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THE EFFECTS OF INTERNAL AND EXTERNAL FACTORS

ON THE VALUE OF A FIRM THROUGH ITS INVESTMENT OPPORTUNITIES

ON THE STOCK EXCHANGE OF THE SOUTHEAST ASIAN COUNTRIES 1) I Gede Adiputra

2) A Lecturer at the Faculty of Economics of Tarumanagara University Jakarta and a Student of Doctoral

Program at the Faculty of Economics and Business of Padjadjaran University Bandung

e-mail : w_wigra@yahoo.com

ABSTRACT

This study aims at gaining effects of a company's internal factors such as the size of the

company, Financial Risk, debt to Equity Ratio, dividend policy and it’s external factors such

as interest rates, exchange rates, inflation and economic growth on Investment Opportunities

as measured by Investment Opportunity Set (IOS), as well as the effects of Investment

Opportunities on the firm value as measured by Tobin's q in 5 (five) Asean countries namely

Indonesia, Malaysia, The Philippines, Singapore and Thailand. The Analysis of this study is a

panel data of 100 huge capital companies engaged in the property since 2008 to 2013. The

author of this study formulates the research problem as follows: What internal & external

factors influence the company’s investment opportunities which are proxied through IOS

either partially or simultaneously? And how does the investment opportunity proxied through

the IOS affect the firm value as measured by Tobin's q?

This study used a simultaneous regression analysis for panel data and the Two Stage

Least Squares (TSLS) methods to estimate parameters. The results show that there is a

positive and significant effect of Investment Opportunity Set (IOS) on the company value of

the 5 ASEAN countries. The internal factors influence showed different results in each

country. The macro-economic and environmental conditions effect the investment activities

as described in the theory of Keynes and Minsky that stated that the micro and macro sectors

cannot be separated from one another.

Keywords: Investment Opportunity Set, Internal Factor, External Factor, Value of The

Firm

I. INTRODUCTION

A. The Research Background

The Asean Economic Community (AEC) is an agreement arranged by ten ASEAN

countries. Mostly in the field of economics in efforts to increase international

competitiveness, increase the economic growth, improve people's economic standard and

reduce poverty. AEC is the realization of ASEAN Vision 2020 to integrate of the economy

of ASEAN countries to establish a single market and build a production base. At least

there are 5 things that will be implemented: to free the flow of goods, services, investment,

capital and skilled labor.

The US crisis in 2008 impacted on the debt crisis in Europe. The European currency

exchange rate fell to the lowest point in the last 4 years, being U.S. $ 1.2237 per 1 euro.

The negative economic growth did not only affect the performance of stock markets in

Europe but also in Asia Pacific. Although the region is considered as an area with better

prospects of economic growth than was the United States and Europe, in 2011 the domino

effect of Europe's debt crisis was increasingly felt in Asia, including Southeast Asia.

Economic impacts on the economy of a country based on the opinion of

conservative company, which is based on the model of Modigliani-Miller, has always said

that there is no relation at all between the financial side with the overall economic

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fluctuations (irrelevant finance). Micro sectors of the company also have no effects on the

overall macro economy dynamics and move on their own. It is then refuted by Keynes and

Minsky who said that the sectors of micro and macro cannot be separated from one

another. Crisis in practice is divided into three generations. The first generation (1970)

refers to the phenomenon of macro economical mismanagement by the government. The

second generation (1980) refers to the liquidity crisis as part of panic holders. The third

generation (1999) shows the relationship between the banking sector, the cooperative

sector and the government macro dynamic economy. The phenomenon is often referred to

as the balance sheet effect of the crises where the effects of the poor condition of the

balance of economic sectors pervasively influence each other.

The Balance Sheet Effect is an approach that states how macroeconomic fluctuations

are also influenced by the balance of the micro sector. Allen et al; 2004 (Rosenberg,

Keller, Setser and Roubini) explained that the financial structure of many developing

countries is a source of fragility and crisis. First, the financial structure itself refers to the

composition and amount of debts and assets in the balance sheet of the country. The

problem then arises is a gap in terms of debt maturity (maturity mismatch), where there is

a gap between short-term liabilities and liquid assets that can be used to meet its

commitments. Second, the Currency Mismatch demonstrates its ability to pay all of its

liabilities in foreign currency. Third, Capital Structure Problem shows the composition of

his own money and capital, and the fourth, solvency problem or how assets are held to

cover all of its liabilities.

Macro fundamentals in terms of capital market analysis are called the fundamental

factors of the State, They are uncontrollable factors that cannot be controlled by the

company. Macro fundamental factors include: (1) economic, (2) socio-cultural,

demographic and environment, (3) political power, government, and laws, (4)

technological and (5) competition (David, 2003). However, this study only implies on the

factors of the fundamental macroeconomic indicators such as interest rates, foreign

exchange rates, inflation and economic growth because they are factors that take lots of

attention of the capital market. The factors affect the capital markets either directly or

indirectly, and the changes will be responded directly by the capital markets, so these

factors are very potential to increase or decrease the risk of market or systematic risks.

The Fundamental factor in the analysis of micro capital market is often referred to as

the company fundamental factor .This factor can be controlled by micro company. The

fundamental factors can be recognized in the company policy and in the company

performance factor. The company policies are defined by its financial management policy,

which includes funding, investment and dividend policy (Weston and Copeland, 1992).

The internal factors of a company that are used in this study and take lots of

attention are Research on the size of the company that was performed by Lopez and

Francisco (2008) which shows that the size of the company gives a significant positive

effect on corporate debt to Equity Ratio that is supported by research conducted in

Indonesia by Euis and Taswan (2003); Santika and Kusuma (2002); Nisa (2003); and

Sujoko and Soebiantoro (2007) which also gave similar results. However, the research

conducted by Ozkan (2001) showed different results which explained that the size of the

firm gives an unsignificant negative effect on the debt to Equity Ratio of the company.

