THE IMPACT OF OWNERSHIP STRUCTURE AND CORPORATE GOVERNANCE ...

Jurakunman Vol. I, No. 11, Januari 2019 ISSN : 2086-681X

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THE IMPACT OF OWNERSHIP STRUCTURE AND CORPORATE

GOVERNANCE ON PROFITABILITY AND FIRM VALUE

Gabriella Ryna Joanne

Prodi Akuntansi Universitas Pelita Harapan

Melinda Haryanto

Prodi Akuntansi Universitas Pelita Harapan

ABSTRACT

This research aims to analyze the impact of ownership structure and corporate

governance on profitability and firm value. The profitability and firm value, which

are the dependent variables in this study, will be calculated using ROA (Return on

Assets) and Tobin’s Q. Ownership structure and corporate governance as the

independent variables consist of institutional and government ownership, board

size, independent board member, and type of auditor with size of firm, debt ratio,

dividends yield, and age of company as the control variables.

The samples that are used in this research are the 24 consumer goods industry

companies that are listed in the Indonesia Stock Exchange. The technique that is

used in this research is multiple regression analysis.

The result of this research shows that there is a significant positive influence of

type of auditor on ROA (Return on Assets) and Tobin’s Q. Moreover, institutional

ownership and board size has a negative significant influence on ROA and

Tobin’s Q. While, government ownership and independent board member has a

negative but insignificant impact on ROA and Tobin’s Q.

Keywords: ROA, Tobin’s Q, Institutional Ownership, Government Ownership,

Board Size, Independent Board Member, Type of Auditor, Size of Firm, Debt

Ratio, Dividends Yield, Age of Company

INTRODUCTION

The financial crisis, which destroyed the economy conditions of Indonesia,

is caused by a number of reasons. According to Hanazaki and Liu (2007) there is

a relationship between corporate governance and the economic disaster that

happened. Corporate governance in relation to the protection of the rights of the

minority shareholders had a major influence in the exchange rate deprecation and

the decrease in stock market in 1997-1998 (Johnson, 2000).

Moreover according to Husnan (2000) the financial crisis occurred due to high

concentration of corporate ownership especially companies controlled by families

have led to poor financing and investment practices. Studies conducted by World

Bank and the Asian Development Bank also indicate that one of the causes of the

recession in Indonesia and other countries is due to poor corporate governance

implementation (Lukviarman, 2004).

Indonesia's government provides a strong encouragement to the


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implementation of Good corporate governance. The evidence from the

government's concern can be seen from the establishment of various regulations

that governs Good corporate governance implementation. Starting from the

creation of the National Committee on Corporate Governance Policy (KNKCG)

through Decree of the Coordinating Minister of Economy Number: KEP / 31 /

M.EKUIN / 08/1999. Then followed by the establishment of the National

Committee on Governance Policy (KNKG) as a substitute for KNKCG through

Decree of the Coordinating Minister for Economic Affairs Number: KEP / 49 /

M.EKON / 11/2004. Subsequently, the issuance of Surat Edaran Ketua Bapepam

Nomor Se-03/PM/2000 that explains that every enterprise should has an audit

committee.

Several overseas studies have attempted to analyze the implications of

corporate governance on the sustainability of a company which most of them

produced diverse conclusions. Topal and Dogan (2014) explained that return on

assets increases and the risk of financial failure decreases as the board size grows.

On the other hand, different result is reported by Vo and Phan (2013). Their

empirical evidence showed board size contributes negatively to firm’s

performance, this happened due to a “gap of power” culture in Vietnamese

companies. Hence they concluded that when board size increases, delegation

would be reduced.

Qasim (2014) indicate significant positive impact of corporate governance

on firm performance except for audit quality. Thus, companies with well-

maintained corporate governance mechanisms are perceived positively by the

financial market participants, which are reflected on companies’ stock market

prices. A research conducted by Alfaraih et. al (2012) found a positive

relationship between institutional ownership and firm performance. On the

contrary, the findings suggest a negative relationship between government

ownership and firm performance, indicating a low performance for firm when

there is an existence of government ownerships showing that they tend to be

politically rather than commercially motivated.

