating a low performance for firm when
there is an existence of government ownerships showing that they tend to be
politically rather than commercially motivated.
Previous conducted researches have showed varying results, which imply
inconsistency and cannot conclusively explain the impact of ownership structure
and corporate governance mechanisms on profitability and firm value. Therefore,
the purpose of this research is to examine and verify these different results using
Indonesia consumption goods sector firms listed in the Stock Exchange period
2011 – 2016 as the sample. This research will be using the model used by Qasim
(2014) to analyze the impact of business ownership and corporate governance
mechanisms on profitability and firm value. One of the limitations of the previous
study is the proxies used to measure corporate governance as there are numerous
other governance mechanisms that could affect firm performance. Qasim used
institutional ownership, government ownership, board size, and audit quality to
measure corporate governance elements. This research will add the number of
independent board members as one of the independent variables, because boards
dominated by externals tend to act in the best interest of shareholders.
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
42
Theoritical Background and Hypotheses Development
Agency Theory
Solomon (2007) explains that agency theory was first introduced by Ross
(1973) and presented with more details by Jensen and Meckling (1976). In their
explanation, shareholders are referred as the ‘principal’ and the managers of the
company are referred as the ‘agents’. Shareholders carry out daily decision
making as the owner or principal of the company to the directors who are the
shareholders’ ‘agents’. This corporate ownership system results an issue, as the
agents do not necessarily consider the best interest of the principal when making
decisions. This problem is nourished by conflicting goals between the principal
and agent. In finance theory, companies’ major purpose is to maximize
shareholder wealth, however this contradicts in real life because company
managers are tempted to make decisions, which prioritize their own personal
objectives, for instance achieving highest bonus possible.
Corporate Governance
According to Cadbury Committee (1992), corporate governance is a system
by which companies are directed and controlled with the objective of achieving a
balance between the authority required by the company to ensure its existence and
accountability to stakeholders. This relates to the authority of owners, directors,
managers, shareholders, and so on. The definition of corporate governance
according to the Decree of the Minister of BUMN No. Kep-117/M-MBU/2002 is
a process and structure used by BUMN to improve business success and corporate
accountability in order to maximize shareholder value in the long term by taking
into account the interests of stakeholders, based on law and ethical values.
From the various definitions above, it can be concluded that Corporate
Governance is a system that regulates, manages, and supervises the process of
business operational to increase the company's value by taking into account the
interest of stakeholders, employees, managers, and other parties involved
according to the applicable law and ethical values.
According to Forum for Corporate Governance in Indonesia (2001),
Organization Economic Cooperation and Development (OECD) developed a set
of principles of Corporate Governance as known as The OECD Principles Of
Corporate Governance, which are as follows: fairness, transparency,
accountability, responsibility
Ownership Structure and Corporate Governance mechanisms
The ownership structures that will be discussed in this research are
institutional ownership and government ownership. Moreover, the corporate
governance mechanisms consist of board size, type of auditor, and number of
independent board members.
Institutional Ownership
Tricker (2009) explains institutional investors consist of financial
institutions, investment trusts, unit trusts or mutual funds and pension funds. The
ownership by commercial banks, hedge funds, insurance companies corporate
pension funds, college endowments, and so on within a company is considered as
an institutional ownership (Al-Malkawi and Pillai, 2012).
Government Ownership
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
43
Government ownership is a proportion of shares in an entity that is owned
by the state. According to Najid and Rahman (2011) claim that state-owned firms
tend to give bad interpretation to shareholders because they often are criticized for
prioritizing political rather than commercial motivation. In addition, the
government can control the policies taken by management to suit the interests /
aspirations of the government.
Board Size
Board size refers to the total member of directors on the board of a
corporation. Keasey et. al (2005) describe that a larger board size will likely
decrease agency problems for instance through more adequate monitoring or
separation of decision responsibilities. Nevertheless, the intention of improving
board legitimacy is established by larger size boards of directors which eventually
caused less collusive action among the individual in the board because this
produce a myth that the larger the board, the more diffused are the members’
responsibilities.
Type of Auditor
According to Arens et. al. (2014) in order to understand the criteria used,
auditor must be qualified and in order to know the types and the total of evidence
to be obtained to reach the proper conclusion after examining the evidence,
auditor must be competent.
Arens et. al. (2014) claim that Certified Public Accounting (CPA) firms
acting as independent auditors are granted the legal right to perform audits under
certain regulations depending on each country. The opinion of independent
auditor is important to external users such as investors, bankers, governmental
agencies, and the overall general public. As of today, there are four big audit
firms, which are Deloitte, PWC (PricewaterhouseCoopers), Ernst & Young, and
KPMG.
Independent Board Members
Tricker (2009) describes independent board members as individuals in the
board who are not involved in any executive management position in the
company. According to Kim and Nofsinger (2007) a board with a higher faction
of independent directors is more effective and reliable at monitoring management.
Literature Review Research on the impact of ownership structure and corporate governance on
profitability and firm’s value has been carried out by many researches, among
them are: Table 1 Literature Review
No Researcher Research Title Dependent
variables
Independent
variables Research Result
1. Mishari
Alfaraih,
Faisal
Alanezi,
Hesham
Almujamed
(2012)
The Influence of
Institutional and
Government
Ownership on
Firm
Performance:
Evidence from
Kuwait
Tobin’s Q
Return on
Assets
Institutional
Ownership
Government
Ownership
Board Size
There is a positive
relationship
between
institutional
investors and firm
performance in
Kuwait. On the
contrary, there is a
negative
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
44
relationship
between
government
ownership and firm
performance in
Kuwait.
