T H E E F F E C T S O F E N V I R O N M E N T R IS K , CAPITAL STRUCTURE, AND CORPORATE STRATEGY ON ASSETS PRODUCTIVITY, FINANCIAL PERFORMANCE AND CORPORATE VALUE: A STUDY ON GO PUBLIC COMPANIES REGISTERED AT JAKARTA STOCK EXCHANGE
THE EFFECTS OF ENVIRONMENT RISK, CAPITAL STRUCTURE, AND CORPORATE STRATEGY ON ASSETS PRODUCTIVITY, FINANCIAL PERFORMANCE AND CORPORATE VALUE: A STUDY ON GO PUBLIC COMPANIES REGISTERED
AT JAKARTA STOCK EXCHANGE
TEDDY CHANDRA
ABSTRACT
T h i s s tu d y w a s a i m e d at: (1) e x a m i n i n g th e e ffe c ts o f environment risk *
c o n s is te d oi financial risk , business risk and market risk on corporate strategy, ca p ita l stru ctu re , asset pro d u c tiv ity , financial performance and
c o r p o ra te value. (2 ) e x a m in in g the effects o f corporate strategy' co n s is te d o f liquidity, sales growth, assets growth and growth potential o n c a p ita l stru ctu re , asS&s pro d u c tiv ity , fin a n c ia l p e r f o r m a n c e a n d
c o r p o ra te v alu e. (3) e x a m i n i n g capital o n a sse ts p ro d u c tiv ity , fin a n c ia l p e r fo r m a n c e a n d c o r p o ra te value. T h e re search w a s an e x p la n a to r y study. T h is s tu d y w a s an e x p la n a to ry research. All c o m p a n ie s re g istered in J a k a rta S to c k E x c h a n g e in 2 0 0 0 -2 0 0 4 periods w e re used as s am p les. T h e y w e r e d i v id e d into m a in b o a rd c a te g o ry c o n s is te d o f 71 e m itte rs ,
d e v e l o p m e n t b o a r d 62 emitters-, and total b o a r d 134 e m itte rs . S tr u c tu ra l E q u a tio n M o d e ! w a s u sed as a n a ly s is m e t h o d . S P S S 11.5
a n d A M O S 5.0 w e re u sed for p ro c e s s in g d ata an d a l lo w i n g h y p o th e tic a l tests to b e p e r fo rm e d . T h e results indicated that: (1 ) in v esto rs e x p e c t m a in b o a rd c o m p a n i e s to a d o p t free cash flo w w h e re a s d e v e lo p m e n t
b o a r d c o m p a n ie s w e r e e x p e c te d to be m o re c o n s e r v a tiv e b y a d o p t in g p e c k i n g o r d e r th e o ry . M o s t In d o n e sia n c o m p a n ie s w e re e x p e c te d to
a d o p t th e latter. A n d , in fact, m o st o f m ain, d e v e lo p m e n t, a n d total bo a rd c o m p a n i e s in In d o n e s ia tend to ad o p t p e c k in g o r d e r th eory. (2) In
g en e ra l, th e in c re a se o f c o m p a n y 's value w a s in flu en c ed b y th e in cre ase o f c o r p o ra te s tra te g y a n d capita l d e d u c tio n , but the in c re a se w o u ld be m u c h m o r e h ig h e r i f a c c o m p a n i e d by raisin g asse ts p ro d u c tiv ity . F or
d e v e lo p m e n t b o a r d c o m p a n i e s in p articular, the in c re a se o f c o m p a n y 's v alu e s h o u ld be a c c o m p a n i e d by c o m p a n y 's fin an c ia l p e r f o r m a n c e . (3)
C r e d i to r s d o n o t c o n s i d e r c o m p a n y 's fin a n c ial risk in g i v i n g lo an s, this im p lie s th e in c re a s e o f s ta c k e d credit. (4) In v e s to rs d o n o t tru st
c o m p a n y 's fin a n c ia l p e r f o r m a n c e report. (5) S trateg ic m a n a g e m e n t m a y p ro v id e h elp in e x p la in in g capital structure p h e n o m e n a w ith sig n ific a n t in flu e n c e o f c o r p o ra te strategy on both capital s tru c tu re an d
c o m p a n y 's value.
Key Words:
C o r p o r a te S trateg y , E n v iro n m e n t R isk, C ap ita l S tru ctu re,
A s s e ts P ro d u c tiv ity , F inancial P e rf o rm a n c e , C o m p a n y 's V a lu e ,
Vol. 17, No. 1/ Agustus 2009 © Centre f o r Indonesian Accounting and M anagement Research Postgraduate Program, Brawijaya University
36 The Effects o f Environment Risk, Capital Structure,
fin a n c ia l risk, b u s in e s s risk m a r k e t risk, sales g r o w t h , as s e ts
g r o w t h , g r o w t h p o ten tia l, liquidity, d e b t to e q u ity ratio, d e b t to
a s s e ts ra tio , e q u ity to A s s e ts ratio, re tu rn to a s s e ts ratio, basic
e a r n i n g ratio, p e c k in g o r d e r T h e o r y , free ca sh flo w th eo ry .
INTRODUCTION
S m a ll companies
a considerable tendency on
' C o m p u te r S cience C ollege Pelita Indonesia, Jl. A .Y ani N o .78-88 P ek an b aru 2 8 1 2 7 T e l p . 0 7 6 1-24418 Faks. 0 761-35508 e-mail:teddy 8 8 8 6 @ y ah o o .co m
P u r n o m o ( 1 9 9 9 : 7 ) t h e r e a r e s e v e r a l r e a s o n s f o r c o m p a n i e s t o m a k e d e b ts : ( 1 ) W h e n t h e r e is t a x , b y m a k i n g d e b t s , c o m p a n i e s m a y t a k e b e n e f i t s . B e c a u s e ,
p a y i n g t h e i n t e r e s t c o s t s w i ll l o w e r t a x p r i c e t h e y m u s t p a y a n d a t t h e s a m e time lever up their values. (2) Companies try to take advantage from "easy believe" and imprudent creditors. Banks do not often serve as prudent evaluator when qualifying credit provision. They are not used to carry out
C apacity, C ondition) a s th e basics for that provision, but adversely creating and growing the culture of corruption, collusion, and nepotism. (3) Raising debts doesn't mean owners'
5 C 's a n a l y s i s
C h a ra c te r ,
C ollateral, C apital ,
s h a r e s d i l u t i o n . I f t h e m a r k e t is in a bearish c o n d i t i o n , f o r c i n g a c a p it a l ra is e b y s e l l i n g s h a r e s w ill o n l y l o w e r its o w n m a r k e t p r i c e a n d t h i s w ill c a u s e
c o m p a n y 's g r e a t lo ss. .
