PAPERAIMITHEBEST YULIANI UNSRI

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AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

INVESTMENT OPPORTUNITY SET ROLE AS MEDIATING THE EFFECT OF
DIVERSIFICATION TO COMPANIES VALUE IN INDONESIA
(EMPIRICAL STUDY OF GO PUBLIC SECONDARY SECTOR COMPANIES)
Yuliani
Economics Faculty, Sriwijaya University, Palembang, South Sumatra
Djumilah Zain, Made Sudarma, Solimun
Economics and Business Faculty, Brawijaya University, Malang, East Java
Abstract
Purpose - This study aims, first, to measure and to interpret the effect of
diversification on company value, and second, to measure the role of Investment
Opportunity Set (IOS) as the mediating effect of diversification to company value.
Design/methodology/approach - This study uses a quantitative approach with
paradigm positivistme. This empirical research object is the go public secondary
sector companies at Indonesia Stock Exchange (ISE). This study use sample 18
companies. Observation period is 2006-2010. The method of data analysis is
Structural Equation Model (SmartPLS software) Ver 2.0 M3.
Findings - First, diversification has significant and positive effect on company value.

Second, IOS acts as a partial mediating effect of diversification to company value.
Research limitations - The study is not concerned with the qualitative, eg
management and customer service. The reason is lack of information qualitative
data. This assessment is only a kind of financial portrait moment and, of course,
contains many limitations. Moreover, the researchers did not check again whether
the financial report is true, that in accordance with the conditions of the company,
without engineering.
Practical implications - The research could be an important input to regulators
such as the company's managers, board of directors, the board of commissioners in
deciding investment opportunities and to explain the information disclosure or
publication on Stock Exchange in the online media. For potential investors, this
study describes the company prospects before buying shares at secondary sector.
Originality/value - This research fills opposition research results of previous
studies, by including IOS as a mediating variable, the effect of diversification on
company value. These variables can explain the emergence of the gap with the
object of observation on go public secondary sector companies in Indonesia.
Keywords: Diversification, Investment Opportunity Set, Value Company.
Article Classification: Research Paper
INTRODUCTION
Revolution

lead

Power View-MPW, Resources-Based
and

companies

View RBV, and Agency View. David

globalization
to

(2003:

choose

development of

diversification, when faced with a very

diversification.

that there are three perspectives to
namely

that

the

new business is

and involving a number of investment

rapidly. Montgomery (1994) suggest
motives,

states

different from the existing business

tight competition and the market grow

diversify

167-170)

When

a

company

chooses to diversify operations from

Market
209

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AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

one to several industries, it mean the

company's enterprise value (Gomes &

diversification strategy done at the

Livdan,

enterprise level (Hitt et al., 2011: 158-

Diversification

159).

technology diversity
Ansoff

diversification
business

(1965)

states

Rumelt

Sujoko,

2006).

associated

3)
with

(Miller,

2004,

that

2006). 4) International Diversification

of

did not lower the company value

(1974),

(Santos et al., 2008). 5) Diversification

is the evolution

growth.

2004;

Hoskisson & Hitt (1990) states that

has

diversification is a corporate level

performance

strategy. Unlike Tecee et al. (1997),

Indonesia (Chakrabarti et al., 2007).

positive

influence
of

on

the

companies

in

Matsusaka (2001) and Barney (2002)

However, research on the effect

states that diversification can be used

of diversification on company value

as a source of sustainable competitive

find the opposite result. First, the

advantage. Clarkson et al. (1983),

value of diversified companies are

Nayyar

suggested

smaller than companies that operate

diversification is the source of value

in a single segment. Value loss

creation. Rumelt (1974) states there

ranged from 13% -15%. Difference in

is

the

value will be reduced if the company

a

(1993)

correlation

between

diversification

of

corporate

made related diversification (Berger &

diversification

and

company

Ofek, 1995). Second, there is a

performance,

including

Strategic

negative relationship between Tobin's

Management

and

Financial

q ratio on diversification (Lang and

Management.