Meanwhile Bhaduri (2002) and Mutamimah (2003) also showed unsignificant results

between the size of the firm and the corporate debt to Equity Ratio. Ramlall’s study (2009)

showed that the size of the company gives a significant negative effect on the debt to

Equity Ratio. Cassar & Holmes (2003) found that the capital structure between small and

medium enterprises are the same, so is the size, it does not give any effects on the

leverage. While some researchers such as Ozkan (2001), Mao (2003), Low & Chen

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(2004), Gaud et), Ojah & Manrique (2005), Akhtar (2005), Pao and Chih (2005),

Supavanij (2006), Chen and Strange (2006), Sayilgan et al (2006) found different results

by showing that the size has a positive effect on the leverage. However, Kwok & Reeb

(2000) showed a negative effect on leverage size. Vera et al (2005), and Chevalier et al

(2006) in Indonesia showed that the size gives a negative effect in the short-term leverage,

but in the long term leverage it gives a positive effect.

Dividend policy tends to be one element of the most stable and predictable by the

company, and most companies are starting to pay dividends after they reach the maturity

stage of the business and when there is no longer a profitable investment opportunity for

the company (Al-Haddad et al., 2011). The proportion of dividends paid to shareholders

depends on the company's ability to generate profits as well as the form of dividend policy

adopted by the related company. Percentage of profits to be paid to the shareholders as a

cash dividend is called the Dividend Payout Ratio (Andriyani, 2008).

Debt to Equity Ratio (DER) is a ratio that describes the ratio of total debt to total

equity of the company. Companies that have greater growth opportunities generally have

lower DER in its capital structure policy (Smith and Watts, 1992). This is due to

management tendency that prefers equity in financing to fund growth with a view to

reduce the agency problems potentially associated with the existence of risky debt in the

capital structure (Subekti and Wijaya, 2001). The increase of debt will affect the income

available for the shareholders, including dividends received because the obligation to pay

debts is felt to be more important than the dividend distribution.

The Investment opportunity is an important factor in the company's financial

functions. Fama(1978) stated that the company value is determined solely by the

Investment Opportunity. The opinion can be interpreted that the investment opportunity is

important, because the company goal to maximize the shareholders wealth will only be

achieved through corporate investment activities.

Investment Opportunity Set (IOS) is an investment opportunity that may affect the

future growth of the company assets or projects that have a positive net present value so

IOS has a very important role for the company as an Investment Opportunity in the form

of a combination of the assets inplace and the investment options in the future, where IOS

will affect the value of a company (Pagalung, 2002).

Hasnawati (2005) found that the positive effect of the investment opportunity value

of the firm amounted to 12.25%, while the remaining 87.75% is influenced by other

factors such as funding decisions, dividend policy, external factors such as inflation rates,

currency exchange rates, economic growth, political and market psychology. Then the

results of the study also found that the funding decisions positively affect the firm value by

16%. In addition, the research found that the dividend policy has a positive effect on the

firm value.

Wahyudi and Pawestri (2006) found that the investment opportunity does not affect

the value of the firm. Then the results of the study also found that funding decisions affect

the value of the firm. In addition, the research found that the dividend policy gives no

effect to the firm value.

Value of the firm as a representation of the stock price is essentially determined by

the company's prospects in the future. The prospects illustrate the availability of

investment opportunities, which can produce a positive NPV. The companies that have

high investment opportunities will be looked differently on the influence to the value of

the firm compared with the companies that have low investment opportunities. In this

study the value of the firm will be measured by Tobin’s q.

The research on the investment and capital structure has been done in many

developed countries (Rajan and Zingales, 1995; Bevan and Danbolt, 2002; Antoniou,

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Guney and Paudyal, 2002), but is very limited in developing countries (Booth et al., 2001;

Pandey, 2001; abd Chen 2004). There are some differences shown between the company's

condition of developed countries and developing countries. Because of that, this study

aims to determine the factors related on the investment policy of the companies listed on

the Stock Exchange of the ASEAN Countries. The focus of this research is the ASEAN

countries because as we know, since the economic crisis of 2008, the center of world

economic power has been slowly shifting from Western Countries, Europe and North

America, to ASIA. In Asia, the fastest economic growing zone is ASEAN. This makes this

study focus on the companies which are members of the ASEAN zone.

Based on the above background, the theme of this research is to analyze the

differences of the company's internal and external effects on the Investment Opportunity

Set (IOS) and its impacts on the firm value of the 5 (five) firms of ASEAN countries.

B. Research Problem

According to the identified background, this study formulates the problem as

follows: What internal& external factors influence the company investment opportunities

that proxied by IOS either partially or simultaneously? And how does the investment

opportunity proxied by the IOS effect firm value as measured by Tobin's q?

C. Research Contribution

Theoretically this study contributes to the knowledge of financial management,

particularly for corporate finance researches, in order to understand investment

opportunities to maximize the value obtained by the firm.

This study provides a practical guide for managers to consider the benefits and costs

of selected financial resources and to perform retrieval Investment Opportunity. By

knowing the proxy investment opportunities through IOS, this study is expected to

contribute the investors as part of the empowerment guidelines for investors to put their

capital to company that has debt and equity considerations which are favorable in the

ASEAN Countries.

II. LITERATURE STUDY, CONCEPTUAL FRAMEWORK AND HYPOTHESES

A Literature Study

1. Investment Opportunity Set (IOS)

Myers (1977) stated that the company is a combination of the value of real assets

(assets in place) and future investment options. Future investment options are then known

as the investment opportunity set (IOS). The investment option is an opportunity to grow,

but many companies are not able to carry out all future investment opportunities.

Companies that are not able to use these investment opportunities will have a higher

expenditure than the value of the lost opportunity. The value of the investment opportunity

is the present value of the optional companies to make an investment in the future.