H o w 'e v e r t h e f i r s t p r o p o s i t i o n h a s f o u n d its c o u n t e r - a r g u m e n t . In y e a r
1 9 5 8 , M o d i g l i a n i a n d M i l l e r , ( in B r e a l e \ a n d M y e r s , 1 9 9 6 : 4 4 9 - 4 5 6 ) , h a d p r o p o s e d s o m e e v i d e n c e s t h a t w i th " n o - t a x a s s u m p t i o n , " c o i p o r a t e v a l u e w o u l d b e i n d e p e n d e n t . N o m a t t e r w h e t h e r it o p e r a t e s w i t h d e b t s o r f u n d e d b y their own internal capital, any capital structure change would not bring any
e f f e c t s o n its v a l u e . B u t in y e a r 1 9 6 3 , M o d i g l i a n i a n d M i l l e r ( M M ) t u r n e d to r e v is e t h e i r a r g u m e n t r e g a r d i n g t h e i r c a p it a l s t r u c t u r e t h e o r y w i t h t h e assumption
o f co rp o ra te incom e tax. MM argued that le v e ra g e would raise corporate value since .debt interest cost defined as
a tax d e d u c tib le expense. The second Modigliani -Miller theory supports company's tendency to raise t h e i r d e b t s f o r f u n d i n g c o m p a n y ' s i n v e s t m e n t . B u t, l a r g e r d e b t m a k e s it m o r e
s u s c e p t i b l e o n b a n k r u p t c y , w h i c h is a v o i d a b l e i f it o n l y u s e s t h e i r i n t e r n a l fund. This risk will bring certain impact on stock price as well as corporate v a l u e . W i t h all o f t h e s e r i s k s , w h y s h a r e h o l d e r s let th is to h a p p e n ?
Vol. 17, No. 1/ Agustus 2009 © Centre f o r Indonesian Accounting and M anagem ent Research Postgraduate Program, Brawijaya University
The International Journal o f Accounting and Business Society 37
S h a r e h o l d e r s g i v e a n i m p r e s s i o n t h a t t h e y let t h e c o m p a n y t o m a k e d e b t s for a reason known as the
agency problem . According to this theory, share
h o l d e r s a r e s u s p i c i o u s o n m a n a g e r 's v e s t e d i n te r e s t: t h a t t h e y m a k e d e c i s i o n s based on their own personal consideration, not for the sake of common
b e n e f i t s . I f t h e r e a r e s o m e o p p o r t u n i t i e s to m a k e a n i n v e s t m e n t , s h a r e h o l d e r s ask their manager to pick one of them, but which investment considered p r o f i t a b l e , it is v e r y h a r d to d e f in e . In t h e o r y , t h e l a r g e r t h e p r o f i t r a te , t h e bigger the risks that appear
(high return, high risk). That once a risky
b u s i n e s s is v e r y m u c h d if f e r e n t f r o m t h e a l r e a d y e s t a b l i s h e d o n e (core business), c o n f i d e n c e o n h o w p o w e r f u l th i s s t e p c o u l d b e , m a y w i n th e
i n f e r io r r e a s o n i n g o f h i g h e r r i s k s i f d i v e r s i f i c a t i o n is t o o f a r u n s i m i l a r f r o m its
c o r e b u s i n e s s . T h e f a c t t h a t tffere is n o r o b u s t r e g u l a t i o n in i n v e s t m e n t m a k e s l a r g e c o m p a n i e s in I n d o n e s i a t o m a k e h u g e i n v e s t m e n t by m a k i n g d e b t s . M u c h o f t h o s e d e b t s t a k e n in f o r m o f f o r e i g n c u r r e n c y w h i c h p r o v i d e q u i t e t e m p t i n g difference on cost o f debt.
In 1 9 6 3 , a t t h e t i m e " t a x " b e c a m e o n e o f d e t e r m i n i n g f a c t o r in M o d i g l i a n i & M i l l e r 's n e w m o d e l , t h e i m p a c t s o f t a x a n d b a n k r u p t c y h a d a l r e a d y
c o m p l i c a t e d t h e p r o c e s s to f in d t h e b e s t f o r m a t o f a n o p t i m u m c a p i ta l structure. This study was aimed at carrying out an empiric examination: w h e t h e r t h a t o p t i m u m c a p i ta l s t r u c t u r e re a l ly e x i s t in I n d o n e s i a n s t o c k m a r k e t . Does the structure have significant influence on corporate value?
To provide answers regarding unconsistent capital structure which
i n f l u e n c e c o r p o r a t e v a l u e , w e c a n n o t r e ly o n f i n a n c i a l t h e o r i e s o n l y . T h e r e is another factor involved, namely: managerial behavior. (Barton & Gordon.