Stulz, 1994; Campa & Kedia, 2002;

Studies of diversification and its

Fukui and Ushijima, 2007). Third, no

impact on the company value is still

significant effect on diversification

debating, whether diversification can

Excess Value and profitability (Harto,

bring benefit or even a negative

2005; Kusmawati, 2005, Satoto, 2009,

impact

Yuliani,

on

company

value.

The

2011).

Four,

diversified

studies suggesting that diversification

companies

have

increases the company value are: 1)

information

problems

On average, higher profitability relate

company's focus (Clarke et al., 2004).

to diversification companies than non-

Various previous studies on the

diversified company (Amit & Livnat,

effects of diversification on companies

1988; Rumelt, 1982; Aisjah, 2009). 2)

value is still not consistent. This

Diversification does not reduce the

creates

210

a

gap,

asymmetric

with

than

the

variable

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AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

operationalize Investment Opportunity

explains that the IOS is a component

Set (IOS) as a mediation between the

of the company's value results from

effect of diversification on companies

the

value. Reason to include variables

investments.

choices

when a company is to diversify,
namely

there

are

a

number

to

Empirical

of

influence

make

studies

on

future

The

IOS

companies

value

investments that will be involved.

outcome remains consistent. On the

Diversification opportunities for the

one

company

companies

will

opportunities

create
that

implemented.

investment
should

hand,

IOS
value

influence
[(Fama,

on
1977;

be

MacKay, 2005; Hasnawati, 2005a,

Investment

2005b; Hossain et al., 2005; Yoon and

opportunities in financial management

Starks,

in the context of investment decisions

Hidayat,

entry. Research Fama and French

Hossain, , 2008; Efni, 2011)]. But on

(1997) has shown that the only

the other hand, Kallapur & Trombley

determinant of the company value is

(1999); Suharli (1997) and Bernadi

an investment decision.

(2008) found that IOS has no effect on

Myers (1977) firstly introduced

1995;

companies

Nopratiwi,

2010;

2004;

Akhtaruddin

value.

IOS

effect

&

on

the Investment Opportunity Set (IOS)

companies value, which means that

in relation to achieving the company's

the

goals. Gaver and Gaver (1995) stated

exist, if the company is able to choose

that IOS provides guidance a broader,

from different investment companies

enterprise value as the primary goal

will acquire surplus for a number of

depends on corporate spending in the

investments made. Surplus proceeds

future, which is now the investment

will be contributed to the cash inflow,

options that are expected to yield a

and then accumulated in improving

greater return. IOS is a combination of

profitability. Conversely, if the IOS

assets in place and future investment

does not affect the company then the

choices with a Net Present Value

company has a deficit in the number

(NPV) positive (Myers, 1977; Kallapur

of

& Trombley, 1999). Adam and Goyal

reduce the equity and will ultimately

(2008) emphasizes that the IOS plays

lower the company value.

investment

investments

an important role in corporate finance
related

to

the

achievement

opportunities

made,

which

that

will

The phenomenon of companies

of

go public in Indonesia showed show

corporate goals. Smith & Watts (1992)

most

211

of

them

diversify

through

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AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

divestment

and

restructuring.

organization

Examples

will lead to a variety of investment

are

opportunities.

Existing

investment

Bimantara Group, Texmaco Group,

opportunities encourage companies to

PT. Indomobil Sukses International

choose investments with a high rate of

Tbk, PT. Karwel Indonesia, Bunas

return.

Therefore,

Finance Indonesia. Sutrisno in Sujoko

earned

surplus,

(2006) found evidence that merger

increases the company value.

and acquisition activity at corporate

This

study

the

company

which
will

in

answer

turn
the

strategy level actions more emphasis

following problems: (1) Measuring and

on maintaining corporate sustainable

interpreting the effect of diversification

advantage. Apparently, the results

on company value, (2) Measuring and

lowered the company's stock price.

examining

For example, the management of PT.

mediation the effect of diversification

Eastman Kodak diversify its business

on

through the acquisition of PT. Sterling

theoretically study: (1) Testing the

Drug. After the acquisition, the stock

theory

price PT. Eastman Kodak fell 15%,

perspective of Montgomery (1994), (2)

therefore, aggrieved shareholders.