According to the Gaver and Gaver (1993), future investment options are not merely

indicated by the projects supported by the research and development activities, but also by

the ability of the company to exploit more opportunities to take advantage as compared to

other similar companies in the same industry group. The higher ability of these companies

is unobservable.

According to Smith and Watts (1992), the investment opportunity set is the result of

choices to make investments in the future. Investment opportunity set demonstrates the

ability of the company to take benefits from the growth prospects. The growth outlook is

an expectation that is desired by management, investors, and creditors. The prospect of

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growing companies for investors is an advantage, because the investment is expected to

deliver high return. Companies that grow will be responded by the markets and the growth

opportunities will be recognized in the proxy investment opportunities with various

combinations of the value of the investment opportunity set.

2. Size of the firm

Large companies are easier to obtain a loan, given the value of assets used is also

larger, and the confidence level is higher and banks are also easier to invest. Therefore,

investment in research is one of the variables determining the size of the company. Titman

(1998), Homaifar (1994), and Gilson (1997) measured the size of firm variables using the

logarithm of total assets. Burgman (1996) and Moh'd et al. (1998) measured the size of

firm variables using the logarithm of sales.

Peasnell, Pope, and Young (1998) showed a negative relationship between firm size

and earnings management in the UK. This shows that the managers who lead larger

companies have a smaller chance to manipulate earnings than managers in smaller

companies, so larger firms will have more investment opportunities than smaller

companies.

Siregar and Main (2005) said that larger companies usually have more available

information to the investor in making an investment decision. Albrecth & Richardson

(1990) and Lee & Choi (2002) found that larger companies have less impetus for income

smoothing than smaller firms because the large firms are more critical. However, the

earnings of management efficient, the greater size of the company's profits will encourage

management for higher investment.

The size of the firm can be expected as a proxy for corporate bankruptcy

opportunities (Titman & Wessels, 1988), political costs (Richardson, 1998; Lobo & Zhou,

2001; Halim et al, 2005), and asymmetric information (Panno, 2003; Deshmukh, 2005).

From the strategic management approach, large companies that are diversified

conglomerately have a lower risk of bankruptcy than a company that does concentric

diversification (Barnet, 2002) that is expected to take advantage of high debt capacity to

diversify. Therefore, there is an expected positive relationship between firm size and

leverage.

3. Financial Risk

Financial leverage is the use of financial resources that will provide additional

benefit than its fixed load, thus increasing the profit available for shareholders. Financial

leverage shows the level of variability of earnings per share due to the uncertainty in net

income before interest and taxes, or the degree of financial leverage (DFL), which

measures the sensitivity of earnings per share to changes in net income before interest and

taxes. Financial risk is the variability of income to be received shareholders, and financial

leverage is one of the factors that influences financial risk. The use of higher financial

leverage will result in permanent high capital costs and high financial risks also. Thus the

higher the degree of financial leverage (DFL) the higher the financial risk.

According to Shapiro (1991:743) and Gilson (1992:242), there are two approaches

to measure the ratio leverage namely: (1) approach using data from the balance sheet to

determine the size of the loan used to finance the company's assets; and (2) the approach

using data from the income statement to measure the company's ability to pay loads of

interest on the loan. Previous researchers produce different conclusions on the influence of

financial risk on capital structure. Byless (1994), Burgman (1996), and Moh'd et al. (1998)

resulted in a positive relationship between financial risk and the capital structure. Haris

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(1991) results do not support the conclusion, namely that the risk has significant negative

effect on the capital structure.

Baye (2006) said there are several factors or sources of uncertainty that may pose a

business risk. The first business is the general macroeconomic conditions which may cause

the tides of business (business cycle) of a company. Both are ups and downs that occur in

a particular industry in which the company operates and manager. Second, lethargy in an

industry is often associated with economic crisis in a particular industry or industry cycle

that has reached a mature stage (maturity). Third is the action and reaction of a competitor

that can’t be predicted with certainty. Action and reaction from competing companies

determine the level of competition between companies in the industry. Fourth is the

changing tastes and preferences of consumers who are not unexpected, as in the industries

of which their life cycle is very fast. Fifth is the uncertainty that comes from the supply

side. Changes in costs and expenses are associated with the change in the price of inputs

used in the production process. Changes in raw material prices, the increase in electricity

and telephone rates, rising fuel prices, and the increase in the minimum wage can lead to

unexpected uncertainty for companies.

Baye (2006) classified the manager's attitude towards risk into three groups, namely

the avoidance of risk (risk averter), neutral risk, and the like risk (risk seekers or risk

lovers). Managers who are risk averters prefer options that give definite benefit with the

lowest possible risk. They feel psychologically uncomfortable and uneasy because of the

uncertainty. Averter risk managers only want to bear a greater risk if the expected return is

greater. Managers who are risk neutral managers are indifferent to the two decisions that

provides the same benefits even if one of them contains a risk. In other words, risk-

neutrals tend to make decisions that maximize benefits regardless of the variant of the

decision. On the other hand the risk managers view risk as a seeker satisfaction, and are

willing to sacrifice a number of benefits to a greater risk. For risk worker managers, the

presence of asymmetric information can increase business uncertainty and risk, and will

restrict access to external funding sources, so as to encourage pecking behavior that has an

impact on the pecking order of capital structure. This fact encourages risk averter

managers to prefer internal sources of funds rather than external sources of funds (Myers

and Majluf 1984; Pawlina & Rennebooh, 2005).

4. Debt to Equity Ratio (DER)

Debt to equity ratio is part of the leverage ratio or the ratio between total debt (short,

medium and long term) of the company's own capital. Analysis of debt-to-equity ratio has

a very important meaning, because it is used to measure the level of use of debt as a source

of corporate financing. Debt to Equity Ratio (DER) reflects the company's ability in

fulfilling all its obligations, which is indicated by the capital used to pay the debt.