Previous conducted researches have showed varying results, which imply

inconsistency and cannot conclusively explain the impact of ownership structure

and corporate governance mechanisms on profitability and firm value. Therefore,

the purpose of this research is to examine and verify these different results using

Indonesia consumption goods sector firms listed in the Stock Exchange period

2011 – 2016 as the sample. This research will be using the model used by Qasim

(2014) to analyze the impact of business ownership and corporate governance

mechanisms on profitability and firm value. One of the limitations of the previous

study is the proxies used to measure corporate governance as there are numerous

other governance mechanisms that could affect firm performance. Qasim used

institutional ownership, government ownership, board size, and audit quality to

measure corporate governance elements. This research will add the number of

independent board members as one of the independent variables, because boards

dominated by externals tend to act in the best interest of shareholders.


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Theoritical Background and Hypotheses Development

Agency Theory

Solomon (2007) explains that agency theory was first introduced by Ross

(1973) and presented with more details by Jensen and Meckling (1976). In their

explanation, shareholders are referred as the ‘principal’ and the managers of the

company are referred as the ‘agents’. Shareholders carry out daily decision

making as the owner or principal of the company to the directors who are the

shareholders’ ‘agents’. This corporate ownership system results an issue, as the

agents do not necessarily consider the best interest of the principal when making

decisions. This problem is nourished by conflicting goals between the principal

and agent. In finance theory, companies’ major purpose is to maximize

shareholder wealth, however this contradicts in real life because company

managers are tempted to make decisions, which prioritize their own personal

objectives, for instance achieving highest bonus possible.

Corporate Governance

According to Cadbury Committee (1992), corporate governance is a system

by which companies are directed and controlled with the objective of achieving a

balance between the authority required by the company to ensure its existence and

accountability to stakeholders. This relates to the authority of owners, directors,

managers, shareholders, and so on. The definition of corporate governance

according to the Decree of the Minister of BUMN No. Kep-117/M-MBU/2002 is

a process and structure used by BUMN to improve business success and corporate

accountability in order to maximize shareholder value in the long term by taking

into account the interests of stakeholders, based on law and ethical values.

From the various definitions above, it can be concluded that Corporate

Governance is a system that regulates, manages, and supervises the process of

business operational to increase the company's value by taking into account the

interest of stakeholders, employees, managers, and other parties involved

according to the applicable law and ethical values.

According to Forum for Corporate Governance in Indonesia (2001),

Organization Economic Cooperation and Development (OECD) developed a set

of principles of Corporate Governance as known as The OECD Principles Of

Corporate Governance, which are as follows: fairness, transparency,

accountability, responsibility

Ownership Structure and Corporate Governance mechanisms

The ownership structures that will be discussed in this research are

institutional ownership and government ownership. Moreover, the corporate

governance mechanisms consist of board size, type of auditor, and number of

independent board members.

Institutional Ownership

Tricker (2009) explains institutional investors consist of financial

institutions, investment trusts, unit trusts or mutual funds and pension funds. The

ownership by commercial banks, hedge funds, insurance companies corporate

pension funds, college endowments, and so on within a company is considered as

an institutional ownership (Al-Malkawi and Pillai, 2012).

Government Ownership


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Government ownership is a proportion of shares in an entity that is owned

by the state. According to Najid and Rahman (2011) claim that state-owned firms

tend to give bad interpretation to shareholders because they often are criticized for

prioritizing political rather than commercial motivation. In addition, the

government can control the policies taken by management to suit the interests /

aspirations of the government.

Board Size

Board size refers to the total member of directors on the board of a

corporation. Keasey et. al (2005) describe that a larger board size will likely

decrease agency problems for instance through more adequate monitoring or

separation of decision responsibilities. Nevertheless, the intention of improving

board legitimacy is established by larger size boards of directors which eventually

caused less collusive action among the individual in the board because this

produce a myth that the larger the board, the more diffused are the members’

responsibilities.

Type of Auditor

According to Arens et. al. (2014) in order to understand the criteria used,

auditor must be qualified and in order to know the types and the total of evidence

to be obtained to reach the proper conclusion after examining the evidence,

auditor must be competent.

Arens et. al. (2014) claim that Certified Public Accounting (CPA) firms

acting as independent auditors are granted the legal right to perform audits under

certain regulations depending on each country. The opinion of independent

auditor is important to external users such as investors, bankers, governmental

agencies, and the overall general public. As of today, there are four big audit

firms, which are Deloitte, PWC (PricewaterhouseCoopers), Ernst & Young, and

KPMG.