2. Yusuf Topal
Mesut
Doğan
(2014)
Impact of Board
Size on Financial
Performance:
The Case of BIST
Manufacturing
Industry
Return on
Assets
Return on
Equities
Tobin’s q
Z Altman
Board Size
Duality
There is a positive
relationship
between the board
size, and return on
assets and Z
Altman score.
However, board
size is not
influential on
market
performance
indicator and return
on equity.
3. Duc Vo
Thuy Phan
(2013)
Corporate
Governance and
Firm
Performance:
Empirical
Evidence From
Vietnam
Return on
Assets
Board
members
Female board
members
CEO Dual
Board’s
educational
level
Board’s
working
experience
Outside
Director
Board’s
compensation
Board’s
ownership
Block holders
The result of the
study shows that
board size has a
negative impact
on firm’s
performance for
Vietnam’s listed
firms.
4. Amer
“Mohammad
Jaser” Qasim
(2014)
The Impact of
Corporate
Governance on
Firm
Performance:
Evidence from
the UAE
Tobin’s Q
Return on
Assets
Institutional
Ownership
Government
Ownership
Board Size
The results indicate
a significant
positive impact of
institutional,
government
ownership, and
board size on firm
performance.
5. Dana AL-
Najjar
(2015)
The Effect of
Institutional
Ownership on
Firm
Performance:
Evidence from
Return on
Assets
Return on
Equity
Institutional
Ownership
Size
Tangibility
Business Risk
The study suggests
that there is no
relationship
between both the
institutional
ownership and firm
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
45
Jordanian Listed
Firms
Debt to Asset
Marketability
performance for
Jordanian listed
firms.
6. Ozcan Isik
Ali Riza
Ince
(2016)
Board Size,
Board
Composition and
Performance: An
Investigation on
Turkish Banks
Operating
return on
assets
Return on
assets
Board size
Board
composition
There is a
significant and
positive
relationship
between board size
and bank
performance.
7. Okumu Ogola
Ochieng
Fredrick
(2015)
Corporate
Governance and
Firm Value for
Firms Listed at
The Nairobi
Securities
Exchange
Return on
assets
Market-
to-Book-
Value
Board Size
Board
Composition
Audit
Committee
The results of the
study indicate that
corporate
governance
attributes have a
significant
influence on
Return on Assets.
However,
corporate
governance
attributes have an
insignificant
influence on firm
value.
8. Mao-Feng
Kao
Lynn
Hodgkinso
Aziz Jaafar
(2013)
Board
Characteristics,
Ownership
Structure And
Firm
Performance:
Evidence From
Taiwan
Dependent
variables:
Return on
assets
Tobin's Q
The
proportion of
independent
directors
The
proportion of
independent
supervisors
Board size
Board
leadership
Block-
holders’
ownership
Institutional
ownership
Foreign
ownership
Family
ownership
The findings of the
study indicate that
board
independence and
institutional
ownership have a
significant and
positive impact on
firm
Performance.
Sources: Data processing by the author, 2017
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
46
Conceptual Framework Figure 1 Conceptual Framework
Sources: Data Processing by the author, 2017
Hypothesis Development
According to Rose (2007) institutional investors serve as a tool of
disciplining management because the free-rider problem associated with dispersed
ownership is alleviated. Research conducted by Wei et. al (2005), Zeitun (2009),
and Al-Zaidyeen and AL-Rawash (2015) show that institutional ownership
negatively influence profitability (ROA) and firm’s value (Tobin’s Q). On the
contrary, a different conclusion was made through the study conducted by AL-
Najjar (2015) suggests that there is no relationship between profitability and firm
value and institutional ownership. However, Hashim and Devi (2008), Qasim
(2014), Alfaraih et al. (2012), report that there is a positive relation between
profitability and firm value and ownership by institutional investors.
Based on the explanation above, the first and second hypotheses of this
research are:
H1: There is a significant positive influence between institutional ownership
and profitability
H2: There is a significant positive influence between institutional ownership
and firm value
Companies owned by government may encounter fewer difficulties to meet
financial reporting regulations, which might trigger management to improve
firms’ performance through the selection of accounting choices (Aljifri &
Moustafa, 2007). Such firms are more likely to enjoy the advantages associated
with state ownership, such as close and effective monitoring, a reduction in
agency cost, and easier access to financing. Therefore, it is plausible to assume
that the profitability and firm value of Indonesia’s listed-consumer goods firms
will be positively affected by government ownership.
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
47
The existence of a negative relationship between government ownership and
profitability as measured by ROA was found in the research conducted by Tran et.
al. (2014), Gursoy and Aydogan (2002), Zeitun and Tian (2007). Moreover,
Alfaraih et. al. (2012) and Wei and Valera (2003) found that government
ownership reduce corporate value as measured by Tobin’s Q. However, Studies
conducted in Kuwait and UAE found a significant positive relationship between
government ownership and firm performance (Aljifri and Moustafa, 2007, Qasim,
2014, and Alfaraih, et. al., 2012).