Lang et al. (1996) found that there is a negative relationship between leverage and

growth in the future of a company that only has a limited growth opportunity. Gull and

Jaggi (1999) found a relationship between free cash flow with debt policies that differs

among companies that have a low IOS with companies that have high IDS. Smith and

Watts (1992) found empirical evidence that the company that has the opportunity to have a

greater debt to equity ratio has lower capital structure policy in funding its own capital

(equity financing)and is likely to reduce agency problems potentially associated with the

company's free cash flow. Under these conditions, it can be stated that the influence of the

IOS to the Debt to Equity Ratio is negative.

Gull and Jaggi (1999) in his research using 1869 data as observations on firms in

the United States between 1989 to 1993, found the influence of free cash flow on debt

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levels that differ between large companies and small companies that have low IOS. Some

of these studies generally provide evidence to support that there is a positive effect of free

cash flow on debt to Equity Ratio. This is consistent with Jensen (1986) which states that

firms with large free cash flow will tend to have higher levels of debt.

5. Dividend Policy

Dividend policy is a policy of the company in determining the proportion of funds

that will be distributed to the holders. Theoretically, the larger a company makes a profit

the greater the ability to pay dividends, but the more the profits earned do not require

companies to increase dividend payments when the company could use the profits

profitably. Beneficial use means the fund could provide a rate of return greater than the

cost of capital.

According to Adedeji (1998), investment has a negative effect on dividends. The

measure of the company's investment will affect the amount of the dividends. The

company that has many opportunities to invest will encourage companies to implement a

small dividend, so that the company has an internal equity to fund investment. Conversely,

the companies that do not have investment opportunities will tend to carry out a high

dividend payout.

Determining the allocation of profits as retained earnings and dividend payments are

a key aspect in dividend policy. Each period, the company must decide whether profits

will be retained or distributed in part or in full to shareholders as cash dividends.

According to Brigham and Ehrhardt (2002:12), dividend policy is a policy that

determines the percentage of profits to be retained the investment and the profits to be paid

out as dividends. Meanwhile, according to Brealey and Myers (2005:432), the dividend

payout ratio is the percentage of earnings paid out as dividends. Furthermore, according to

Damodaran (2002:7), the principle of the dividend policy is a decision to determine funds

reinvested and the income that will be distributed to the shareholders. Then, according to

Gitman (2000:165), dividend policy can be formulated by the amount of dividend per

share divided by the amount of earnings per share.

From the definition above, it can be concluded that a dividend policy decision is

made by financial managers in determining the proportion of revenue that will be

distributed to shareholders as dividends, as measured by the amount of the Dividend

Payout Ratio (DPR) and the income that will be reinvested in the company as profit

detained.

6. Interest Rate

According to the quantity theory, the main cause of inflation is the emergence of

excess money circulation demand. The increasing of money supply without balancing the

amount of goods causes the high prices of goods. Consequently, when the value of money

decreases, the people are not interested in saving money. They would prefer to keep the

goods. To make people put more interest to save money, the government raises the interest

rate, so the interest rate becomes high.

Rising interest rates will encourage people to save, and lazy to invest in the real

sector. The increase of interest rates will also be borne by the investors. The public does

not want to risk investing with high costs, as the investment may become undeveloped.

Many companies find it difficult to sustain their lifes, and this led the company's

performance to decline. The decline of the company's performance may result in reducing

stock prices meaning the value of the firm will also be declined.

Several studies on the interest rate issues have been carried by Solnik (1996),

Eduardus (1997), and Dedi and Riyatno (2007). The results of the study by Solnik (1996),

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found that there is a significant negative relationship between stock returns and interest

rate. Eduardus (1997), found that the interest rate gave positive effect but not in significant

ways on the systematic risk. Suryanto (1998), in his research found that the rate of the

interest deposits on U.S. and Singapore dollars, and Japanese Yen gives significant effect

on the stock prices. Similarly, Dewi (2001) found that the rate of interest significantly

influences the Index property sector. While Sudjono (2002), in his research found that the

rate of interest gave significant negative effect on stock prices. But Dedi and Riyatno

(2007), found that the rate of interest gave significant negative effect but did not give the

same significant way negatively on the systematic risk.

7. Exchange Rate

The exchange rate is the price or value of the local currency against foreign

currencies. The actors in the international market put lots of concern on the determination

of foreign exchange (forex), due to the effects of foreign exchange rate to the costs and

benefits of "playing" in the trade of goods, services and securities (Mudrajad, 1996).

Fundamental factors that allegedly serve strong influence on the foreign exchange rate are

the money supply, real income relative, relative prices, inflation differences, the difference

in interest rates, and the demand as well as the offering asset in both countries.

Gustav Cassel, a Swedish economist in 1918 introduced the theory of Purchasing

Power Parity (PPP), the theory of Interest Rate Parity (IRP), and the International Fisher

Parity theory (IFE), Purchasing Power Parity (PPP) exchange forex connected with

commodity prices in local currency in the international market, namely the foreign

exchange rate that will tend to decrease in the same proportion to the rate of increasing

prices (Baillie and McMahon, 1990). The decreasing rate makes the rate of price increases

production costs especially in companies that use imported raw materials. As a result, the

competitiveness of these companies are declined, because companies must sell their

products at a higher price. The theory of Purchasing Power Parity (PPP) also explaines

that the spot rate of a currency will change in response to differences in inflation between

two countries. As a result, the purchasing ability of consumers when buying goods in their

own country will be equal to the purchasing ability when importing goods from other

countries (Mudrajad, 1996). Theory of IRP (Interest Rate Parity) forward exchange rate of

a currency that contains a premium (discount) determined by the difference in interest

rates between the two countries. As a result, the closed interest rate arbitrage will be much

more profitable than the domestic interest rate (Mudrajad, 1996).