Expanding the study of signaling

This study develops a diversified

the

company
of

role

of

IOS

value.

as

Benefits

diversification

with

theory (Ross, 1977), namely company

variable relationships, IOS and the

with

company value, as well as fill the

opportunities mean better corporate

research gap of Lang and Stulz

growth. (3) The study extends the

(1994)

research topics of the theory of

and

Fukui

and

Ushijima

variety

of

investment

(2007). Research of Lang and Stulz

Financial

(1994) in the United States and Fukui

Investment Management. While the

and Ushijima (2007) in Japan showed

practical benefits of this research can

inconsistent results. In fact, the two

be input for management, investors

researchers

same

and other practitioners about the

performance indicators Tobin's Q.

impact of the interaction of each

This study fills the gap by offering a

variable to increase the company

single solution, which operate as a

value in order to obtain images and

mediating

information

using

influence

the

between

IOS

diversification on companies value.

Management

about

the

performance of the company.

IOS mediating variable will make an
increasingly broad diversification, it

212

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financial

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AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

RESEARCH HYPOTHESIS
The

study's

will first try to use excess assets to the

findings

nearest market to enter. If there is still

are

excess capacity, the company will

inconsistent regarding the relationship

enter the market more deeply. But if

of diversification on company value.

the assets used in the market too

Hitt & Hokisson (1990) suggests,
diversification

relation

with

much

the

Palich

et

that

al.

relationship

The

between

have

linear

intermediaries often run inefficiently or
even absent. Based on explanation

businesses. Therefore, it exploits the

above, the hypotheses formulation of

synergy of economic diversification. In

diversification

business

Therefore,
cost,

so

the

on

company

Hypothesis 1: The more extensive

high

secondary

diversification will lead to greater
marginal

effect

value is:

diversification can lead to control
difficulties.

that

developing economies, capital market

between

forms,

concluded

reason is that in countries with

implementation of pricing practices,

non-linear

also

(Khanna and Palepu, 1999). The

enhance market power, facilitate the

the

between

companies in emerging economies

by MBV approach. Diversification can

cross-subsidies

relationship

diversification is more profitable for

diversification

and performance has been described

and

the

diminishing function. Several studies

performance relationship can be linear
non-linear.

market,

diversification and marginal profit is

(2000) suggests, diversification and
and

current

edge and low profit. This indicates

higher the degree of diversification the
performance.

the

companies will lose their competitive

performance of non-linear form, ie the
lower

with

sector

company

to

diversify, the higher company value

high

diversification causes a decrease in
Investment Opportunity Set as

the company value.
Montgomery
that

the

(1994)

reason

an investment option depends on the

explains

value

diversification

company is looking to diversify the

Montgomery

existing
&

expenditure

growth

chosen

by

by

the

growth

of

competitive advantage in business.

resources.

Wernerfelt

discretionary

influenced

control will greater. Another reason is
optimize

future

manager (Kole, 1991). Each choice is

market. That is, the market share
to

of

Diversification can be done because

(1988)

the

stated that the diversified company, it

213

company

has

investment

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AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

opportunities

set.

resource

Investment

considerations,
and market

strategic

opportunities means the company will

assets

share. When

have a good value, reflected in the

companies implement diversification,

stock price as well as for other

they will contribute to the increased

indicators. IOS plays an important role

company value. IOS acts strengthen

in corporate finance related to the

the company to diversify. Therefore

achievement of corporate goals.

the presented hypothesis as follows:

Singh et al (2003) and MacKay

Hypothesis 2: IOS mediate the

(2003) conduct empirical research on

diversification effect to company

the effects of diversification to IOS.

value.

The results showed that company was
not

consistent

opportunity

to

investments

is

because
diversify
differ.

Based on explanation above,

the

theoretically

their

and

empirically,

the

model hypotheses are follows:

Investment

Opportunity Set selected based on

H1
Value
Company
(γ2)

Difersification
(χ)

IOS
(γ1)

H2

Figure 1. Research Hypothesis Model
RESEARCH METHODS

the aim is to find an explanation of the

A. Approach and Type Research

relationship

The approach is a quantitative

(causality)

between

variables through hypothesis testing.

study with paradigm positivistme by
empirical research on the go public

B.

secondary sector companies in IDX.