Based on the explanation above, the third and fourth hypotheses of this
research are:
H3: There is a significant positive influence between government ownership
and profitability
H4: There is a significant positive influence between government ownership
and firm value
Berghe and Levrau (2004) express that increasing the board size means increasing
the expertise, which produces a more knowledgeable and skillful board, compare
to smaller boards. Lasfer (2002) explain that the ability of CEO to dominate
boards are decreased in larger board size.
Research conducted by Mak and Kusnadi (2005), Bebeji et. al. (2015), and
Guest (2009) report that board size negatively influence profitability (ROA) and
firm’s value (Tobin’s Q). However, a research conducted by Topal and Dogan
(2014) indicates that a large board size will improve a firm’s performance. A large
board size appears to be better for firm performance because the study explained
that return on assets increases and the risk of financial failure decreases as the
board size grows. This because larger board size can dominate the irrational
decision by CEO. Moreover, study by Qasim (2014) also explains that board size
positively influence firm performance. Similar results are shown by the research
conducted by Fredrick (2015). Board size has a positive impact on firm
profitability as measured by ROA. Weterings and Swagerman (2012) also suggest
that there is a positive relationship between board size and firm value as measured
by Tobin’s Q.
Based on the explanation above, the fifth and sixth hypotheses of this
research are:
H5: There is a significant positive influence between board size and
profitability
H6: There is a significant positive influence between board size and firm
value
Previous literature indicates that type of auditor is considered as one of the
elements that have an effect on audit quality (Carcello and Nagy, 2004). DeZoort
et. al. (2002) explain that when detecting errors larger audit firms are better
compared to smaller audit firm due to the greater resources at disposal and more
superior skills and experience possess by employees. As a result, in comparison
with smaller audit firms, large audit firms are able to conduct their audits at a
higher standard. According to Qasim (2014) higher audit control may increase
profitability and firm value because it may control opportunistic management
behaviors and reduce agency costs.
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
48
A number of researches has been conducted and among them produced
mixed conclusions. For instance, a study conducted by Aryan (2015) using 69
Jordanian companies report that there is no relationship between type of auditor
and profitability. On the contrary, research by Fooladi and Shukor (2012) using
400 Malaysian public listed companies provide the evidence that bigger audit
firms increase profitability as measured by ROA and firm value as measured by
Tobin’s Q. Bouaziz (2012) also found that auditor type positively affect
profitability using 26 Tunisian firms listed on the Tunis Stock Exchange as the
samples.
Based on the explanation above, the seventh and eighth hypotheses of this
research are:
H7: There is a significant positive influence between type of auditor and
profitability
H8: There is a significant positive influence between type of auditor and firm
value
According to Jensen and Meckling (1976) in Yasser (2011) due to the
opportunistic behavior of dependent board members, independent board members
are necessarily needed in order to monitor and control such actions. In addition,
independent board members act as neutralizers to keep the balance in the board
with the aim of improving its effectiveness. According to Walt & Ingley (2003)
and Nicholson & Kiel (2007) in Isik and Ince (2015) the presence of independent
directors (outside directors) reduces agency problems, this because they enable the
board to better discover and reduce any self-interested actions by managers.
As of today, there have been mixed results of research conducted regarding
the effect of independent directors on firm performance. For instance, the research
conducted by Ness et. al. (2010) shows that there is no relationship between
number of outside directors with firm performance as measured by ROA. On the
contrary, research conducted by Jackling and Johl (2009) suggests that there is a
positive and significant relationship between independent director (outside
directors) and financial performance as measured by Tobin’s Q. Moreover, study
conducted by Knyazeva et. al. (2013) indicates that outside directors has a positive
impact on firm profitability (ROA).
Hence, although prior studies regarding the relationships between
independent board members and profitability (ROA) and firm value (Tobin’s Q)
produced mixed-results, the concept of the effect of outside directors on reducing
agency problems hence improving firm performance is adopted.
Based on the explanation above, the first and second hypotheses of this
research are:
H9: There is a significant positive influence between number of independent
board member and profitability
H10: There is a significant positive influence between number of independent
board member and firm value
RESEARCH METHODLOGY The population of this research is all consumer goods companies industry in
Indonesia Stock Exchange (BEI) from year 2011 to 2016 (6 years).
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
49
The sample in this study was taken by adapting the research model taken
according to the reference journal, where the companies are selected according to
the completeness of the data based on the following criteria:
1. Consumer goods companies which are consistently listed in the Indonesia
Stock Exchange (BEI) and disclose its annual financial statement in the
currency of Rupiah from year 2011 to 2016.
2. Consumer goods companies that continuously produce income during the
observation period.
Empirical Research Model
There are two model regression panels with the following specifications:
Where;
Tobin’s Q = MV of Equity + BV of Debt / BV of Assets
ROA = Return on assets ratio; net income/total assets
(GOV) = Proportion of government ownership in the firm
(INST) = Proportion of Institutional ownership in the firm
(AUDIT) = External auditor type; 1 if the company's accounts are audited by
a big four auditing firm, 0 otherwise.
(BSize) = Board size
(IND) = Number of independent board member
(LnTA) = Natural logarithm of total assets
(DRATIO) = Debt Ratio; total debt/total assets.