1 9 8 7 & 1 9 8 8 ). P r e v i o u s s t u d i e s f o u n d t h e i n f l u e n c e o f co rp ora te stra te g y on capital structure (Barton & Gordon, 1987 & 1988; Lowe,
et a l 1994; Chathoth, 2002). Corporate Strategy associated with financial theory and
influence capital structure are growth strategy and liquidity. (Kim
et al, 1 986: Barton & Gordon, 1988; Balakrishnan & Fox, 1993; hatfieId
et al, 1994; Lowe
et al, 1994; McConnell et al, 1995; Jung et al, 1996; Chen, 2002: Chathoth, 2002; Tian Pao
et al, 2003; Eldomiaty, 2003). Leland and Pyle (1997) and Ross (1977) assumed that managers utilize Jhe ratio of capital s t r u c t u r e a s s ig n a l . A s a m a t t e r o f fa c t, h ig h
leverage w ill r e s u l t in la r g e r
e x p e n s e a n d l a r g e r r is k s o f b a n k r u p t c y p a r ti c u la r l y f o r l o w q u a l i f i e d c o m p a n i e s . Stulz (1990) confirms that debts may bring positive or negative impact o n c o r p o r a t e v a l u e ( e v e n i f t a x a n d b a n k r u p c y c o s t a r e n o t i n c l u d e d ) . H e saw a m a n a g e r a s a p e r s o n t h a t d o e s n o t h a v e a n y s h a r e o f h i s o w n . It's o n l y h is
p o w e r t h a t m a k e s h i m r e c e i v i n g p r o j e c t s w i th n e g a t i v e p rese n t value. As a
c o n s e q u e n c e , s h a r e h o l d e r s w ill f o r c e h im to m a k e d e b t s . B u t i f t h e y f o r c e h im
Vol. 17, No. //
Agustus 2009
Centre f o r Indonesian Accounting and M anagem ent Research
Postgraduate Program, Brawijaya University
38 The Effects o f Environment Risk, Capital Structure,
t o o h a r d , m a n a g e r w ill n e g l e c t h is o b l i g a t i o n t o t a k e p r o j e c t s w i t h p o s i t i v e p r e s e n t v a l u e . T h a t 's w 'h y it is n e c e s s a r y t o ' p u t
agency cost o f debt and agency cost o f m anagerial discretion s t a y in b a l a n c e . T h i s
51 ie s t h a t c o m p a n i e s w i t h h i g h g r o w t h r a te w ill h a v e n e g a t i v e c o r r e l a t i o n w i tn erage, w 'h e r e a s c o m p a n i e s w i t h l o w g r o w t h r a te w i ll h a v e p o s i t i v e c o r r e l a t i o n
w i th •erage (McConnell & S e r v a e s : 1 9 9 5 ).
from surrounding environment:quently called as
In s tr a te g ic
m a n a g e m e n t, risks
that
come
u n ce rta in ty, co m p lexity, d yn a m ism and illib e ra lity (Olsen, et, 1 9 9 8 ; S i m e r l y & L i, 2 0 0 0 ; C h a t h o t h , 2 0 0 2 ) . In f i n a n c i a l t h e o r y , r i s k s a r e c l a s s i f i e d i to fin a n c ia l risk, business ris k and m arket risk ( B a r t o n & G o r d o n , 1 9 8 8 ; L o w 'e , et /., 1994; Setyaningsih, 1996; Prasad, et ai,
1997; Kochhar & Hitt, 1998; Booth, etd., 2000; Han Shin,ef ai, 2000; R a t n a w a t i , 2 0 0 1 ; C h a t h o t h , 2 0 0 2 ; T i e n P a o , 2 0 0 3 ; i I d o m ia t y , 2 0 0 3 ; S u d a r m a ,
2 0 0 4 ; I n d a h w a t i , 2 0 0 4 ) . T h e d e f in i ti o n o f r i s k in strategic m anagem ent and
f i n a n c i a l t h e o r y a r e a l m o s t s im il a r . T h a t t h e r is k s i t s e l v e s r i s e f r o m e f f o r t s to
g a i n o p p o r t u n i t i e s w h i l e r e d u c i n g t h r e a ts . T h e r e f o r e , a p r o p e r f o r m u l a t i o n o f corporate strategy
risk and strategic m anagem ent — in p a r t i c u l a r corporate strategy — has ever been reported by some scholars (Barton &Gordon, 1988; Lowe, et a/., 1 9 9 4 ; C h a t h o t h , 2 0 0 2 ) . In t h e f r e e
ca sh flow theory, Jensen (1986) asserts that manager having free cash flo w t e n d s to m a k e le s s b e n e f i c i a l i n v e s t m e n t . M a n a g e r t h i n k s t h a t it is b e t t e r t h a n i f h e r e t u r n s t h e m o n e y t o t h e s h a r e h o l d e r s . M a n a g e r w o u l d
p r e f e r i n v e s t m e n t t h a t m a y r e t a i n c o r p o r a t e g r o w 'th , t h o u g h t h e g r o w t h w o n 't r a i s e its v a l u e . A c c o r d i n g t o t h i s t h e o r y , s h a r e h o l d e r s f o r c e m a n a g e r to m a k e
d e b t s a s m u c h a s p o s s i b l e : in o r d e r t o d e d u c t a g e n c y c o s t , a n d t o d i s c i p l i n e t h e m a n a g e r in m a n a g i n g t h e i r f u n d a n d f o r c e h i m t o a c h i e v e c e r t a i n p r o d u c t i v i t y l e v e l a s t h e y e x p e c t . J e n s e n s a i d t h a t 'd e b t s w o u l d e n c o u r a g e more
efficient management,
that
utilization become more productive. Hence, the fr e e cash flo w theory predicts positive relationship
assets
b e t w e e n c a p i ta l s t r u c t u r e w i th i n v e s t m e n t a n d a s s e ts p r o d u c t i v i t y ( S u n i h e n . 2003).