Sample

While

this

type

of

research

Population

and

Research

is

The study population was all

explanatory (explanatory research),

companies included in the secondary
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sector in IDX. This includes basic

earnings. 4) The Company has a

industry

sub-

positive equity balance, and 5) the

sectors), miscellananeous industry (3

Company has more than one type of

sub-sector), consumer goods industry

business.

and

chemicals

(6

(5 sub-sectors) during the observation
period

2006-2010.

Object

Based on these criteria, the

of

amount eligible is 18 companies. This

observation in the study is the annual

study

report 2010 amounted to 136 issuers.

(census). The unit of analysis is the

Population criteria include: 1) The

pooling of data with lag time during

Company publishes audited financial

the observation period (t) by the

statements

The

number of observations 72 cases.

Company did not incur losses. 3) The

Companies that entered the samples

Company

shown in Table 1:

2006-2010.
has

2)

positive

retained

used

a

sample

saturated

Table 1. Sample Research
No
Emiten
Kode
Sub Sector
01
Indocement Tunggal P Tbk
INTP
Cement
02
Ekadharma International Tbk
EKAD
Chemicals
03
Charoen Pokphand Indonesia Tbk CPIN
Animal Feed
04
Astra Otoparts
AUTO
Automotive and Comp.
05
Indo Kordsa Tbk
BRAM
Automotive and Comp.
06
Indospring Tbk
INDS
Automotive and Comp.
07
Selamat Sempurna Tbk
SMSM
Automotive and Comp.
08
Sumi Indo Kabel Tbk
IKBI
Cables
09
Indofood Sukses Makmur Tbk
INDF
Food and Beverages
10
Mayora Indah Tbk
MYOR
Food and Beverages
11
Siantar Top Tbk
STTP
Food and Beverages
12
Ultra Jaya Milk Tbk
ULTJ
Food and Baverages
13
Darya-Varia Laboratoria Tbk
DVLA
Pharmaceuticals
14
Merck Tbk
MERK
Pharmaceuticals
15
Pyridam Farma Tbk
PYFA
Pharmaceuticals
16
Mustika Ratu Tbk
MRAT
Cosmetics and Household
17
Unilever Indonesia Tbk
UNVR
Cosmetics and Household
18
Kedawung Setia Industrial Tbk
KDSI
Houseware
Sources: Companies Go Public Performance Summary, 2010

C. Sources and Data Collection

Stock IDX-UB. Furthermore, financial

Methods

statements are used to obtain data
from each study variable.

The data used are secondary
data, such as financial statements
Year 2006-2010, obtained from the
Annual

Report

Database

Corner

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D. Operational Definition of Research Variables
Table 2. Operational Definition of Research Variables
Variables
Difersification (χ1)

Indicators
Market Sharet-1
Free Cash Flow t-1

David (2003): The Company is
developing several businesses
led by a holding company that
oversees couple of
subsidiaries and scattered in
various types of business
IOS (γ1)
Myers (1977):
The combination between
assets in place and future
investment opportunity with a
positive NPV
Value Company (γ2)
Damodaran (2006):
Companies value is a measure
of management success in
past operations and future
prospects.

Size t-1
Compensation t-1

Measurement
Sales/sales industry
∆ Retairned
earning+depreciation+amortization
∆ TA
∆ Renumeration paid to the boards of
commissioners and directors

MBA Ratio t-1
MBE Ratio t-1
EP Ratio t-1
CEFA/BVA Ratio t-1

(TA-TE)+(OSxSP)/BVA
(OSxSP)/TE
EPS/SP
FA/BVA

Tobin’s Q t
ROIC t

(OSxSP)+(D+I)-CA/TA
EBIT/EQUITY

Description: TA = Total Assets; TE = Total Equity; OS = Outstanding Share; SP = Share Price; BVA
= Book Value of Assets; EPS = Earnings Per Share; FA = Fixed Assets; D = Total Debt; I =
Inventory; CA = Current Assets; EBIT = Earnings Before Interest and Tax.