Independent Board Members

Tricker (2009) describes independent board members as individuals in the

board who are not involved in any executive management position in the

company. According to Kim and Nofsinger (2007) a board with a higher faction

of independent directors is more effective and reliable at monitoring management.

Literature Review Research on the impact of ownership structure and corporate governance on

profitability and firm’s value has been carried out by many researches, among

them are: Table 1 Literature Review

No Researcher Research Title Dependent

variables

Independent

variables Research Result

1. Mishari

Alfaraih,

Faisal

Alanezi,

Hesham

Almujamed

(2012)

The Influence of

Institutional and

Government

Ownership on

Firm

Performance:

Evidence from

Kuwait

Tobin’s Q

Return on

Assets

Institutional

Ownership

Government

Ownership

Board Size

There is a positive

relationship

between

institutional

investors and firm

performance in

Kuwait. On the

contrary, there is a

negative


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relationship

between

government

ownership and firm

performance in

Kuwait.

2. Yusuf Topal

Mesut

Doğan

(2014)

Impact of Board

Size on Financial

Performance:

The Case of BIST

Manufacturing

Industry

Return on

Assets

Return on

Equities

Tobin’s q

Z Altman

Board Size

Duality

There is a positive

relationship

between the board

size, and return on

assets and Z

Altman score.

However, board

size is not

influential on

market

performance

indicator and return

on equity.

3. Duc Vo

Thuy Phan

(2013)

Corporate

Governance and

Firm

Performance:

Empirical

Evidence From

Vietnam

Return on

Assets

Board

members

Female board

members

CEO Dual

Board’s

educational

level

Board’s

working

experience

Outside

Director

Board’s

compensation

Board’s

ownership

Block holders

The result of the

study shows that

board size has a

negative impact

on firm’s

performance for

Vietnam’s listed

firms.

4. Amer

“Mohammad

Jaser” Qasim

(2014)

The Impact of

Corporate

Governance on

Firm

Performance:

Evidence from

the UAE

Tobin’s Q

Return on

Assets

Institutional

Ownership

Government

Ownership

Board Size

The results indicate

a significant

positive impact of

institutional,

government

ownership, and

board size on firm

performance.

5. Dana AL-

Najjar

(2015)

The Effect of

Institutional

Ownership on

Firm

Performance:

Evidence from

Return on

Assets

Return on

Equity

Institutional

Ownership

Size

Tangibility

Business Risk

The study suggests

that there is no

relationship

between both the

institutional

ownership and firm


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Jordanian Listed

Firms

Debt to Asset

Marketability

performance for

Jordanian listed

firms.

6. Ozcan Isik

Ali Riza

Ince

(2016)

Board Size,

Board

Composition and

Performance: An

Investigation on

Turkish Banks

Operating

return on

assets

Return on

assets

Board size

Board

composition

There is a

significant and

positive

relationship

between board size

and bank

performance.

7. Okumu Ogola

Ochieng

Fredrick

(2015)

Corporate

Governance and

Firm Value for

Firms Listed at

The Nairobi

Securities

Exchange

Return on

assets

Market-

to-Book-

Value

Board Size

Board

Composition

Audit

Committee

The results of the

study indicate that

corporate

governance

attributes have a

significant

influence on

Return on Assets.

However,

corporate

governance

attributes have an

insignificant

influence on firm

value.

8. Mao-Feng

Kao

Lynn

Hodgkinso

Aziz Jaafar

(2013)

Board

Characteristics,

Ownership

Structure And

Firm

Performance:

Evidence From

Taiwan

Dependent

variables:

Return on

assets

Tobin's Q

The

proportion of

independent

directors

The

proportion of

independent

supervisors

Board size

Board

leadership

Block-

holders’

ownership

Institutional

ownership

Foreign

ownership

Family

ownership

The findings of the

study indicate that

board

independence and

institutional

ownership have a

significant and

positive impact on

firm

Performance.

Sources: Data processing by the author, 2017


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Conceptual Framework Figure 1 Conceptual Framework

Sources: Data Processing by the author, 2017

Hypothesis Development

According to Rose (2007) institutional investors serve as a tool of

disciplining management because the free-rider problem associated with dispersed

ownership is alleviated. Research conducted by Wei et. al (2005), Zeitun (2009),

and Al-Zaidyeen and AL-Rawash (2015) show that institutional ownership

negatively influence profitability (ROA) and firm’s value (Tobin’s Q). On the

contrary, a different conclusion was made through the study conducted by AL-

Najjar (2015) suggests that there is no relationship between profitability and firm

value and institutional ownership. However, Hashim and Devi (2008), Qasim

(2014), Alfaraih et al. (2012), report that there is a positive relation between

profitability and firm value and ownership by institutional investors.