" Inform ation a sym m etry assumption and The p e c k in g order theory (Myers dan Majluf: 1984) predict that companies would take p e c k in g order theory as
a n o p t i m u m f i n a n c i a l s t r a t e g y . T h e b a s i c r e a s o n f o r t h i s t h e o r y is i f m a n a g e r s e r v e s a s a h a l f - o w n e r , h e w o u l d e x e r t s a ll h is e f f o r t s t o g a i n h i g h e r s t o c k p r i c e e x c e e d i n g its r e a v a l u e
(over price). C ost o f eq uity ca p ita l as a sensitive
i s s u e w o u l d b e t h r o w n t o tb m a r k e t to g iv e a n i m a g e t h a t t h e s t o c k p r i c e ha d
b e e n t o o h ig h . T h i s s t u d y w a s a i m e d a t: ( 1 ) e x a m i n i n g t h e e f f e c t s o f
e n v iro n m e n t ris consisted
o f fin a n c ia l risk, business risk and market risk on corporate strategy. capit structure,
asset productivity, fin a n c ia l p erfo rm a n c e and corporate value.
(examining the effects of corporate strategy ; consisted of liquidity, sales growth, assets g ro w th and gro w th p o te n tia l on capital structure, assets
Vol. 17, No. 1/ Agustus 2009
Centre f o r Indonesian Accounting and M anagem ent Research Postgraduate Program, Brawijaya University
The International Journal o f Accounting and Business Society
productivity, financial performance and corporate value. (3) examining capital on assets productivity, financial performance and corporate value.
RESEARCH METHOD
T h i s s t u d y is a n e x p l a n a t o r y o b s e r v a t i o n a l e x - p o s t f a c t o r e s e a r c h t h a t presents causal explanation or relationships among variables through hypothetical examination. As population were go public companies registered at Jakarta Stock Exchange (JSE or Bursa Efek Jakarta, BEJ). Samples were t a k e n p u r p o s i v e l y , in a c c o r d w i th c r i t e r i o n s a s f o l l o w : 1) T h e y m u s t h a d b e e n r e g is t e r e d a t J S E s i n c e 1 9 9 8 . T h o s e r e g i s t e r e d in 1 9 9 9 o r t h e n e x t y e a r s w o u l d n o t b e c l a s s i f i e d a s s a m p l e s . T h i s is in o r d e r t o p r e v e n t b i a s t h a t m a y c o f n e from age difference among companies as long as they become "public." 2) Their financial reports end up on 3 1 December. Companies that do not have
f i n a n c i a l r e p o r t s c l o s e d 31 D e c e m b e r w e r e e x c l u d e d . T h i s is in o r d e r t o a v o i d mis-perception on their performance. 3) Banks and finance institutions (banks, M u l t i F i n a n c e a n d I n s u r a n c e ) w e r e e x c l u d e d f o r a v o i d i n g b i a s c a u s e d by
d i f f e r e n c e in t y p e s o f b u s i n e s s a n d c r i t e r i o n s o f s t a n d a r d m e a s u r e m e n t . 4 ) In t h e p r e s e n t e d f i n a n c i a l r e p o r t s , n e g a t i v e e q u i t y b a l a n c e is n o t p e r m i s s i b l e , fo r th is w o u l d c a u s e d i s o r d e r s i f i n c l u d e d in to r a ti o a n a ly s i s .
main board and development board. Main board includes great emitents with good track record, whereas development board handles smaller emitents. Development board also
J S E c l a s s i f i e d e m i t e n t s i n to t w o g r o u p s :
i n c l u d e s c o m p a n i e s ( e m i t e n t s ) t h a t a r e in p r o c e s s o f r e s t r u c t u r i z a t i o n a n d performance recovery. Concerning that these emitents come form various s e c t o r s in J S E , a n d in o r d e r t o a v o i d b i a s r e s u l t e d f r o m u n i f i c a t i o n o f
d i f f e r e n t s e c t o r s , t h i s s t u d y h e l d s e c t o r a l a n a l y s i s w i th g r o u p i n g a s f o l lo w s :
Table 1. Sectoral Analysis On Companies At Jakarta Stock Exchange
NO
MEMBERS 1 Basic and chemicals Industries
SECTOR
26 Emitents 2 Multivarious Industries
26 Emitents 3 Consumption Goods Industries
21 Emitents 4 Property
Real
Estate
and 22 Emitents
Transportation
& Emitents
5 Infrastructure
26 Emitents
6 Commerce and Service Data Insufficient
Agriculture and Mining
TOTAL
122 Emitent
Source: processed
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© Centre f o r Indonesian Accounting and M anagem ent Research Postgraduate Program, Brawijaya University
40 The Effects o f Environment Risk, Capital Structure .............
T h e r e w a s o n l y 9 e m i t e n t s o r 4 5 d a t a f o r A g r i c u l t u r e a n d m in in g . T h i s n u m b e r is i n s u f f i c i e n t t o fu lf ill m i n i m u m S E M r e q u i r e m e n t ( 1 0 0 D a ta ). Therefore both sectors can not be included for further analysis.
The number of samples was 100 minimally, since analysis instrument u s e s S t r u c t u r a l E q u a t i o n M o d e l i n g . D a t a w e r e o f p r i m a r y a n d s e c o n d a r y at J S E a n d g o p u b l i c c o m p a n i e s a t J S E . D o c u m e n t a t i o n w a s c a r r i e d o u t in o r d e r to c h e c k : f i n a n c i a l r e p o r t s , s t o c k p r i c e , C o m b i n e d S t o c k P r i c e I n d e x , a n d t h e list o f e m i t e n t s c l a s s i f i e d a s m a i n b o a r d a n d d e v e l o p m e n t b o a r d . C o n c e r n i n g that so many variables involved and the need to find out relationships among v a r i a b l e s s i m u l t a n e o u s l y , a s t a t i s t i c m u l t i v a r i a t e m e t h o d is n e c e s s a r y f o r
analyzing more than two variables. Structural Equation Model (SEM) was u s e d w i t h t h e h e l p o f s o f t w a r e S P S S a n d A M O S 4 .0 .