(DYLD) = Dividends Yield;
(AGE) = Number of years since establishment
α = Intercept coefficient of firm i,
β = Row vector of slope coefficients of regressors;
εit = Residual error of firm I in year t.
Research Variables. This research uses two dependent variables, five
independent variables, and four control variables. The dependent variables used in
this research are firm’s value as measured by Tobin’s Q and profitability as
measured by ROA (Return on Asset). The independent variables used are
government ownership, institutional ownership, type of auditor, board size, and
independent board member. While, the control variables used are size of firm,
debt ratio, dividends yield, and number of years since establishment.
Discussion
Descriptive of Sample Observation
In accordance with the criteria that had been previously mentioned in
chapter three, this research has come to obtain a sample of 24 companies for each
year in the six years period (2011-2016). The total sample that is used in this
Tobin's Q = α + β1 (GOV) + β2 (INST) + β3 (BSize) + β4 (AUDIT) + β5 (IND) +
β6 (LnTA) + β7 (DRATIO) + β8 (DYLD) + β9 (AGE) + εit
ROA = α + β1 (GOV) + β2 (INST) + β3 (BSize) + β4 (AUDIT) + β5 (IND) +
β6 (LnTA) + β7 (DRATIO) + β8 (DYLD) + β9 (AGE) + εit
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
50
research is 144 samples. The selection of the sample is described in the table 2
below: Table 2 Sample Choice
Description Number of Companies
Number of Consumer Goods companies constantly
listed in Indonesia Stock Exchange from 2011-
2016
39
Consumer goods companies that do not disclose its
annual financial statement in the currency of
Rupiah
0
Consumer goods companies that do not issue and
publish its financial statement which ended in 31
December
(8)
Consumer goods companies that do not provide
complete data related to variables required
0
Consumer goods companies that do not
continuously produce income
(6)
Total samples for each year 24
Total number of samples for 6 years (2011-2016) 144
Table 3 Descriptive Statics Result
Variable | Obs Mean Std. Dev. Min Max
-------------+--------------------------------------------------------
roa | 144 .1544562 .1222465 .01542 .6572
tobinsq | 144 3.9289 3.929118 .74184 20.06521
gov | 144 .0484625 .1858354 0 .9003
inst | 144 .1693951 .2701745 0 .9201
bsize | 144 6.041667 2.773186 2 15
-------------+--------------------------------------------------------
ind | 144 .5763889 1.081179 0 7
audit | 144 .5833333 .4947274 0 1
lnta | 144 14.80618 1.675016 11.67872 18.33547
debtratio | 144 .3963794 .1599901 .02235 .75178
dyld | 144 .0354333 .0986339 0 .96012
-------------+--------------------------------------------------------
age | 144 42.95833 19.68347 2 87
Source: Data processing from STATA, 2017
Classical Assumption Tests
Normality Test. After running the Shapiro-Wilk test, the null hypotheses
indicating that the variables are normally distributed is rejected because the
probability is less than 5%. Hence, a treatment to resolve the normality problem
should be conducted. Below is the result of the remedy for the dependent
variables, which are ROA (Return on Asset) and Tobin’s Q: 0.08870 and 0.06028
After conducting the treatment, the null hypotheses indicating that the
variables are normally distributed is accepted because the probability is more than
5%. Hence, it can be concluded that the samples are normally distributed.
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
51
Multicollinearity Test. Based on the results, all of the variables have a value of
VIF less than 10. This means that all of the variables in the regression model do
not have a multicollinearity problem.
Heteroscedasticity Test. Based on the results, the probabilities of both dependent
variables, which are ROA (Return on Assets) = 0.1643 and Tobin’s Q = 0.4736.
Hypotheses Test Table 4 R2 and Adjusted R2 Results
Source: Data processing by the author, 2017
Based on the results in Table 4, the value of R-squared with ROA (Return
on Assets) as the dependent variable is 0.5771. This means the ability of the
independent variables, which are government ownership, institutional ownership,
board size, independent board members, and type of auditor to explain ROA is
57.51%. While, the other 42.49% cannot be explained by the independent
variables in the regression model.
Based on the results in Table 4, the value of R-squared with Tobin’s Q as
the dependent variable is 0.5268. This means the ability of the independent
variables, which are government ownership, institutional ownership, board size,
independent board members, and type of auditor to explain ROA is 52.68%.
Meanwhile, the other 47.32% cannot be explained by the independent variables in
the regression model.
F-Test
The results of the F-test is summarized in the table 5 below: Table 5 F-test Results
Source: Data processing by the author, 2017
Based on the F-test result with ROA and Tobin’s Q as the dependent
variable in table 5, the probability, which is 0.0000, is less than the predetermined
significance level (1%, 5%, and 10%). The null hypotheses is rejected, this means
all the independent variables, which are government ownership, institutional
ownership, board size, independent board members, and type of auditor have an
influence toward ROA (Return on Asset) and Tobin’s Q..