Based on the explanation above, the first and second hypotheses of this

research are:

H1: There is a significant positive influence between institutional ownership

and profitability

H2: There is a significant positive influence between institutional ownership

and firm value

Companies owned by government may encounter fewer difficulties to meet

financial reporting regulations, which might trigger management to improve

firms’ performance through the selection of accounting choices (Aljifri &

Moustafa, 2007). Such firms are more likely to enjoy the advantages associated

with state ownership, such as close and effective monitoring, a reduction in

agency cost, and easier access to financing. Therefore, it is plausible to assume

that the profitability and firm value of Indonesia’s listed-consumer goods firms

will be positively affected by government ownership.


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The existence of a negative relationship between government ownership and

profitability as measured by ROA was found in the research conducted by Tran et.

al. (2014), Gursoy and Aydogan (2002), Zeitun and Tian (2007). Moreover,

Alfaraih et. al. (2012) and Wei and Valera (2003) found that government

ownership reduce corporate value as measured by Tobin’s Q. However, Studies

conducted in Kuwait and UAE found a significant positive relationship between

government ownership and firm performance (Aljifri and Moustafa, 2007, Qasim,

2014, and Alfaraih, et. al., 2012).

Based on the explanation above, the third and fourth hypotheses of this

research are:

H3: There is a significant positive influence between government ownership

and profitability

H4: There is a significant positive influence between government ownership

and firm value

Berghe and Levrau (2004) express that increasing the board size means increasing

the expertise, which produces a more knowledgeable and skillful board, compare

to smaller boards. Lasfer (2002) explain that the ability of CEO to dominate

boards are decreased in larger board size.

Research conducted by Mak and Kusnadi (2005), Bebeji et. al. (2015), and

Guest (2009) report that board size negatively influence profitability (ROA) and

firm’s value (Tobin’s Q). However, a research conducted by Topal and Dogan

(2014) indicates that a large board size will improve a firm’s performance. A large

board size appears to be better for firm performance because the study explained

that return on assets increases and the risk of financial failure decreases as the

board size grows. This because larger board size can dominate the irrational

decision by CEO. Moreover, study by Qasim (2014) also explains that board size

positively influence firm performance. Similar results are shown by the research

conducted by Fredrick (2015). Board size has a positive impact on firm

profitability as measured by ROA. Weterings and Swagerman (2012) also suggest

that there is a positive relationship between board size and firm value as measured

by Tobin’s Q.

Based on the explanation above, the fifth and sixth hypotheses of this

research are:

H5: There is a significant positive influence between board size and

profitability

H6: There is a significant positive influence between board size and firm

value

Previous literature indicates that type of auditor is considered as one of the

elements that have an effect on audit quality (Carcello and Nagy, 2004). DeZoort

et. al. (2002) explain that when detecting errors larger audit firms are better

compared to smaller audit firm due to the greater resources at disposal and more

superior skills and experience possess by employees. As a result, in comparison

with smaller audit firms, large audit firms are able to conduct their audits at a

higher standard. According to Qasim (2014) higher audit control may increase

profitability and firm value because it may control opportunistic management

behaviors and reduce agency costs.


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A number of researches has been conducted and among them produced

mixed conclusions. For instance, a study conducted by Aryan (2015) using 69

Jordanian companies report that there is no relationship between type of auditor

and profitability. On the contrary, research by Fooladi and Shukor (2012) using

400 Malaysian public listed companies provide the evidence that bigger audit

firms increase profitability as measured by ROA and firm value as measured by

Tobin’s Q. Bouaziz (2012) also found that auditor type positively affect

profitability using 26 Tunisian firms listed on the Tunis Stock Exchange as the

samples.

Based on the explanation above, the seventh and eighth hypotheses of this

research are:

H7: There is a significant positive influence between type of auditor and

profitability

H8: There is a significant positive influence between type of auditor and firm

value

According to Jensen and Meckling (1976) in Yasser (2011) due to the

opportunistic behavior of dependent board members, independent board members

are necessarily needed in order to monitor and control such actions. In addition,

independent board members act as neutralizers to keep the balance in the board

with the aim of improving its effectiveness. According to Walt & Ingley (2003)

and Nicholson & Kiel (2007) in Isik and Ince (2015) the presence of independent

directors (outside directors) reduces agency problems, this because they enable the

board to better discover and reduce any self-interested actions by managers.