Several studies have been conducted on the exchange rate by Claude, et al (1996),

Suryanto (1998), Sudjono (2002), Siti (2004), Robiatul and Ardi (2006), and Edi and

Riyatno (2007). The results of the study done by Claude, et al (1996), found that the

economic risk (including foreign exchange) was positively related to stock returns in the

capital market of developed countries, whereas in the new capital markets in developing

countries that was no significant influence of economic risk (including foreign exchange)

on stock returns. Suryanto (1998), in his research found that the exchange rate of U.S.

dollar, Singapore dollar and the pound sterling significantly has effect on stock prices.

Sudjono Research (2002), found that the exchange rate is negatively related to the stock

price. Siti (2004), found that the exchange rate is negatively related to the stock price but

does not significantly show negative effect on the stock. Meanwhile the research results

reached by Robiatul (2006), found that the exchange rate gave significant negative effect

on the stock. However, the results of research done by Dedi and Riyatno (2007), found

that the exchange rate gave positive and significant effect on the systematic risk.

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8. Inflation

If we talk about inflation, we do not talk about a change in the prices of some goods,

but we talk about the average of change. The value or the inflation in a certain period

describes (yearly, monthly) the average increasing of prices in the economy (Sadono,

2000). Therefore, the higher the average inflation value in the prices of goods, the higher

investment activities will be.

The increasing prices will cause high inflation. This condition will affect the rise in

production costs. High production costs will cause the price of goods to rise, and this will

direct the purchasing ability of the community to lower level as well as declining real

incomes. The declining purchasing ability results is declining sales which will decline the

company's profits. If the corporation profits decline, the performance of the company will

also decline.

The decline in stock prices occurs in accordance with the law of demand in

economic theory. The fewer the number of items requested, the lower the price will be.

Investors and prospective investors are reluctant to buy shares of the company, because

the expected return is on a low level due to reduced corporate profits. This results in lower

company's stock prices.

9. Economic Growth

Economic growth illustrates the material standard of living that increases all the time

(one year) for the living of people in a country that is derived from the increasing revenue,

thus allowing people to consume the amount of goods and services which are more

numerous and diverse (Mankiw, 2003). To measure economic growth, economists use

data of gross domestic product (GDP), which measures the total average income of

everyone in the economy. Gross Domestic Product (GDP) is often regarded as the best

measure of economic performance.

Because economic growth is measured by GDP growth, the inflation, the interest

rate and the exchange rate are dominant in influencing economic growth. Inflation, interest

rates, and exchange rates will affect consumption investment, government purchases and

net exports. Inflation and interest rates present the real sector, and the exchange sectors

present the foreign sector. Therefore, in this study, the economic growth is an indicator of

the outcome variable of inflation, interest rates, and exchange rates. As well as the

economic indicators, economic growth can also be used as a signal of the presence or the

absence of improved economic performance that can affect the performance of the capital

markets.

The reciprocal relationship occurs because on the one hand, the higher the economic

growth, means the greater part of the revenue should be saved, so that the investment will

create greater efforts. Therefore, in this case, the investment is a function of economic

growth. On the other hand, the greater the investment in a country, the greater the rate of

economic growth can be achieved. Thus, in this case, the rate of economic growth is a

function of investment.

As a result of the reciprocal relationship, the policy implications in projecting an

investment requirement must pay attention to the variables of economic growth, as well as

in projecting economic growth they should pay attention to variable of investment. In the

logic of capital market participants, investors and prospective investors will pay attention

to the economic growth variables in making investment decisions. This is due to economic

growth, as previously described as an indicator of economic performance. Increased

economic growth illustrates that the performance of the economy rises, and this will give

hope to the investors to see good prospectus in the investment, due to signal of economic

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growth which directs one to make profit in the investment made. Some studies relating to

economic growth that have been done by Ritter (2004), found that income per capita is

negatively related to equity returns in the future. While Nieuwerburgh, et al (2005), found

that the stock market has a weak correlation with GDP growth.

10. Value of the Firm

The value of the firm can be defined as a company's fair value that describes the

company's investor perception of the issuers concerned. According to Husnan and

Pudjiastuti (2004), a prespective buyer is willing to pay the price when the company is

sold. Meanwhile, according to Keown, et al. (2007) the value of the firm is connected to

the market value of debt and equity securities of the outstanding company. The price paid

by the prospective buyer is willing to be interpreted as the market price of the company

itself. In the stock market, the market price means the price that investors are willing to

pay for each share of the company. Therefore it can be said that the value of the firm is an

investor's perception of the company that has always been associated with the stock price.

A normative goal of financial management is to increase the value of the firm, which

is reflected in the market price of its stock (Fama, 1978; Wright and Ferris, 1997; Walker

2000;, and Qureshi, 2006). To increase the value of the firm means to maximize the

wealth or well-being shareholders (Martin, et al., 1994). The company's objective is to be

achieved through the implementation of financial management functions operated

carefully and precisely, based on an opinion that any financial decision taken will affect

other financial decisions that impact on value of the firm (Jensen and Smith, 1994; Fama

and French, 1998). Financial management of the company regarding to the settlement of

the important decisions taken by the related company includes other investment

opportunities, financing, and dividend policy. The combination of the three decisions

optimizes the value of the firm, thus the decision-making is intertwined with one another

(Mbodja and Mukhrejee, 1994, and Qureshi, 2006).

One alternative that is used in assessing the value of the firm is to use Tobin's q.

According to Sukamulja (2004), this ratio can provide the best information, because the

Tobin's q includes elements of debt and equity of companies. Not only ordinary shares and

equity companies but also the entire assets of the company. Incorporating all assets of a

company means the company not only focused on one type of investor which is the

investor of stocks, but is also focused on creditors that help the company to operate

financially through the loans granted.

Fama and French (1998) conducted research on the investments that gave empirical

evidence, and identified that the investment resulting from the leverage has positive

information about the company in the future, having positive impact on value of the firm.

In addition, the research also found that the resulting investment of dividend policy has

positive information about the company in the future, having positive impact on value of

the firm.