T-test of ROA (Return on Assets)
Based on the t-test result, the equation of the regression model with ROA
(Return on Asset) as the dependent variable is as follows:
ln_ROA = -3.121 - 0.178(GOV) - 0.870(INST) - 0.041(BSize) - 0.032(IND)
Dependent Variables R-squared Adjusted R-squared
ROA (Return on Assets) 0.5771 0.5487
Tobin’s Q 0.5268 0.4950
Dependent Variables Prob>F Hypotheses Result
ROA (Return on Assets) 0.0000 H0 is rejected
Tobin’s Q 0.0000 H0 is rejected
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
52
+ 0.749(AUDIT) + 0.024(LNTA) - 0.171(DebtRatio) + 0.389(DYLD)
+ 0.015(AGE) + e
Moreover, the following conclusions are made in regard of the hypothesis
that had been developed in this research: Table 6 Hypotheses Acceptance (ROA)
Dependent Variable: ROA (Return on Assets)
Independent Variable Coefficient P-Value Hypotheses Decision
Government ownership -0.1779544 0.475 Null Hypothesis is
accepted
Institutional ownership -0.869691 0.000*** Null Hypothesis is
accepted
Board Size -0.0411631 0.044** Null Hypothesis is
accepted
Independent Board Member -0.0319748 0.482 Null Hypothesis is
accepted
Type of Auditor 0.7492985 0.000*** Null Hypothesis is
rejected *significant at the 10% level, **significant at the 5% level, *** significant at the 1% level
Source: Data processing by the author, 2017
T-test of Tobin’s Q
Based on the t-test result, the equation of the regression model with Tobin’s
Q as the dependent variable is as follows:
Tobin’s Q = -2.158 - 0.103(GOV) - 1.610(INST) - 0.069(BSize) - 0.011(IND)
+ 0.784(AUDIT) + 0.117(LNTA) + 0.423(DebtRatio) + 0.665(DYLD)
+ 0.025(AGE) + e
Based on the conclusions above, the hypotheses decision for the
independent variables are summarized in Table10 below: Table 7. Hypotheses Acceptance (Tobin’s Q)
Dependent Variable: Tobin’s Q
Independent Variable Coefficient P-Value Hypotheses Decision
Government ownership -0.1025676 0.796 Null Hypothesis is
accepted
Institutional ownership -1.609768 0.000*** Null Hypothesis is
accepted
Board Size -0.068982 0.034** Null Hypothesis is
accepted
Independent Board Member -0.0105189 0.884 Null Hypothesis is
accepted
Type of Auditor 0.7835923 0.000*** Null Hypothesis is
rejected *significant at the 10% level, **significant at the 5% level, *** significant at the 1% level
Source: Data processing by the author, 2017
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
53
Discussion and Analysis
The Influence of Government Ownership
The regression from the research model shows that government ownership
does not have a significant positive influence on profitability as measured by
ROA (Return on Assets) and firm value as measured by Tobin’s Q. Instead, it
shows a negative insignificant impact. This finding is similar to the studies
conducted by Hovey et. al (2003) and Wei (2007) where state ownership is not
related to firm value and ROA, respectively. Moreover, research conducted by
Tran et. al. (2014), Gursoy and Aydogan (2002), Zeitun and Tian (2007) found the
presence of a negative relationship between government ownership and ROA.
Moreover, Alfaraih et. al. (2012) and Wei and Valera (2003) found that
government ownership reduce corporate value as measured by Tobin’s Q.
There are several reasons why government ownership has a negative
insignificant impact toward ROA (Profitability) and Tobin’s Q (Firm Value)
according to Srivastava and Jhajharia (2011). First, government may not be
motivated to seek profits and increase firm value, but is guided by social altruism.
For example, the government may give more attention to unemployment or
control over certain strategic industries rather than the firm’s performance.
Second, government might not be the real owner who governs the company, but
the bureaucrats. Since bureaucrats will not gain anything from ensuring a
company is performing well or have good corporate governance, they are not
motivated or has no personal interest in doing it.
The Influence of Institutional Ownership
The regression from the research model shows that institutional ownership
does not have a positive influence on profitability as measured by ROA (Return
on Assets) and firm value as measured by Tobin’s Q. Instead, it shows a negative
impact. This outcome is similar to the findings by Wei et. al (2005) and Zeitun
(2009), and Al-Zaidyeen and AL-Rawash (2015). Such relationship might happen
due to the dominant effect of conflict of interest between institutional investors
and the management rather than the role of institutional investors to oversee the
management. Institutional investor might develop profitable affairs thus being less
attracted in restricting and supervising management movement. This may
eventually affect the effectiveness of the company and its performance.
The Influence of Board Size
Based on the results above, board size has a negative significant influence
towards profitability as measured by ROA (Return on Assets) and firm value as
measured by Tobin’s Q, hence when board size is getting bigger, the value of
ROA and Tobin’s Q decreases. Similar negative relationship is found by Mak and
Kusnadi (2005), Bebeji et. al. (2015), and Guest (2009). This negative relationship
may be constructed due to the reason that larger board size has a potential to face
discoordination and miscommunication. Another reason is because larger board
size may be slow in making decisions, which in contrast with smaller board size
that tend take quick and adequate decision. These reasons then may affect the
company’s effectiveness and its overall performance may decline.