RESULTS AND DISCUSSIONS
Environment risk on
E nvironm ent R isk had not significant effects on C orp orate S tra teg y w i t h f a u lt tolerance of 87%. The same description found at Main board and Development
b o a r d . F a u l t t o l e r a n c e o f e a c h g r o u p a r e 9 8 , 3 % a n d 5 1 , 4 % , r e s p e c t i v e l y . A f a ir
e x c e p t i o n a p p l i e d t o c h e m i c a l a n d b a s ic i n d u s t r i e s , m u l t i v a r i o u s i n d u s t r ie s , a n d consumption good Industries, where for these three sectors,
e n v iro n m e n t R isk had significant effects on
C o rp o ra te Strategy. With fault tolerance of 2,1%, 4%, and "Fix," respectively. Only Property & R e a l e s ta t e , T r a n s p o r t a t i o n & I n f r a s t r u c t u r e , a n d C o m m e r c e a n d S e r v i c e d id n o t
agree with this relationships.
E nvironm ent R isk had not any effects on
C orporate Strategy. With fault tolerance of 14,9% for Property & Real estate
a n d T r a n s p o r t a t i o n & I n f r a s t r u c t u r e a n d 5 3 , 6 % f o r - c o m m e r c e a n d s e r v ic e s e c to r s .
Environment risk on Capital Structure.
There was significant effect of
e n v i r o n m e n t r i s k o n c a p i t a l s t r u c t u r e a t M a i n b o a r d c o m p a n i e s w i th fa u lt t o l e r a n c e o f 0 , 2 % . T h e f i n d i n g s in m a i n b o a r d c o m p a n i e s w e r e n o t f o l l o w e d by Development Board companies which found no significant effects of
E nvironm ent R isk on capital Structure, with fault tolerance of 1 1,9%. Whereas
f o r t h e T o t a l B o a r d ( M a i n B o a r d p lu s D e v e l o p m e n t B o a r d ) t h e r e w a s significant effects of
E nvironm ent R isk o n c a p i ta l s t r u c t u r e , w i t h f a u lt t o l e r a n c e of 0,5% only. For Basie and Chemicals Industries and Commerce and Service
t h e r e w a s a F i x r e l a t i o n s h i p . W 'h ile f o r m u l t i v a r i o u s i n d u s t r i e s a n d c o n s u m p t i o n good Industries there was significant effects of environm ent risk o n c a p i ta l s t r u c t u r e , w i t h f a u l t t o l e r a n c e o n l y 1 ,8 % a n d 2 , 7 % , r e s p e c t i v e l y . T h e r e v e r s e applied to property & Real Estate and Transportation & Infrastructure Sectors with fault tolerance of 46.7%.
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Environment Risk on Assets productivity.
E nvironm ent risk had significant
e f f e c t s o n a s s e ts p r o d u c t i v i t y a s f o u n d o n m a i n b o a r d c o m p a n i e s w i th f a u lt t o l e r a n c e o n l y o f 0 , 2 % . W h e r e a s D e v e l o p m e n t B o a r d s t r o n g l y c o n f i r m e d fix relationship between
environm ent risk and assets productivity. The same results reflected from the Total Board which found Fix relationship between
E n v iro n m e n t R is k a n d a s s e t s p r o d u c t i v it y . T h e r e s u l t s o f t h e s e t h r e e s e c t o r s may be found on Basic and .Chemicals Sector which had fix relationship between
environm ent risk a n d a s s e ts p r o d u c t i v i t y . T h i s r e s u l t s w e r e f o l l o w e d by Consumption
& Real Estate and Transportation & Infrastructure Sectors which found significant effects of enviro nm en t R isk on assets productivity. Fault tolerance of both sectors was o n l y 0 , 5 % a n d 3 , 6 % r e s p e c t i v e l y . W h e r e a s M u l t i v a r i o u s I n d u s t r i e s anti Commerce and
Goods
Industries and
Property
no significant relationships of environm ent risk o n a s s e t s p r o d u c t iv i t y . F a u lt t o l e r a n c e o f e a c h s e c t o r r e a c h e d 72,4% for Multivarious Industries and 57,3% for Commerce and Service Sector.
Service
Sectors found
In Main board companies,
Environment risk
en v iro n m en t risk had no significant effects on Financial P e r f o r m a n c e w i t h f a u l t t o l e r a n c e o f 2 5 , 7 % . W h e r e a s t h e r e s u lt s f o u n d in
D e v e l o p m e n t b o a r d g r o u p s e e m e d to b e d i f f e r e n t : environm ent risk had s i g n i f i c a n t e f f e c t s o n F i n a n c i a l P e r f o r m a n c e w i th f a u lt t o l e r a n c e s e b e s a r 0 . 7 % .
B u t. th is r e s u lt w a s n o t r e f l e c t e d in t h e r e s u l ts o f T o t a l B o a r d s h o w i n g t h a t en v iro n m en t risk h a d n o s i g n i f i c a n t e f f e c t s o n F i n a n c i a l P e r f o r m a n c e w i th
Estate, Transportation & Infrastructure found that
environm ent risk had significant effects on Financial Performance with fault tolerance only of 7%. Basic and Chemicals Sector, Multivarious Industries, Consumption Goods Industries and Commerce and Service Sectors showed the reverse: en viro n m en t risk had no significant effects on financial performance. Fault tolerance of each sector was 77,4% for Basic and Chemicals, 46,4% for Multivarious Industries, 98.3%
4 6 , 4 % fo r Commerce and Service Sector.
for Consumption Goods Industries and
e n v iro n m en t risk had significant effects on corporate value with fault tolerance only of 2,8%. This was followed by Development board which found significant effects of
E n v iro n m e n t risk on Corporate Value. For main board,
environm ent risk o n c o r p o r a t e v a l u e , w i th fa u lt t o l e r a n c e o n l y o f 8 , 6 % . T h u s , the Total board showed convincing relationships between en viro nm ent risk on corporate value, with fault tolerance only of 0,3%. S e c t o r a l a n a l y s i s s h o w e d d i f f e r e n t r e s u lt s , s o m e o f t h e m s u p p o r t e d h y p o t h e s i s
a n d s o m e o f t h e m d i d n o t . B a s i c a n d C h e m i c a l s S e c t o r f o u n d a F ix relationship of enviro nm en t risk on corporate value. This was followed by Consumption Goods Industries and Commerce & Service Sector that found Vol. I 7, No. // Agustus 2009
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42 The Effects o f Environment Risk, Capital Structure,
e n v ir o n m e n t r is k on corporate value, with fault tolerance only of 9,8% for Consumption Goods Industries and 4,9% for Commerce and Service Sector. Other sectors such as Multivarious Industries and Property & Real Estate and Transportation & Infrastructure found no significanr relationship between
Significant effects of
en viro nm ent ris k and corporate value. Each fault tolerance reached 55% for Multivarious Industries and 26% for Property & Real Estate and Transportation & Infrastructure.