Hasnawati (2005) found that the positive effect on the investment opportunity value

of the firm amounted to 12.25%, while the remaining 87.75% the influenced by other

factors such as funding decisions, dividend policy, external factors such as inflation rates,

currency exchange rates, growth economic, political, and market psychology. Then the

results of the study also found that the funding decisions positively affected value of the

firm by 16%. In addition, the results of the research showed that the dividend policy has a

positive effect on the value of the firm.

11

B. Conceptual Framework

Starting with the housing credit crisis with high risk (subprime mortgage) in the

United States in the last semester of 2007, suddenly the global financial crisis (crisis of

Europe) and the Financial crisis occurred not only in the financial sectors but also had

spread to the real sectors. Further results of the global Financial crisis was that the world

economy slowed sharply in the last two quarters of 2008 would experienced a serious

recession in 2009 which also happened in East Asia, Oceania and Southeast Asia.

This research was conducted in ASEAN countries such as Indonesia, Malaysia, the

Philippines, Singapore, Thailand, particularly in Investment Opportunities on property

stocks in order to raise value of the firm.

The first construction of this study is suspected in internal factors that influence the

investment opportunity, namely 1) the size of the company, 2) Financial risk 3) debt to

Equity Ratio, 4) dividend policy. The second construction is suspected in external factors

that influence the investment policies namely, 1) the interest rate, 2) foreign exchange

value, 3) inflation and 4) economic growth.

Furthermore, the influence of both external and internal construction of the

IOS mentioned above is used to test the effect of IOS on value of the firm as measured by

Tobin'q. For more details, the paradigm can be seen as follows:

12

Figure 1. The Framework of Thought Paradigm

H1

1

H2

H4

H3

Internal Factor

Firm Size

Financial Risk

Debt Equity Ratio

Dividend Policy

Invesment

Opportunity Set

(IOS)

Value of

the Firm

H9 H5

H6

H7

H8

External Factor

Interest rate

Exchange Rate

Inflation

Economic Growth

I & II

13

C. Hypothesis

1. There is an effect of size of the firm on investment opportunities on the Stock

Exchange in five ASEAN countries.

2. There are significant financial risks to the company's investment opportunities

proxied through the IOS of the five ASEAN countries’s Stock Exchanges.

3. There is certain Debt Equity Ratio Effect on Investment Opportunities proxied

through IOS on the five ASEAN countries’s Stock Exchanges.

4. There is certain influence of Dividend Policy on Investment Opportunities proxied

through the IOS on the five ASEAN countries’s Stock Exchanges.

5. There is certain effect of interest rates on the investment opportunities which is

proxied through the IOS on the Stock Exchanges of the five ASEAN countries.

6. There is certain effect of foreign exchange rates on the Investment Opportunities

proxied through the IOS on the Stock Exchange of the five ASEAN countries.

7. There is certain effect of inflation on the investment opportunities which is proxied

through the IOS on the five ASEAN countries’s Stock Exchanges.

8. There is certain influence of economic growth on the investment opportunities IOS

proxied through the Stock Exchange on the five ASEAN countries.

9. There are certain effects given by the investment opportunities proxied by the IOS on

the Value of firm on the Stock Exchange of the ASEAN countries.

III RESEARCH METHODOLOGY

A. Operationalization of variables

The size of the firm, is a reflection of the company’s wealth (Fraser, 2006) as measured

by the natural Log total assets.

Financial risk, where the greater the fixed costs, of the company the more likely the

company to experience financial difficulties leading to bankruptcy (Delcoure, 2007)

which is measured by:

Risk =

Debt to Equity Ratio is a simple calculation that compares the total debt of the

company's capital shareholders (Ross et al. 2003:66)

Debt Equity Ratio (DER) =

Dividend policy is a policy that determines the percentage of profits to be retained to be

invested and the profits to be paid out as dividends. The policy is calculated through a

dummy variable, with the following provisions:

DPR = 0, when the company does not issue dividends;

DPR = 1, when the company issues dividends as it should.

Investment Opportunity Set (IOS) is an investment opportunity in the form of a

combination of owned assets (assets in place) and the investment options in the future,

which IOS will affect the value of a firm (Pagalung, 2002).

14

IOS in this case is measured by the ratio of MVE / BE. This ratio is used to consider the

opinions of Gaver and Gaver (1993) which may relate the market value of the firm to its

opportunity to grow and carry out investment activities so that the company can obtain

its equity and its asset growth. Therefore, this study uses market value to book the value

of equity (MVE / BVE) as a proxy for the IOS. Mathematically, the market value to book

value of equity (MVE / BVE) is formulated as follows:

MVE / BVE =

Value of the firm: many alternatives can be used to specify a proxy of value of the firm,

one of which is called the Q Ratio Tobin's q, which was developed by James Tobin

(1967). The Tobin's Q is defined as the ratio of the market asset value with the book

value taken from these assets. Some researchers like Black et al. (2002); Brown and

Caylor (2004); Bøhren and Odegaard (2004); Wei et al. (2005); Imam and Malik (2007);

Khan, Balachandran, and Mather (2007); Kowalewski et al. (2007); Amidu (2007);

Fahlenbrach and Stulz (2007); Javed and Iqbal (2007); Dharmapala and Khanna (2008);

Belcredil and Rigamonti (2008) used the Tobin's q. as a proxy value of the firm.

Calculating the value of Tobin's Q respectively - each sample uses the formula:

Tobin's Q = (ME + DEBT) / TA

Where:

ME = the number of common shares of the company multiplied by the

company's closing stock price

DEBT = (Total Debt + Inventory - Current Assets)

TA = the book value of total assets of the company

If the value of Tobin's Q is more than one (Tobin's Q> 1), then the company's market

value is greater than the value of the firm assets recorded in the financial statements. This

means that the company is recognized and marked well by the market so that company has

certain opportunity to increase the volume of trade.