The Influence of Independent Board Member
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
54
Based on the results above, the influence of independent board member is
insignificant towards profitability as measured by ROA (Return on Assets) and
firm value as measured by Tobin’s Q. This outcome is similar to the research
conducted by Ness et. al. (2010). Moreover, the empirical result also shows that
there is a negative relationship between independent board member and ROA and
Tobin’s Q. This might be somewhat surprising, because most scholars argued that
independent directors improve corporate governance thus resulting in better
financial performance due to the knowledge they posses (Kao et. al., 2013,
Jackling and Johl, 2009, Knyazeva et. al., 2013). However, Ararat et. al. (2010)
and Wang and Oliver (2009) quoted by Fuzi et. al. (2016) explain that when there
is no association or negative relationship between independent directors and
firm’s performance, the existence of independent directors on the board might be
jeopardized. Companies might fulfilled the regulations on the required number of
the independent directors on the board, however there is a possibility of
neutralizing the power of independent board members through several strategies.
Firms might appoint a person who has irrelevant background that they seem
powerless on the board. Another scenario is companies might appoint someone
who has personal, financial, and social ties with the dominant shareholders, which
eventually affect their independent judgment.
The Influence of Type of Auditor
The regression from the research model shows that type of auditor has a
significant positive influence on profitability as measured by ROA (Return on
Assets) and firm value as measured by Tobin’s Q. This result is consistent with
the past studies conducted by Qasim (2014), Fooladi and Shukor (2012), and
Aljifiri and Moustafa (2007). Furthermore, this relationships is established due to
the reason that bigger audit firm may provide more well-trained expertise and
maintain their independence in performing their jobs as auditor such as detecting
errors compared to smaller audit firm. Hence, this derives to a company obtaining
higher audit control, which may increase profitability and attract investor to
increase firm value because it may control opportunistic management behaviors
and reduce agency costs.
CONCLUSIONS, LIMITATIONS, AND RECOMMENDATIONS
Conclusions
This research is conducted in order to examine the factors that affect
profitability and firm value. The factors that are being studied in this research are
ownership structure and corporate governance. The ownership structure consists
of institutional and government ownership. The corporate governance consists of
board size, independent board members, and type of auditor. These factors are
being examined with the help of four control variables, which are size of
company, debt ratio, dividend yield, and age of company. The profitability is
measured using ROA (Return on Assets), while the proxy to measure firm value is
Tobin’s Q.
The sample for the regression model has a total sample of 144, which
consists of the 24 consumer goods industry companies listed in Indonesia Stock
Exchange for the period 2011-2016.
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
55
The conclusions based on the results of the research can be summarized as:
1. The impact of government ownership towards profitability and firm value is
negative but insignificant. This is because government tends to prioritize social
altruism rather than obtaining profitability and increasing firm value and the
one who exercise governance in government ownership is bureaucrats. This is
in line with the research by Hovey et. al (2003) and Wei (2007).
2. The impact of institutional ownership towards profitability and firm value is
negative and significant. This happens due to agency problems where there is a
conflict of interest between institutional investors and the management. This
evidence is consistent with the research done by Wei et. al (2005) and Zeitun
(2009), and Al-Zaidyeen and AL-Rawash (2015).
3. The impact of board size towards profitability and firm value is negative and
significant. This is caused because larger board size seems to be less efficient
in making decisions. This is in line with the research by Mak and Kusnadi
(2002), Bebeji (2015), and Guest (2009).
4. The impact of independent board member towards profitability and firm value
is negative but insignificant. This happens because the role of independent
director is jeopardized or manipulated by the company. This evidence is
consistent with the research done by Ness et. al. (2010), Ararat et. al. (2010),
and Wang and Oliver (2009).
5. The impact of auditor type towards profitability and firm value is positive and
significant. Such influence occurs because big four companies tend to have
more well trained personnel. This is in line with the research by Qasim (2014),
Fooladi and Shukor (2012), and Aljifiri and Moustafa (2007).
In conclusion, companies with appropriate ownership structure and strong
corporate governance influence company performance in terms of obtaining
profits and attracting investors to increase firm value.
Research Limitations
There are several limitations in this research, which is needed to be mentioned in
order to avoid any misinterpretation. Moreover, research limitations are useful for
the development of a similar research in the future.
1. This research only focuses on consumer goods industry companies as its
sample for the period of six years from 2011 to 2016.
2. This research only uses two types of ownerships, which are institutional, and
government ownership.
3. This research only uses three corporate governance mechanisms variables,
which are board size, independent board members, and type of auditor.
Recommendations
Based on the results and limitations above, the following recommendations are
given for improving this research for future researches:
1. The future research should use bigger samples, for instance by using other
industry such as mining industry, agriculture industry, etc. with longer period
than six years.
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
56
2. The future research should use more than two types of ownerships other than
institutional ownership, and government ownership, such as managerial
ownership, family ownership, foreign ownership, and many more.
3. The future research should use more than three corporate governance
mechanisms variables other than board size, independent board members, and
type of auditor, such as audit committee, CEO duality, board’s working
experience, women on board and many more.
REFERENCES
Alfaraih, M., Alanezi, F., & Almujamed, H. (2012). The Influence of Institutional
and Government Ownership on Firm Performance: Evidence from
Kuwait. International Business Research, 5(10), 192-200.
doi:10.5539/ibr.v5n10p192
Aljifri, K., & Moustafa, M. (2007). The Impact of Corporate Governance
Mechanisms on the Performance of UAE Firms: An Empirical
Analysis. Journal of Economic & Administrative Sciences, 23(2), 71-93.
doi:10.1108/10264116200700008
Al-Malkawi, H., & Pillai, R. (2012). Internal Mechanisms of Corporate
Governance and Firm Performance: A Review of Theory and Empirical
Evidence. Journal of Modern Accounting and Auditing, 8(4), 549-568.