E. Method of Data Analysis

(2) a relatively small number of

Inferential statistics are used to

observations namely 72 observations

determine the relationship between

and (3) empirical models indicate

variables simultaneously. This study

causality tiered.

uses Structural Equation Model (SEM)
RESULTS AND DISCUSSION

based on the variance, the Partial

Hypothesis Testing Results (H1)

Least Square (PLS), using software

This study has two hypotheses,

SmartPLS Ver 2.0 M3. The reasons
the

for using PLS is (1) The research

direct

testing

and

mediating

testing variable. The test results are

variables are latent or unobservable,

presented in Table 3:
Table 3. Hypothesis Testing Results
Independent
Variable

Dependent
Variable

Diversification
Diversification
IOS

CV
IOS
CV

Path Coefficient

t-statistic

p-value

Explanation

2,428
16,099
4,221

0,018
0,000
0,000

Significant
Significant
Significant

0,316
0,650
0,267

Source: Adapted from secondary data
Description: CV = Company value; Significant at α = 5%

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Table 3 shows that each of the

extensive

secondary

sector

independent variables have a positive

companies to diversify, the higher

and

company's value is received (H1

significant

effect

on

the

dependent variable. The direct effect

Accepted).

of diversification on company value is
Hypothesis Testing Results (H2)

significant and positive, the value of s
path coefficient is 0.316 and p-value

Testing

mediating

variables

less than 0.05. The direct effect of

influence also called indirect effect

diversification on IOS is significant

testing, aims to determine the position

and positive. Big

path coefficient is

of mediating variable (IOS) in this

0.650 and p-value less than 0.05. The

study. The process of examination the

direct effect of IOS on company value

IOS variable in determining the type of

is 0.267, p-value less than 0.05.

mediation, whether partial or complete

Therefore, the effect is significant and

mediation steps are as follows:

positive.

Step 1: Calculate the path

Table 3 shows the results of a
positive

and

significant

effect

coefficients. The way is to enter the

of

IOS variable in the model and the

diversification on company value. The

empirical test results, as shown in

first hypothesis which states the more

Table 4:

Table 4.
Mediation Test Results Analysis with Variable IOS
Original sampel
estimate

tstatistic

p-value

Explanation

0,316
0,650
0,267

2,253
19797
4,417

0,027
0,000
0,000

Significant
Significant
Significant

(a)

Diver
Diver
IOS

CV
(c)
IOS
(d)
CV

Source: Adapted from secondary data

Step 2: Calculate the path coefficient without entering the IOS variable in
empirical models. The test results are shown in Table 5 follows:
Table 5.
Result Analysis of Variable Test Mediation Without IOS
Original sample- t-statistic
estimat
Diver

CV

(b)

0,568

Source: Adapted from secondary data

217

19,880

p-value

Explanation

0,000

Significant

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AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

Table 4 and Table 5 shows the

These

results

suggest

that

value of (c), (d) is significant, and (b)

diversification

significant. Path coefficient (a) is

variation in the increased value of

smaller than the path coefficient (b).

secondary

Therefore, the nature indirect effect of

Indonesia during the Year 2006-2010.

mediated diversification on company

Palich et al. (2000) explains

value

through

IOS

company

the
in

the diversification and performance

mediation. That is, diversification can

relationship can take linear and non-

directly affect the company value and

linear form. This study proves that for

can also through IOS. It can be stated

the secondary sector in Indonesia

that

relationship

as

a

sector

explain

partial

hypothesis

is

can

a

mediating

between

diversification

influence of IOS diversification on

with company values are linear. The

company

linearity assumption is tested by

value

received

or

(H2

Accepted).

relationship between the value of
corporate

diversification.

The

test

DISCUSSION

result significance at p-value 0.000

Diversification Effect on Company

0.05, so it is said that the relationship

Value

between the two variables is linear.
Analysis results the influence

The findings of this study can be

of diversification on company value is

illustrated in linear curve pattern of

significant

diversification

and

positive.