As of today, there have been mixed results of research conducted regarding

the effect of independent directors on firm performance. For instance, the research

conducted by Ness et. al. (2010) shows that there is no relationship between

number of outside directors with firm performance as measured by ROA. On the

contrary, research conducted by Jackling and Johl (2009) suggests that there is a

positive and significant relationship between independent director (outside

directors) and financial performance as measured by Tobin’s Q. Moreover, study

conducted by Knyazeva et. al. (2013) indicates that outside directors has a positive

impact on firm profitability (ROA).

Hence, although prior studies regarding the relationships between

independent board members and profitability (ROA) and firm value (Tobin’s Q)

produced mixed-results, the concept of the effect of outside directors on reducing

agency problems hence improving firm performance is adopted.

Based on the explanation above, the first and second hypotheses of this

research are:

H9: There is a significant positive influence between number of independent

board member and profitability

H10: There is a significant positive influence between number of independent

board member and firm value

RESEARCH METHODLOGY The population of this research is all consumer goods companies industry in

Indonesia Stock Exchange (BEI) from year 2011 to 2016 (6 years).


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The sample in this study was taken by adapting the research model taken

according to the reference journal, where the companies are selected according to

the completeness of the data based on the following criteria:

1. Consumer goods companies which are consistently listed in the Indonesia

Stock Exchange (BEI) and disclose its annual financial statement in the

currency of Rupiah from year 2011 to 2016.

2. Consumer goods companies that continuously produce income during the

observation period.

Empirical Research Model

There are two model regression panels with the following specifications:

Where;

Tobin’s Q = MV of Equity + BV of Debt / BV of Assets

ROA = Return on assets ratio; net income/total assets

(GOV) = Proportion of government ownership in the firm

(INST) = Proportion of Institutional ownership in the firm

(AUDIT) = External auditor type; 1 if the company's accounts are audited by

a big four auditing firm, 0 otherwise.

(BSize) = Board size

(IND) = Number of independent board member

(LnTA) = Natural logarithm of total assets

(DRATIO) = Debt Ratio; total debt/total assets.

(DYLD) = Dividends Yield;

(AGE) = Number of years since establishment

α = Intercept coefficient of firm i,

β = Row vector of slope coefficients of regressors;

εit = Residual error of firm I in year t.

Research Variables. This research uses two dependent variables, five

independent variables, and four control variables. The dependent variables used in

this research are firm’s value as measured by Tobin’s Q and profitability as

measured by ROA (Return on Asset). The independent variables used are

government ownership, institutional ownership, type of auditor, board size, and

independent board member. While, the control variables used are size of firm,

debt ratio, dividends yield, and number of years since establishment.

Discussion

Descriptive of Sample Observation

In accordance with the criteria that had been previously mentioned in

chapter three, this research has come to obtain a sample of 24 companies for each

year in the six years period (2011-2016). The total sample that is used in this

Tobin's Q = α + β1 (GOV) + β2 (INST) + β3 (BSize) + β4 (AUDIT) + β5 (IND) +

β6 (LnTA) + β7 (DRATIO) + β8 (DYLD) + β9 (AGE) + εit

ROA = α + β1 (GOV) + β2 (INST) + β3 (BSize) + β4 (AUDIT) + β5 (IND) +

β6 (LnTA) + β7 (DRATIO) + β8 (DYLD) + β9 (AGE) + εit


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research is 144 samples. The selection of the sample is described in the table 2

below: Table 2 Sample Choice

Description Number of Companies

Number of Consumer Goods companies constantly

listed in Indonesia Stock Exchange from 2011-

2016

39

Consumer goods companies that do not disclose its

annual financial statement in the currency of

Rupiah

0

Consumer goods companies that do not issue and

publish its financial statement which ended in 31

December

(8)

Consumer goods companies that do not provide

complete data related to variables required

0

Consumer goods companies that do not

continuously produce income

(6)