Al-Najjar, D. (2015). The Effect of Institutional Ownership on Firm Performance:
Evidence from Jordanian Listed Firms. International Journal of Economics
and Finance, 7(12), 97-105. doi:10.5539/ijef.v7n12p97
Al-Zaidyeen, K. A., & AL-Rawash, S. Z. (2015). The Effect of Ownership
Structure on Corporate Performance of Listed Companies in Amman Stock
Exchange: An Empirical Evidence of Jordan. International Journal of
Managerial Studies and Research, 3(5), 41-49.
Arens, A. A., Elder, R. J., & Beasley, M. S. (2014). Auditing and Assurance
Services (15th ed.). Boston: Pearson.
Aryan, L. A. (2015). The Relationship between Audit Committee Characteristics,
Audit Firm Quality and Companies’ Profitability. Asian Journal of Finance
& Accounting, 7(2), 215-226. doi:10.5296/ajfa.v7i2.8530
Bebeji, A., Mohammed, A., & Tanko, M. (2015). The Effect of Board Size and
Composition on The Financial Performance of Banks in Nigeria. African
Journal of Business Management, 9(16), 590-
598. doi:10.5897/ajbm2015.7797
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
57
Berghe, V. L., & Levrau, A. (2004). Evaluating Boards of Directors: What
Constitutes A Good Corporate Board?. Corporate Governance: An
International Review, 12(4), 461-478. doi:10.1111/j.1467-
8683.2004.00387.x
Bouaziz, Z. (2012). The impact of the presence of audit committees on the
financial performance of Tunisian companies. International Journal of
Management and Business Studies, 2(4), 57-64.
Cadbury, A. (1992). Report of the Committee on the Financial Aspects of
Corporate Governance. London: Gee.
Carcello, J. V., & Nagy, A. L. (2004). Client Size, Auditor Specialization and
Fraudulent Financial Reporting. Managerial Auditing Journal, 19(5), 651-
668. doi:10.1108/02686900410537775
Deloitte. (2016, February). Independent board members can be a valuable
resource for private companies (Rep.). Retrieved
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Risk/gx-
ccg-on-boards-agenda-feb-2016.pdf
DeZoort, T., Hermanson, D. R., Archambeault, D., & Reed, S. (2002). Audit
Committee Effectiveness: Asynthesis of The Empirical Audit Committee
Literature. Journal of Accounting Literature, 21, 38-75.
Fooladi, M. & Shukor, Z. A. (2012). Board of Directors, Audit Quality and firm
performance: Evidence from Malaysia. Paper presented at the National
Research & Innovation Conference for Graduate Students in Social Science,
Mahkota Hotel, Melaka.
Forum for Corporate Governance in Indonesia. (2001). Corporate Governance:
Peranan Dewan Komisaris dan Komite Audit dalam Pelaksanaan
Corporate Governance (Tata Kelola Perusahaan). Jakarta: Prentice Hall.
Fredrick, O. O. (2015). Corporate Governance And Firm Value For Firms Listed
At The Nairobi Securities Exchange. Unpublished Master’s Thesis,
University of Nairobi, Nairobi, Kenya.
Fuzi, S. F., Halim S. A., &Julizaerma, M. K. (2016). Board Independence and
Firm Performance. Procedia Economics and Finance, 37, 460 – 465.
Guest, P. M. (2009). The Impact of Board Size on Firm Performance: Evidence
from the UK. The European Journal of Finance, 15(4), 385-404.
doi:10.1080/13518470802466121
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
58
Gursoy, G. & Aydogan, K. (2002). Equity Ownership Structure Risk Taking and
Performance: An Empirical Investigation in Turkish Listed
Companies. Emerging Market Finance and Trade, 38(6), 6-25.
Halil, E. A. & Hassan, A. (2012). The effect of firm size on profitability: An
empirical Icelandic firms. Bitrost Journal of Social Sciences, 1, 33-42.
Hanazaki, M., & Liu, Q. (2007). Corporate Governance and Investment in East
Asian Firms - Empirical Analysis of Family-Controlled Firms. Journal of
Asian Economics, 18(1), 76-97. doi:10.1016/j.asieco.2006.12.003
Harrison, W. T., Horngren, C. T., & Thomas, C. W. (2014). Financial Accounting
(10th ed.). Toronto, Ontario: Pearson Education.
Hashim, H.A. & Devi, S. (2008). Board characteristics, ownership structure and
earnings quality: Malaysian evidence. Research in Accounting in Emerging
Economies, 8, 97-123.
Hassan, S. U., & Farouk, M. A. (2014). Audit Quality and Financial Performance
of Quoted Cement Firms in Nigeria. European Journal of Business and
Management, 6(28), 73-82.