Thus,

hypothesis that the more extensive
secondary
diversify,
company's

sector
hence
value,

companies
increasing
is

and

relationship:

to
the

acceptable.

Company Value

Diversification

Source: Adapted from secondary data

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AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

Figure 2
Linear relationships between Diversification and Company Value
Findings Secondary Sector in Indonesia
Linear

relation

model

was

company finally can achieve superior

developed from the market based

return.

view and transaction cost economies
perspective.

It

is

said

that

This

the

(2002),

study
which

supports
states

Barney

that

the

company can create value through the

rationality of the company to diversify

exploitation

with anticompetitive motivation is to

of

market

power

advantages. It is a positive linear

exploit

relationship

researchers such as Bourantas et al.

and

between

performance.

diversification

Internal

the

(1987);

market

market

Amit

and

share.
Livnat

Some
(1988);

based view and transaction cost

Szymanski et al. (1993); Chakrabarti

perspective, by Montgomery (1994), is

et

proved

significant and positive relationship

in

this

study.

Reason

al.

(2002)

has

demonstrated

in

between diversification on company

Indonesia to diversify created by the

value. Miller (2006) concluded that the

views and approach of market-based

relationship

economic transaction costs.

company value on the 192 companies

secondary

sector

companies

diversification

on

Market-based view approach is

in the United States is as significant

actually referring to the power sources

and positive. While in Indonesia, the

that affect industry competition that

findings are consistent with research

comes from thinking Porter (1980), in

Aisjah (2009); Sujoko (2006), that

order to formulate the company's

diversification provides significant and

competitive strategy related to the

positive effect for companies listed on

environment. For Porter, Environment

the Indonesian stock market.

is the industry in which the company

These results contrast with the

competes. The company's ability to

results of Lang and Stulz (1994);

cope with the industrial environment is

Campa and Kedia (2002) and Fukui

being developed (Hitt et al., 2011)

and Ushijima (2007). Fukui & Uhijima

referred as managing the company's

research manufacturing company in

resources as an integrated input.

Japan. The results showed that the

Therefore, it create a potential source

relationship

of Sustainable Competitive Advantage

company

(SCA),

to

negative. That is, the wider number of

the

businesses owned by companies in

the

outperform

company
its

is

able

competitors,

219

of

value

diversification

and

is

but

significant

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AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

Japan, the lower the company value.

operating profit was also smaller

This means that the curve of the

fungsi

relationship

and

company than the focus company or

value of companies in Japan are non-

operate with a single segment. Berger

linear

and

of

diversification

(curviliear

linkage

inverted-U-shaped model
intermediate

model.

happen

companies

to

model),
and

Both

the

Ofek

respon

(1995)

conditions

models

in

impulse

of

diversified

argued

lower

the

financial

performance of diversified companies

Japan

than

focus

company

cause

the

because of diversification that have

company value as a whole will be

been done have optimum limit. This

lower, because the amount of excess

means that the company did not

investment

generate diversification benefits in

company's financial results are not

accordance with the increase in the

well diversified into the following year.

performance

of

the

degree of diversification or even lead

Financial performance condition

to an increase in some costs such as

of the secondary sector in Indonesia

the costs of coordination, due to the

during the year 2006-2010 showed

increasing

the

sales growth 16.94%, with average

company's business structure. The

sales of Rp 88 trillion per year. This

condition is called inverted-U model or

suggests

also

diversified companies

complexity

occurs

in

of

organization's

the

secondary

sector

have better

diminishing returns (Palich et al.,

sales performance. Increased sales

2000), called the intermediate linkage

growth was followed by an increase in

model.

operating income and net income, ie

This study is not in line with the

35% to 39% in operating profit and net

findings of Berger and Ofek (1995), Li

income for development. Financial

& Wang

(2003);

Kusmawati

(2005);

Sulastri

(2006);

condition is a market share measure

Harto

(2005,

of secondary sector companies in
Indonesia with a sizable percentage.