Capital Structure on Assets Productivity.
In l in e w i t h fre e ca sh flo w t h e o r y o f J e n s e n ( 1 9 8 6 ) i n v e s t o r s w o u ld f o r c e t h e m a n a g e m e n t t o u t i li z e a s s e ts productively, by making much more debts and debts. That capital structure
w o u l d b r i n g p o s i t i v e i m p a c t o n a s s e t s p r o d u c t i v i t y . T h i s is in a c c o r d w i t h t h e findings of Lichtenberg and Siegel (1990); Nickell & Nicolitsas (1999);
F i l b e c k & G o r m a n ( 2 0 0 1 ) ; I n d a h w a t i ( 2 0 0 4 ) . T h e r e is a c o n v i n c i n g r e l a t i o n s h i p b e t w e e n c a p i t a l s t r u c t u r e a n d a s s e t s p r o d u c t i v i t y b o th f o r t h e
main board and development board. But the relationship was negative: opposed against with hypothesis
a n d fr e e cashflow t h e o r y . In o t h e r w o r d s , t h e i n c r e a s e o f c a p i ta l s t r u c t u r e w o u l d l o w e r a s s e t s p r o d u c t i v i t y . C o m p a n i e s p r e f e r r e d to
u t il iz e i n t e r n a l f u n d ( l i q u i d i t y ) t o i m p r o v e a s s e t s p r o d u c t i v i t y t h a n m a k i n g debts which
lowering their assets p r o d u c t i v i t y . P r i o r i t y o n t h e u t i l i z a t io n i f i n t e r n a l f u n d r e f l e c t s
only bloat expenses that
in
turn
the p eckin g order theory of Myers (1984) rather
ihanfree cashflow theory. Though investors tend
to embrace the fr e e cashflow theory by encouraging m a n a g e m e n t t o m a k e d e b t s , b u t in f a c t , m a n a g e m e n t s b o t h in m a i n a n d development board tend to behave conservative!) towards debts. Then
c a r e f u l n e s s is s o m e k i n d o f t r a u m a o n t h e i r e x p e r i e n c e d u r i n g t h e p a s t 1 9 9 8
c r i s i s . T h e r e s u l t in s e c t o r s s h o w e d t h a t o n l y B a s i c a n d C h e m i c a l s S e c t o r a n d Property & Real Estate and Transportation & Infrastructure that found convincing effects of capital structure on assets productivity, w hile other sectors did
not find any convincing one. Only Consumption Goods Industries that embraces
fr e e cash flo w theory of Jensen (1986), where m a n a g e m e n t w a s f o r c e d t o m a k e d e b t s to u t ili z e a s s e t s a s e f f i c i e n t a s p o s s i b l e . T h i s w o u l d r e s u l t in n e g a t i v e e f f e c t s o f l i q u i d i t y o n a s s e t s p r o d u c t i v i t y . In other words, management did not invest on
liq u id assets as internal fund r e s e r v e , b u t t e n d s t o u s e d e b t s . O t h e r s e c t o r s s t ill s h o w e d p o s i t i v e e f f e c t s according to the p ec kin g order theory.
Capital structure on Financial Performance.
In l i n e w i t h p e c k in g order theo ry of Myers (1984) that put priority on internal source funding, debts w o u l d o n l y b r i n g n e g a t i v e i m p a c t o n f i n a n c i a l p e r f o r m a n c e , in a c c o r d w i t h the findings of Kester (1986); Titman & Wessels (1988); Barton & Gordon (1988); Friend & Lang (1988); Harris (1991); Rajan & Zingales (1994); J o h n s o n ( 1 9 9 7 ) : J o r d a n , e t a/.( 1 9 9 8 ); M o h ’d. e t a / . ( 1 9 9 8 ) ; W a l d ( 1 9 9 9 ) ; Wiwattanakantang (1999); Booth,
et a/.(2000); Elashker & Wattanasuwannee Vol. 17, No. 1/ Agustus 2009
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(2000); Huang & Song (2002); Antoniou (2002); Chen, et a/.(1998); Chathoth (2002); Tien pao (2003); Bunkanxvanicha, eta/.(2003); Chen (2003); Akhtar (2005), Ratnawati (2001) and Indahwati (2003). The result
f o u n d in m a i n b o a r d c o m p a n i e s s h o w e d n o c o n v i n c i n g r e l a t i o n s h i p b e t w e e n capital structure and financial performance. On contrary, for development board there was convincing relationship between capital structure and
F i n a n c i a l P e r f o r m a n c e , t h e d i r e c t i o n r e s u lt e d f o r m a i n b o a r d w a s p o s i t i v e , whereas for development board was negative. This showed that for main board, raising debts would provide additional benefits that would improve company's
Financial Performance, while, for development board raising debts may became new burden which only deduct company's Financial Performance. T h i s is in l i n e w i t h t h e f i n d i n g s o f D a m o d a r a n ( 1 9 9 7 ) . S e c t o r s t h a t fo u rfd s i g n i f i c a n t e f f e c t s o f c a p it a l s t r u c t u r e o n F i n a n c i a l P e r f o r m a n c e ' w e r e o n ly Multivarious Industries and consumption goods. Negative direction was found only on Multivarious Industries and Commerce and Service Sector. W h i le , o t h e r s e c t o r s f o u n d p o s it iv e d ir e c tio n
Capital structure on
p e c k in g o rder th eo ry of Myers (1984) raising debts may give negative signal to investors for
Corporate Value.