Hovey, M., Li, L., & Naughton, T. (2003). The Relationship Between Valuation
and Ownership of Listed Firms in China. Corporate Governance, 11(2),
112-122. doi:10.1111/1467-8683.00012
Isik, O., & Ince, A. R. (2016). Board Size, Board Composition and Performance:
An Investigation on Turkish Banks. International Business Research, 9(2),
74-84. doi:10.5539/ibr.v9n2p74
Jackling, B. & Johl, S. (2009). Board Structure and Firm Performance: Evidence
from India’s Top Companies. Corporate Governance: An International
Review, 17(4), 492–509. doi: 10.1111/j.1467-8683.2009.00760.x
Jensen, M. C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and
Takeovers. The American Economic Review, 76(2), 323-329.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial
Behavior, Agency Costs, and Ownership Structure. Journal of Financial
Economics, 3(4), 305-360. doi:10.1002/9780470752135.ch17
Johnson, S. (2000). Observations on Corporate Governance in the Asian
Crisis. Global Financial Crises, 297-306. doi:10.1007/978-1-4615-4367-
1_29
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
59
Keasey, K., S. Thompson and M. Wright (eds.), 2005, Corporate Governance:
Accountability, Enterprise and International Comparisons . London:
Wiley.
Kim, K. A., & Nofsinger, J. R. (2007). Corporate Governance (2nd ed.). New
Jersey, USA: Pearson/Prentice Hall.
Kimmel, P. D., Weygandt, J. J., & Kieso D. E. (2013). Financial Accounting IFRS
Edition. Hoboken, New Jersey: John Wiley & Sons, Inc.
Knyazeva, A., Knyazeva, D., & Masulis, R. (2013). The Supply of Corporate
Directors and Board Independence. Review of Financial Studies, 26(6),
1561-1605. doi: 10.1093/rfs/hht020
Kao, M. F., Hodgkinson, L., Jaafar, A. (2013, July). Board Characteristics,
Ownership Structure and Firm Performance: Evidence from Taiwan. Paper
presented at the Seventh Asia Pacific Interdisciplinary Research in
Accounting Conference, Kobe, Hyogo.
Lasfer, M. (2002). Board Structure and Agency Costs. Paper presented at the
EFMA 2002 London Meetings, London, England.
Lukviarman, N. (2004). Ownership structure and Firm Performance: the Case of
Indonesia. Unpublished Doctoral Dissertation. Curtin University of
Technology, Perth, Western Australia.
Mak, Y. T., & Kusnadi, Y. (2005). Size Really Matters: Further Evidence on the
Negative Relationship Between Board Size and Firm Value. Pacific-Basin
Finance Journal, 13(3), 301-318. doi:10.1016/j.pacfin.2004.09.002
Najid, N., & Abdul Rahman, R. (2011). Government Ownership and Performance
of Malaysian Government-Linked Companies. International Research
Journal of Finance and Economics, (61), 42-56.
Ness, R. K., Miesing, P., & Kang, J. (2010). Board of Director Composition and
Financial Performance in a Sarbanes-Oxley World. Academy of Business
and Economics Journal, 10(5), 56-74.
Qasim, A. M. (2014). European Journal of Business and Management. The Impact
of Corporate Governance on Firm Performance: Evidence from the
UAE, 6(22), 118-124.
Rose, C. (2007). Can Institutional Investors Fix the Corporate Governance
Problem? Some Danish Evidence. Journal of Management and Governance,
11(4), 405-428.
Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X
60
Solomon, J. (2007). Corporate Governance and Accountability (2nd ed.).
Chichester, England: John Wiley & Sons.
Solomon, J., & Solomon, A. (2004). Corporate Governance and Accountability.
Chichester, England: John Wiley & Sons, Ltd.
Topal, Y., & Dogan, M. (2014). Impact of Board Size on Financial Performance:
The Case of BIST Manufacturing Industry. International Journal of
Business Management and Economic Research, 5(4), 74-79.
Tran, N. M., Nonneman, W., Jorissen, A. (2014). Government Ownership and
Firm Performance: The Case of Vietnam. International Journal of
Economics and Financial Issues. 4(3), 628-650.
Tricker, B. (2009). Corporate Governance: Principles, Policies, and Practices.
Oxford, UK: Oxford University Press.
Vo, D., & Phan, T. (2013). Corporate Governance and Firm Performance:
Empirical Evidence From Vietnam. Journal of Financial Economics, 78,
210-226.
Walt, N., & Ingley, C. (2003). Board Dynamics and the Influence of Professional
Background, Gender and Ethnic Diversity of Directors. Corporate
Governance: An International Review, 11(3), 218-234. doi:10.1111/1467-
8683.00320
Wei, G. (2007). Ownership Structure, Corporate Governance and Company
Performance in China. Asia Pacific Business Review, 13(4), 519-545.
doi:10.1080/13602380701300130
Wei, Z., & Varela, O. (2003). State Equity Ownership and Firm Market
Performance: Evidence From China’s Newly Privatized Firms. Global
Finance Journal, 14(1), 65-82. doi:10.1016/s1044-0283(03)00005-x
Wei, Z., Xie, F., & Zhang, S. (2005). Ownership Structure and Firm Value in
China's Privatized Firms: 1991–2001. Journal of Financial and Quantitative
Analysis, 40(1), 87-108. doi:10.1017/S0022109000001757
Weterings, J. P., & Swagerman, D. M. (2012). The impact of board size on firm
value: Evidence from the Asian real estate industry. Asian Journal of
Business and Management Sciences, 1(8), 22 - 43.
Zeitun, R. (2009). Ownership Structure, Corporate Performance and Failure:
Evidence From Panel Data of Emerging Market. Corporate Ownership and
Control, 6(4), 96-114. doi:10.22495/cocv6i4p10