B. Data Collection Techniques

The data used in this study is a secondary data which are panel data including a

cross-sectional and time series for the 100 large-cap companies in 2008-2013 except for

non financial and insurance companies. The data are obtained as follows:

1. Data for large-cap companies of the 5 ASEAN countries (Indonesia, Malaysia, the

Philippines, Thailand and Singapore);

2. Data of internal factors such as the size of the firm, the financial risk, EBIT, the

outstanding Volume Shares and the total equity taken from:

a. Bloomberg.com

b. Yahoo.finance.com

C. Design Analysis and Testing Hypotheses The assumption of regression testing was performed using regression models and

simultaneous panels using common qualifications, as follows:

In the panel data regression, there are three approaches consisting of a least squares

approach (pooled least squares), fixed effects approach (fixed effect), and the random

effects approach (random effect). Model of pooled least squares (PLS) is a model obtained

15

by combining or collecting all cross section data and time series data. This data model is

then estimated using ordinary least squares (OLS), as follows:

ititit Xy

i shows the cross-section units (i = 1, ...., n);

t shows the time series (t = 1, ...., t).

From these equations, constant parameters of α and β will be obtained and the

Coefficient derived involving n x t observation makes the parameters to be put in the

simultaneous equations above and can be estimated by using Two Stage Least Squares.

IV The Results

The results of this study shows the differences of the Internal factors on its certain

influence to the companies implied to the IOS with internal and external factors influence

to Investment opportunity set (IOS) and its impact on value of the firm in each ASEAN

country.

Table 1: The influence of internal factors on the company's Investment Opportunity Set (IOS)

on each property in the shares of each ASEAN country.

Variable coefficient Prob Indonesia

1. Firm size -18.76969 0.0722*

2. Risk -5.998738 0.7787

3. DPR 13.79208 0.1330

4. DER 3.395001 0.5873

F-Statistic R-Square

1.334009 0.031327

0.259452

IOS to Value of the firm 0.649975 0.0000***

Philippines

1. Firm size -34238.06 0.0840*

2. Risk 12657.67 0.4569

3. DPR -570403.6 0.7002

4. DER 11533.19 0.7855

F-Statistic R-Square

0.254026 0.022995

0.906460

IOS to Value of the firm 1.107165 0.0000***

Malaysia

1. Firm size 3121.940 0.7177

2. Risk -7836.259 0.4738

3. DPR 3.384764 0.8801

4. DER -62.55285 0.0486**

F-Statistic R-Square

0.033786 0.001031

0.997787

IOS to Value of the firm 0.621610 0.0000***

16

Singapore 1. Firm size -5362.698 0.3158

2. Risk -520.5629 0.2677

3. DPR -1814.807 0.3969

4. DER 687.3658 0.1961

F-Statistic R-Square

0.777440 0.035294

0.542905

IOS to Value of the firm 0.802229 0.0000***

Thailand

1. Firm size -37210.89 0.0070***

2. Risk -67782.78 0.3887

3. DPR -28821.19 0.0162**

4. DER -11188.97 0.0160**

F-Statistic 2.316858 0.064376*

IOS to Value of the firm

R-Square

0.561968 0.104993

0.0000***

Note: *** Significant at 1%; ** significant at 5%; * significant at 10%

Table 2: The effect of internal and external factors on the company's Investment Opportunity

Set (IOS) for each property in the shares of each ASEAN country.

Variable coefficient Prob

Indonesia 1. Firm size -121.7293 0.0540*

2. Risk -25.93174 0.1366

3. DPR 18.97825 0.0571*

4. DER 7.656251 0.5697*

5. Interest rate -16.22290 0.0211**

6. Exchange rate -6990778. 0.0349**

7. inflation -14.07080 0.0003***

8. Economic Growth -4.021671 0.0697*

F-Statistic 1.623764 0.021601**

IOS to Value of the firm R-Square

0.641628 0.342154

0.0000***

Philippines 1. Firm size -45090.09 0.0202**

2. Risk 15894.38 0.3512

3 . DPR -257724.5 0.8161

4. DER 37081866 0.0001***

5. Interest rate 7.55E+10 0.0001***

6. Exchange rate -767817.8 0.0000***

7. inflation -179099.4 0.0001***

8. Economic Growth 12992.62 0.6759

F-Statistic 0.965238 0.468988

IOS to Value of the firm R-Square

0.881958 0.087035

0.0000***

17

Malaysia 1. Firm size -28485.81 0.5395

2. Risk -99514.99 0.1706

3. DPR -140.4197 0.0203**

4. DER -279.4902 0.5487

5. Interest rate 100999.2 0.0583*

6. Exchange rate 0.006663 0.0000***

7. inflation 67.93392 0.5216

8. Economic Growth -15.50014 0.7260

F-Statistic 22.12104 0.0000***

IOS to Value of the firm

R-Square

0.611657 0.582193

0.0000***

Singapore 1. Firm size -5520.612 0.2940

2. Risk -482.3037 0.2242

3. DPR -5599.563 0.4473

4. DER 1088.033 0.1964

5. Interest rate 16312738 0.0276**

6. Exchange rate 30330974 0.0276**

7. inflation -3327.945 0.0184**

8. Economic Growth -3571.314 0.0350**

F-Statistic 0.925457 0.500173

IOS to Value of the firm R-Square

0.877629 0.083748

0.0000***

Thailand 1. Firm size -69627.33 0.0058***

2. Risk -160863.3 0.0428**

3. DPR -39106.80 0.1527

4. DER -9615.758 0.0017***

5. Interest rate -385832.6 0.1596

6. Exchange rate -4.43E+08 0.1283

7. inflation -11770.37 0.0632*

8. Economic Growth 22558.51 0.0071***

F-Statistic 2.253240 0.032462**

IOS to Value of the firm R-Square

0.694262 0.193773

0.0000***

Note: *** Significant at 1%; ** significant at 5%; * significant at 10%

It can be seen that:

1. Indonesia

The results indicate that firm size gives a significant negative effect on the IOS and

the financial risk when the investment opportunities and the debt policies do not show

significant ones to the IOS. This shows that the size of the company becomes a

recommended factor in the decision making to invest in Indonesia.