In a c c o r d w i t h
i n t e r n a l f u n d is i n s u f f i c i e n t t o m a k e i n v e s t m e n t . T h i s is in l i n e w i t h t h e findings of Jensen & Meckling (1976); Myers (1976); Myers (1984); Myers & Majlut (1984); Damodaran (1997); Fama & French (1998); Ross,
et at (1999); Antoniou (2002 Indahwati" (2004); Sugihen (2003) and Sudarma (2004). The result showed that only main board companies that convincingly fo u n d t h e e f f e c t s o f c a p it a l s t r u c t u r e o n c o r p o r a t e v a l u e , w h i l e d e v e l o p m e n t
b o a r d c o m p a n i e s d i d n o t f i n d t h e s a m e . In g e n e r a l in all s e c t o r w e c a n n o t f i n d any significant effects of capital structure on corporate value. The direction w a s p o s i t i v e , w h i c h m e a n s t h a t r a i s i n g d e b t s w o u l d g i v e p o s i t i v e s i g n a l to
i n v e s t o r s t h a t in t u r n w o u l d i m p r o v e c o r p o r a t e v a l u e . T h i s is in a c c o r d w i th
f r e e cash flo w theory of Jensen (1986). Only
signaling th e o ry of Ross (1977)
Basic and Chemicals Sector, Consumption Goods Industries and P r o p e r t y & R e a l E s ta t e , T r a n s p o r t a t i o n & I n f r a s t r u c t u r e f o u n d c o n v i n c i n g r e l a t i o n s h i p s o f c a p i t a l s t r u c t u r e a n d c o r p o r a t e v a l u e . T h e d i r e c t i o n is n e g a t i v e , w h i l e o t h e r s s e c t o r s is p o s i t i v e . H i s i m p l i e d t h a t p e c k in g order
theory is a p p l i e d m o r e o f t e n o n m u l t i v a r i o u s i n d u s t r i e s , C o n s u m p t i o n G o o d s Industries, property & real estate and Transportation & Infrastructure. While, Basic and Chemicals Sector, Commerce and Service Sector tend to .
signaling theory of Ross (1977) an d fr e e cashflow theory of Jensen (1986).
Gordon (1987) found
Corporate S tra teg y on
co rporate stra te g y and capital s t r u c t u r e . T h e y w e r e s u p p o r t e d b v C h a t h o t h ( 2 0 0 2 ) w h o f o u n d a fix relationship
a significant relationship between
structure. The relationship between
between
co rp o ra te stra te g y and
capital
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44 The Effects o f Environment Risk, Capital Structure ,
and second (development) board showed quite high value of 47,6% for the main board and 53,1% for development board. The numbers showed a very
c l o s e r e l a t i o n s h i p . T h i s r e l a t i o n w a s a l s o r e f l e c t e d in h y p o t h e s i s a n a l y s i s o n
m a m b o a r d c o m p a n i e s t h a t s h o w e d a f ix i n f l u e n c e o f co rporate stra teg y on
c a p i t a l s t r u c t u r e . T h e s a m e t h i n g a p p l i e d t o s e c o n d b o a r d c o m p a n i e s th a t showed significant effects of
corporate strategy on capital structure. This m e a n s t h a t in t a k i n g p o l i c y r e g a r d i n g c a p i t a l s t r u c t u r e , c o m p a n i e s a l w a y s
c o n s i d e r c o r p o r a t e s t r a t e g y . In g e n e r a l , c o m p a n i e s in I n d o n e s i a a l s o s h o w e d
c a p i t a l s t r u c t u r e p o l i c y t h a t c o u n t s c o r p o r a t e s tra te g y . Only Basic and Chemicals Sector and Commerce and Service Sector did not show any relationship between
co rp o ra te stra te g y and capital structure. While, multi-various industries, Consumption Goods, Property & Real Estate, and Transportation & Infrastructure showed a convincing relationships between
corporate strategy’ a n d c a p i t a l s t r u c t u r e . C o m p a n i e s in B a s i c &
C h e m i c a l s S e c t o r , a n d C o m m e r c e & S e r v i c e S e c t o r g a v e le s s a t t e n t i o n o n
e s t a b l i s h e d c o r p o r a t e s t r a t e g y in t a k i n g c a p i t a l s t r u c t u r e p o l ic i e s .
H a ll & W e i s s ( 1 9 8 3 ) a n d C a p o n (1990)
Corporate Strategy on Assets productivity.
F in a n c i a l P e r f o r m a n c e . A s s e t s p r o d u c t i v i t y is o n e f o r m o f f i n a n c i a l p e r f o r m a n c e . T h e
found that
e l e m e n t o f c o r p o r a t e s t r a t e g y w e m e a n h e r e is g r o w t h s t r a t e g y . M a i n b o a r d and development board showed a close and convincing relationship between
c o r p o r a t e s t r a t e g y a n d a s s e t s p r o d u c t i v i t y . T h e s a m e r e s u l t r e f l e c t e d in all
c o m p a n i e s in I n d o n e s i a . T h i s m e a n s t h a t to o p t i m i z e a s s e t u t i l i z a t i o n , management must put attention on the already established corporate stra te g y .
Only Basic and Chemicals Sector and Property & Real Estate and Transportation & Infrastructure that showed convincing relationship between corporate strategy with assets productivity. This implies that other sectors
g a v e l e s s a t t e n t i o n o n a l r e a d y e s t a b l i s h e d c o r p o r a t e s t r a t e g y in o r d e r to
a c h i e v e e f f i c i e n c y in a s s e t s u t i li z a t i o n .