2007). Research Berger and Ofek
(1995) using a sample of 5233

Mediating

companies. The results showed that
the

diversified

company

-15%,

smaller

than

of

IOS

as

Diversification Effect on Company

have

Value

difference value loss ranged from
13%

Role

The results of path analysis, to

the

measure the IOS as a mediating of

companies that operate in a single

variable

segment. In addition, the company's

diversification

effect

on

company value, shows a significant
220

rd

AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

and positive coefficient (Table 4). This

(partial mediation). This is because

means that the diversification affect

the value of (c), (d) is significant, and

on company value, either directly or

(b) significant. Path coefficient (a) is

indirectly, through IOS. Based on the

smaller than the path coefficient (b).

description of the steps to determine

Positive direction of indirect effect

the nature of the variables IOS

demonstrates the ability MBAR and

(Tables 4 and 5), it was found that the

MBER

variable IOS affect value company
(Table

5.7)

increase

positive effect for increasing corporate

the

value.

company value, initially only 0.316 in

The

the absence of IOS, rising to 0.568

study's

findings

are

consistent and support Fama (1978)

(Table 5) after including IOS.
This study was able to prove

research. Direct and indirect influence

that the IOS is a partial intervening

of diversification on company value

variables to enhance the role MBER

through IOS is obtained from the

and MBAR and in influencing the

activities of the investment itself,

company value. The consequence of

through the selection of projects or

this finding is that companies need to

other measures such as the creation

pay attention to the book value of

of new products, the replacement of

assets and the book value of equity.

more

The book value of assets reflects the

development

growth prospects of the company,

development, and mergers with other

used to see how much its assets for

companies (Myers , 1976). Enterprise

the company's operations. The higher

value represented by Tobin's Q is also

the

the

influenced by investment opportunities

company growth prospects, because

and discretionary expenditure in the

the company has a productive asset.

future

The equity book value reflects the

Hyeon, 1998).

capitalization of shares on the stock

The

book

value,

the

better

efficient

engines,

of

(Myers,

the

research

1977;

findings

&

Myeong

in

this

&

study

market. The higher the equity book

support the signaling theory. IOS

value, the better the prospects of the

shown

company in the eyes of investors and

essential enhance shareholder value.

prospective investors. This condition

These

will

provide a signal about the company's

make

funding

decisions.

Therefore, these two elements have a

growth

221

by
types

MBAR
of

AND

MBER

investments

prospects,

the

will

growth

rd

AIMI 3 International Conference:Improving Local Business Performance Through Cross Culture Management

prospects for assets and market

Some

capitalization value stocks, which is

suggested are: first, still need to be

reflected in the expected future equity

developed and empirically examined

growth. This fact is based on the

the influence of diversification on the

assumption

control

company

that
value

the
will

maximum

systems

that

at

may

every

level

acquired

corporate and business unit level.

through the selection of investments

This is because when companies

with a positive net present value. That

diversify, the consequences faced

is, the investment expenditures have

was the change of organizational

been considered and analyzed with

structure or the structure of the larger

existing

and

methods,

be

suggestions

the

selected

comprehensive

businesses.

investments with positive NPV (Chan

Therefore, it is necessary that the

et al., 1990). Fama and French (1998)

study looked at the business structure

stated that the investment provides a

changes because it also have an

positive signal about the company's

impact on policy and strategy. This

growth

growth

condition is seen in the phenomenon

stocks in the future, resulting an

of several publicly traded companies

increase of company value as a

that make quite aggressive business

whole.

development for a relatively short

and

capitalization

period
CONCLUSION

AND

prospects

RECOMMENDATIONS
This

study
First,

sector

Indonesia

of

the

in

two

IOS

secondary
diversified

outlook

growth

for

asset

variables.

Therefore,

it

is

growth with positive development from
year to year. Companies that have

were able to increase the company
value, as reflected in the value of
Tobin's Q. Second, IOS acts as a
mediation

and

Second,

important for companies to maintain

company that formed by market share

partial

time.

capitalization of growth stocks reflect

resulted

conclusions.

of

positive

growth

development

give

positive

signal

to

that

company

between

investors

performance

has

good

prospects.

diversification and companies value.
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