Total samples for each year 24

Total number of samples for 6 years (2011-2016) 144

Table 3 Descriptive Statics Result

Variable | Obs Mean Std. Dev. Min Max

-------------+--------------------------------------------------------

roa | 144 .1544562 .1222465 .01542 .6572

tobinsq | 144 3.9289 3.929118 .74184 20.06521

gov | 144 .0484625 .1858354 0 .9003

inst | 144 .1693951 .2701745 0 .9201

bsize | 144 6.041667 2.773186 2 15

-------------+--------------------------------------------------------

ind | 144 .5763889 1.081179 0 7

audit | 144 .5833333 .4947274 0 1

lnta | 144 14.80618 1.675016 11.67872 18.33547

debtratio | 144 .3963794 .1599901 .02235 .75178

dyld | 144 .0354333 .0986339 0 .96012

-------------+--------------------------------------------------------

age | 144 42.95833 19.68347 2 87

Source: Data processing from STATA, 2017

Classical Assumption Tests

Normality Test. After running the Shapiro-Wilk test, the null hypotheses

indicating that the variables are normally distributed is rejected because the

probability is less than 5%. Hence, a treatment to resolve the normality problem

should be conducted. Below is the result of the remedy for the dependent

variables, which are ROA (Return on Asset) and Tobin’s Q: 0.08870 and 0.06028

After conducting the treatment, the null hypotheses indicating that the

variables are normally distributed is accepted because the probability is more than

5%. Hence, it can be concluded that the samples are normally distributed.


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Multicollinearity Test. Based on the results, all of the variables have a value of

VIF less than 10. This means that all of the variables in the regression model do

not have a multicollinearity problem.

Heteroscedasticity Test. Based on the results, the probabilities of both dependent

variables, which are ROA (Return on Assets) = 0.1643 and Tobin’s Q = 0.4736.

Hypotheses Test Table 4 R2 and Adjusted R2 Results

Source: Data processing by the author, 2017

Based on the results in Table 4, the value of R-squared with ROA (Return

on Assets) as the dependent variable is 0.5771. This means the ability of the

independent variables, which are government ownership, institutional ownership,

board size, independent board members, and type of auditor to explain ROA is

57.51%. While, the other 42.49% cannot be explained by the independent

variables in the regression model.

Based on the results in Table 4, the value of R-squared with Tobin’s Q as

the dependent variable is 0.5268. This means the ability of the independent

variables, which are government ownership, institutional ownership, board size,

independent board members, and type of auditor to explain ROA is 52.68%.

Meanwhile, the other 47.32% cannot be explained by the independent variables in

the regression model.

F-Test

The results of the F-test is summarized in the table 5 below: Table 5 F-test Results


Based on the F-test result with ROA and Tobin’s Q as the dependent

variable in table 5, the probability, which is 0.0000, is less than the predetermined

significance level (1%, 5%, and 10%). The null hypotheses is rejected, this means

all the independent variables, which are government ownership, institutional

ownership, board size, independent board members, and type of auditor have an

influence toward ROA (Return on Asset) and Tobin’s Q..

T-test of ROA (Return on Assets)

Based on the t-test result, the equation of the regression model with ROA

(Return on Asset) as the dependent variable is as follows:

ln_ROA = -3.121 - 0.178(GOV) - 0.870(INST) - 0.041(BSize) - 0.032(IND)

Dependent Variables R-squared Adjusted R-squared

ROA (Return on Assets) 0.5771 0.5487

Tobin’s Q 0.5268 0.4950

Dependent Variables Prob>F Hypotheses Result

ROA (Return on Assets) 0.0000 H0 is rejected

Tobin’s Q 0.0000 H0 is rejected


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+ 0.749(AUDIT) + 0.024(LNTA) - 0.171(DebtRatio) + 0.389(DYLD)

+ 0.015(AGE) + e

Moreover, the following conclusions are made in regard of the hypothesis

that had been developed in this research: Table 6 Hypotheses Acceptance (ROA)

Dependent Variable: ROA (Return on Assets)

Independent Variable Coefficient P-Value Hypotheses Decision

Government ownership -0.1779544 0.475 Null Hypothesis is

accepted

Institutional ownership -0.869691 0.000*** Null Hypothesis is

accepted

Board Size -0.0411631 0.044** Null Hypothesis is

accepted

Independent Board Member -0.0319748 0.482 Null Hypothesis is

accepted

Type of Auditor 0.7492985 0.000*** Null Hypothesis is

rejected *significant at the 10% level, **significant at the 5% level, *** significant at the 1% level


T-test of Tobin’s Q

Based on the t-test result, the equation of the regression model with Tobin’s

Q as the dependent variable is as follows:

Tobin’s Q = -2.158 - 0.103(GOV) - 1.610(INST) - 0.069(BSize) - 0.011(IND)

+ 0.784(AUDIT) + 0.117(LNTA) + 0.423(DebtRatio) + 0.665(DYLD)

+ 0.025(AGE) + e

Based on the conclusions above, the hypotheses decision for the

independent variables are summarized in Table10 below: Table 7. Hypotheses Acceptance (Tobin’s Q)

Dependent Variable: Tobin’s Q

Independent Variable Coefficient P-Value Hypotheses Decision

Government ownership -0.1025676 0.796 Null Hypothesis is

accepted

Institutional ownership -1.609768 0.000*** Null Hypothesis is

accepted

Board Size -0.068982 0.034** Null Hypothesis is

accepted

Independent Board Member -0.0105189 0.884 Null Hypothesis is

accepted

Type of Auditor 0.7835923 0.000*** Null Hypothesis is

rejected *significant at the 10% level, **significant at the 5% level, *** significant at the 1% level



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Discussion and Analysis

The Influence of Government Ownership

The regression from the research model shows that government ownership

does not have a significant positive influence on profitability as measured by

ROA (Return on Assets) and firm value as measured by Tobin’s Q. Instead, it

shows a negative insignificant impact. This finding is similar to the studies

conducted by Hovey et. al (2003) and Wei (2007) where state ownership is not

related to firm value and ROA, respectively. Moreover, research conducted by

Tran et. al. (2014), Gursoy and Aydogan (2002), Zeitun and Tian (2007) found the

presence of a negative relationship between government ownership and ROA.

Moreover, Alfaraih et. al. (2012) and Wei and Valera (2003) found that

government ownership reduce corporate value as measured by Tobin’s Q.

There are several reasons why government ownership has a negative

insignificant impact toward ROA (Profitability) and Tobin’s Q (Firm Value)

according to Srivastava and Jhajharia (2011). First, government may not be

motivated to seek profits and increase firm value, but is guided by social altruism.

For example, the government may give more attention to unemployment or

control over certain strategic industries rather than the firm’s performance.

Second, government might not be the real owner who governs the company, but

the bureaucrats. Since bureaucrats will not gain anything from ensuring a

company is performing well or have good corporate governance, they are not

motivated or has no personal interest in doing it.

The Influence of Institutional Ownership

The regression from the research model shows that institutional ownership

does not have a positive influence on profitability as measured by ROA (Return

on Assets) and firm value as measured by Tobin’s Q. Instead, it shows a negative

impact. This outcome is similar to the findings by Wei et. al (2005) and Zeitun

(2009), and Al-Zaidyeen and AL-Rawash (2015). Such relationship might happen

due to the dominant effect of conflict of interest between institutional investors

and the management rather than the role of institutional investors to oversee the

management. Institutional investor might develop profitable affairs thus being less

attracted in restricting and supervising management movement. This may

eventually affect the effectiveness of the company and its performance.

The Influence of Board Size

Based on the results above, board size has a negative significant influence

towards profitability as measured by ROA (Return on Assets) and firm value as

measured by Tobin’s Q, hence when board size is getting bigger, the value of

ROA and Tobin’s Q decreases. Similar negative relationship is found by Mak and

Kusnadi (2005), Bebeji et. al. (2015), and Guest (2009). This negative relationship

may be constructed due to the reason that larger board size has a potential to face

discoordination and miscommunication. Another reason is because larger board

size may be slow in making decisions, which in contrast with smaller board size

that tend take quick and adequate decision. These reasons then may affect the

company’s effectiveness and its overall performance may decline.

The Influence of Independent Board Member


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Based on the results above, the influence of independent board member is

insignificant towards profitability as measured by ROA (Return on Assets) and

firm value as measured by Tobin’s Q. This outcome is similar to the research

conducted by Ness et. al. (2010). Moreover, the empirical result also shows that

there is a negative relationship between independent board member and ROA and

Tobin’s Q. This might be somewhat surprising, because most scholars argued that

independent directors improve corporate governance thus resulting in better

financial performance due to the knowledge they posses (Kao et. al., 2013,

Jackling and Johl, 2009, Knyazeva et. al., 2013). However, Ararat et. al. (2010)

and Wang and Oliver (2009) quoted by Fuzi et. al. (2016) explain that when there

is no association or negative relationship between independent directors and

firm’s performance, the existence of independent directors on the board might be

jeopardized. Companies might fulfilled the regulations on the required number of

the independent directors on the board, however there is a possibility of

neutralizing the power of independent board members through several strategies.