After the external variables are included to the study, it shows that only the risk

variables give insignificant effect on the IOS, while the variables of firm size, dividend

policy, debt to Equity Ratio and all external company variables show certain significant

effect to the IOS.

18

Simultaneously variables of internal factors are not significant to the IOS.

Meanwhile, after the combination with external variables, simultaneously the internal and

external variables are recognized significant enough to the IOS.

On studying the IOS variables’ influence to the firm value, the results show that the

variables are significantly related to the value of the firm's IOS either by internal variables

and the combination of internal and external companies.

The differences found above implied the author to speculate that the macro

economic environment has caused such symptoms. The statement has exactly the same

conclusion with the theory of Keynes and Minsky who said that the micro and macro

sectors cannot be separated from one another.

2. The Philippines

The results indicate that firm size gives a significant negative effect on the IOS. The

financial risk investment opportunities, and debt policies are not significant to the IOS.

This shows that the size of the company becomes a factor in the decision making in

investment.

After the external variables are included to the study, it shows that only variables of

firm size and debt policies give significant effect on the IOS, while the risk and dividend

policy variables do not show certain significant effects to the IOS.Variables of external

firm interest rates, the exchange rates and inflation significantly affect the IOS, and the

economic growth is not significant to the IOS.

The variables of the IOS implied in the internal factors are not significant to the IOS.

Meanwhile, after the combination with the external variables, its simultaneous effects of

the internal and the external variables are not significantly shown on the IOS.

This finding contrasts with the situation in Indonesia where the involvement of external

variables such as interest rates, exchange rates, and inflation are shown significantly on the

IOS. The influence of internal and internal variables is not significantly shown.

3. Malaysia

The study finds that the debt to Equity Ratio has positive and significant effects to

the IOS while the financial risk, the investment opportunities and the firm size is not

significant related to the IOS.

After the external variables are included, the results of the study shows that only

significant variable of dividend policy are shown on the IOS. Meanwhile the risk

variables, the firm size, the debt to Equity Ratio do not significantly relate to the IOS. The

external variables of the firm which are interest rates and exchange rates are shown

significantly on the IOS while the inflation significantly shown on the IOS and the

economic growth is not significantly recognized on the IOS.

Simultaneously, the variables of internal factors is not significant to the IOS.

Meanwhile, after the external variables are included into, the internal and external

variables seem to be significant to the IOS. About the effects of the IOS variables to value

of the firm, the findings show that the variables are significantly shown on the value of the

firm either by internal variables or variables of Internal and External companies.

The findings indicate that the inclusion of external variables result in internal and

external factors and has a significant effect on the IOS. It is similar with the theory of

Keynes and Minsky who said that micro and macro sectors cannot be separated from one

another.

19

4. Singapore

The findings show that all variables of the firm are not significantly related to the

IOS. After the external variables are included, the findings of the study show that all

company's internal variable show no significant effect on the IOS, while all external

variables show significantly to the IOS.

Simultaneously the internal factors are not significant to the IOS. Meanwhile, after

the external variables are included, simultaneously the internal and external corporate

variables show no significant effects on the IOS.

The variables of the IOS influence the firm value which involves the internal

variables and the combination of internal and external firm variables.

The findings conclude that the external variables such as interest rates, its exchange rates,

the inflation and its economic growth are simultaneously shown while the internal

variables are shown insignificantly to the IOS, this similar of the Philippines.

5. Thailand

The study's findings indicate that the firm size, the dividend policy and the debt to

Equity Ratio show a significant effect on the IOS. Meanwhile the financial risk do not

show the same to the IOS.

After the external variables are involved into, the findings of the study show that

only the dividend policy variable is shown insignificant on the IOS, while variables of the

firm size, the financial risk, the debt policies, the inflation variable and the economic

growth are significantly shown on the IOS.

Simultaneously the variables of internal factor gives significant effects on the IOS.

Meanwhile, after the external variables are involved, simultaneously internal and external

variables are significantly shown on the IOS.

In accordance with the influences of the IOS variables to the the firm value, the

findings show that the variables are significantly shown on the firm value either by

involving the internal variables be the combination of both Internal and External

companies.

Certain differences found in the results on each country above are assumed by the

author as ones implied by certain macro-environment conditions in each country. This

confirms the theory of Keynes and Minsky who said that the micro and macro sectors

can’t be separated from one another. So the theory of the balance sheet effect when a crisis

occur due to the poor balance of the economic sectors pervasively influence each other

sector.

V. CONCLUSION

1. For Indonesia, related to its conditions, the size of the firm becomes a certain factor in

making decision for investment, the macro-economic and environmental conditions

affect the investment activities as described in the theory of Keynes and Minsky who

said that the micro and macro sectors cannot be separated from one another.

2. For the Philippines, the size of the firm is concerned to be a factor in making decision

for investment. The involvement of external variables such as interest rates, exchange

rates and inflation are simultaneously shown on the IOS while the internal variables are

not significant to the IOS.

3. For Malaysia, the debt to Equity Ratio is concerned to be a factor in making decision for

investment. The external variables imply internal and external factors resulted in a

significant effect on the IOS.

20

4. For Singapore, the research findings indicate that all the internal variables are not

significant to the IOS. After the external variables involved into, all the external

variables of the firm is partially and significantly related to the IOS. But simultaneously

the internal variables are not significant to the IOS.

5. For Thailand, the financial risk is not significant, while other internal variables such as

the size of the firm, the dividend policy and the debt to Equity Ratio are significantly

shown on the IOS. Simultaneously, the company's internal factors are significantly

recognized on the IOS. Once the external variables are involved, the internal and

external variables simultaneously show significant effects on the company's IOS.

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