Corporate Strategy- on Financial Performance. Study on the relationship
between co rp o ra te s tr a te g y and Financial Performance was pioneered by Barton & Gordon (1987). Their study was followed and supported by Capon,
et ai (1990) and
H ill & J o n e s ( 1 9 9 8 ) . T h e r e s u l t o f c o r r e l a t i o n c o e f f i c i e n t a n a l y s i s showed a close relationship between
corporate stra te g y and Financial P e r f o r m a n c e , in f i rs t c l a s s , s e c o n d c l a s s , a n d c o m p a n i e s in all s e c t o r s in
g e n e r a l . B u t. f r o m h y p o t h e t i c a l a n a l y s i s o n l y s e c o n d c l a s s c o m p a n i e s th a t found significant effects of
corporate stra teg y on financial performance, w h e r e a s f o r t h e m a i n b o a r d c o m p a n i e s a n d all s e c t o r s d i d n o t f o u n d a n y relationship. This implies that corporate strategy do not have optimum role for
i m p r o v i n g f i n a n c i a l p e r f o r m a n c e , e x c e p t in d e v e l o p m e n t b o a r d c o m p a n i e s . It Vol. 17, No. 1/ Agustus 2009
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was only multi-various industries sector that had convincing relationship
b e t w e e n c o r p o r a t e s t r a t e g y a n d f i n a n c i a l p e r f o r m a n c e , w h e r e a s o t h e r s e c to r s
d id not.
Corporate Strategy on Corporate Value.
C o n v i n c i n g c o r p o r a t e s t r a t e g y is v ita l, to m a k e i n v e s t o r s t o p e r c e i v e t h a t t h e c o m p a n y h a d a g o o d c o r p o r a t e value. Ratnawati (2001) and Sudarma (2004) found significant relationship between corporate growth and corporate value. The results of correlation
a n a l y s i s s h o w e d t h a t t h e r e is a c l o s e r e l a t i o n s h i p b e t w e e n c o r p o r a t e s t r a t e g y w ith c o r p o r a t e v a l u e , b o t h f o r m a i n b o a r d , d e v e l o p m e n t b o a r d c o m p a n i e s , a n d all s e c to r s . T h e s a m e r e s u l t w a s a l s o r e f l e c t e d f r o m h y p o t h e t i c a l a n a l y s i s w h i c h f o u n d a s i g n i f i c a n t i n f l u e n c e o f c o r p o r a t e s t r a t e g y o n c o r p o r a t e valife. T h is s h o w e d t h a t p r o p e r c o r p o r a t e s t r a t e g y m a y b e c o m e a p o s i t i v e s i g n a l f o r
i n v e s t o r s , t h a t in t h e f u t u r e it w o u l d b e r e a l i z e d in f o r m o f i m p r o v e d corporate value.
f r e e ca sh flo w meory of Jensen (1986). Reversely, for development board companies, investors tend to recommend internal fimding rather than making debts,
d e b t s . T h i s p r o v e d t h a t i n v e s t o r s t e n d t o a g r e e w ith
w h i c h is in lin e w i t h p e c k in g ord er th eo ry of Myers (1984). On the other hand, management of main and development boards had a
c o n s e r v a t i v e a t t i t u d e o n d e b t s . T h e y a r e m o r e c o n v i n c e d o n th e effectiveness of p e c k in g order theory and asym m etric inform ation theory
b y p u t t i n g p r i o r i t i e s o n i n t e r n a l c a p i ta l f u n d i n g r a t h e r t h a n t h e e x t e r n a l one.
companies prefer to make investments on
Management of main
board
liq u id assets a s t h e i r a n t i c i p a t i o n o n b u s i n e s s ris k increase. Second board management, on the contrary did not take the same policy, though they were
c o n c e rn e d on p e c k in g o rd er th eo ry and
a sym m etric in fo rm a tio n th e o ry and recognized positive impact of the raise of liq u id assets on financial performance.
2. C o r p o r a t e v a l u e t h a t i n d i r e c tl y d e s c r i b e s c o m p a n y 's s t o c k p r i c e w a s influenced by assets productivity, capital structure,
co rpo ra te strategy and en viro n m en t risk In t h e e r a o f g l o b a l i z a t i o n p r e s e n t l y c o m p a n i e s a r e r e q u i r e d t o b e m o r e p r o d u c t i v e t o c o m p e t e w i t h e a c h o t h e r . T h a t 's why the increase of assets productivity was responded positively by
i n v e s to r s . D e d u c t i n g n e w d e b t s m a y b e e f f e c t i v e to r a i s e c o r p o r a t e v a l u e when accompanied by productive assets utilization. Formulating and
u t i l i z i n g g o o d c o r p o r a t e s t r a t e g y m a y a l s o r a i s e c o r p o r a t e v a l u e , but it w o u l d b e s t r o n g e r i f a c c o m p a n i e d b y r a is i n g p r o d u c t i v e a s s e t s u t il iz a t i o n .
H e n c e , r i s k i n c r e a s e w o u l d still b e r e s p o n d e d p o s i t i v e l y b y i n v e s t o r s f o r
Vol. 1 7 , No. //
Agustus 2009
Centre f o r Indonesian Accounting and M anagement Research
Postgraduate Program , Brawijaya University
46 The Effects o f Environment Risk, Capital Structure, ....
they see the company ii able to utilize assets productively through a proper formulation of corporate strategy and strong capital structure. When composing capital structure, most of Indonesian companies always
c o n s i d e r a c o r p o r a t e s t r a t e g y t h a t is a b l e t o e l i m i n a t e r is k s . In s h o r t , p r o d u c t i v e a s s e t s u t i l i z a t i o n is t h e b e s t p r e l u d e s t e p r e c o m m e n d e d
for levering up corporate value.
3. Corporate value of main board companies was also influenced by assets productivity,
capital
structure,
c o rp o ra te s tr a te g y and
e n v iro n m e n t r is k P r o d u c t i v e a s s e t s u t il iz a ti o n w a s h i g h l y a p p r e c i a t e d b y
i n v e s to r s . B u t th e y a l s o e x p e c t t h a t m a n a g e m e n t w o u l d b e m o r e