Firms might appoint a person who has irrelevant background that they seem

powerless on the board. Another scenario is companies might appoint someone

who has personal, financial, and social ties with the dominant shareholders, which

eventually affect their independent judgment.

The Influence of Type of Auditor

The regression from the research model shows that type of auditor has a

significant positive influence on profitability as measured by ROA (Return on

Assets) and firm value as measured by Tobin’s Q. This result is consistent with

the past studies conducted by Qasim (2014), Fooladi and Shukor (2012), and

Aljifiri and Moustafa (2007). Furthermore, this relationships is established due to

the reason that bigger audit firm may provide more well-trained expertise and

maintain their independence in performing their jobs as auditor such as detecting

errors compared to smaller audit firm. Hence, this derives to a company obtaining

higher audit control, which may increase profitability and attract investor to

increase firm value because it may control opportunistic management behaviors

and reduce agency costs.

CONCLUSIONS, LIMITATIONS, AND RECOMMENDATIONS

Conclusions

This research is conducted in order to examine the factors that affect

profitability and firm value. The factors that are being studied in this research are

ownership structure and corporate governance. The ownership structure consists

of institutional and government ownership. The corporate governance consists of

board size, independent board members, and type of auditor. These factors are

being examined with the help of four control variables, which are size of

company, debt ratio, dividend yield, and age of company. The profitability is

measured using ROA (Return on Assets), while the proxy to measure firm value is

Tobin’s Q.

The sample for the regression model has a total sample of 144, which

consists of the 24 consumer goods industry companies listed in Indonesia Stock

Exchange for the period 2011-2016.


55

The conclusions based on the results of the research can be summarized as:

1. The impact of government ownership towards profitability and firm value is

negative but insignificant. This is because government tends to prioritize social

altruism rather than obtaining profitability and increasing firm value and the

one who exercise governance in government ownership is bureaucrats. This is

in line with the research by Hovey et. al (2003) and Wei (2007).

2. The impact of institutional ownership towards profitability and firm value is

negative and significant. This happens due to agency problems where there is a

conflict of interest between institutional investors and the management. This

evidence is consistent with the research done by Wei et. al (2005) and Zeitun

(2009), and Al-Zaidyeen and AL-Rawash (2015).

3. The impact of board size towards profitability and firm value is negative and

significant. This is caused because larger board size seems to be less efficient

in making decisions. This is in line with the research by Mak and Kusnadi

(2002), Bebeji (2015), and Guest (2009).

4. The impact of independent board member towards profitability and firm value

is negative but insignificant. This happens because the role of independent

director is jeopardized or manipulated by the company. This evidence is

consistent with the research done by Ness et. al. (2010), Ararat et. al. (2010),

and Wang and Oliver (2009).

5. The impact of auditor type towards profitability and firm value is positive and

significant. Such influence occurs because big four companies tend to have

more well trained personnel. This is in line with the research by Qasim (2014),

Fooladi and Shukor (2012), and Aljifiri and Moustafa (2007).

In conclusion, companies with appropriate ownership structure and strong

corporate governance influence company performance in terms of obtaining

profits and attracting investors to increase firm value.

Research Limitations

There are several limitations in this research, which is needed to be mentioned in

order to avoid any misinterpretation. Moreover, research limitations are useful for

the development of a similar research in the future.

1. This research only focuses on consumer goods industry companies as its

sample for the period of six years from 2011 to 2016.

2. This research only uses two types of ownerships, which are institutional, and

government ownership.

3. This research only uses three corporate governance mechanisms variables,

which are board size, independent board members, and type of auditor.

Recommendations

Based on the results and limitations above, the following recommendations are

given for improving this research for future researches:

1. The future research should use bigger samples, for instance by using other

industry such as mining industry, agriculture industry, etc. with longer period

than six years.


56

2. The future research should use more than two types of ownerships other than

institutional ownership, and government ownership, such as managerial

ownership, family ownership, foreign ownership, and many more.

3. The future research should use more than three corporate governance

mechanisms variables other than board size, independent board members, and

type of auditor, such as audit committee, CEO duality, board’s working

experience, women on board and many more.

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