Does internal corporate governance mechanism control firm risk? Evidence from Indonesia’s three high-risk sectors

• Pages: 1362-1376
• DOI: https://doi.org/10.1108/CG-02-2019-0071
• Date: 27 August 2019
• Published date: 27 August 2019
• Author: Saarce Elsye Hatane,Stellania Supangat,Josua Tarigan,Ferry Jie
• Subject Matter: Strategy

Does internal corporate governance

mechanism control f‌irm risk? Evidence

from Indonesia’s three high-risk sectors

Saarce Elsye Hatane, Stellania Supangat, Josua Tarigan and Ferry Jie

Abstract

Purpose –This study aims to examine the control of corporate governance towards firm risks for a

sampleof Indonesianfirms in agriculture, mining and propertyindustries. This study highlights the impact

of four indicators of internalmechanism of corporate governance, i.e. board size,board independence,

board gender and board ownership,on three measurements of firm risks, i.e. total risk, asset return risk

and idiosyncraticrisk.

Design/methodology/approach –Panel data analysisis conducted using a sample of 62 companies of

agriculture,mining and property industries listedin Indonesia Stock Exchange from2013 to 2017. Pooled

ordinaryleast square with hetero-corrected is the statisticalapproach conducted to test the hypotheses.

Findings –The result indicates that board size and board gender insignificantly influence firm risks.

While board independence gives varied impacts towards firm risks, it gives positive influence towards

total asset return risk, insignificant towards idiosyncratic risk and negative towards total risk. Other

interesting results are found in board ownershipthat has insignificant influence on asset return risk and

negativeinfluence on idiosyncratic and total risk.

Research limitations/implications –Firms should incorporate corporate governance, especially the

impactful rolesof board independence and board ownership as they serveas tools in reducing firm risk.

Moreover, investors may have a better understanding of corporate governance and factors that are

influencingfirm risks. Therefore, this studycan assist them to make the right investmentdecision.

Originality/value –This study is notably the first to use comprehensively three measurements of firm

risks in Indonesia. Risks can come frominternal and external, thus the company should understand the

various types of risks facingthe company. Total risk measures both the internal and external risks,while

asset returnrisk gives another perspectiveusing overall market perception aboutthe equity and assets of

the company. Finally,this study also measures internal risk, which is theonly risk that can be controlled

and minimisedby the board of the company.

Keywords Corporate governance, Firm risks, Idiosyncratic risk, Asset return risk, Total risk

Paper type Research paper

1. Introduction

Looking at high-risk industries in Indonesia; mining, agriculture and property industries are

included in that category. They are very susceptible towards changes in the global

macroeconomic (Indonesia Investments,2018a, 2018b). Factors such as economics,

politics, regulation changes, technology, market situation and nature can interfere with the

business. The mining industry has been an essential sub-sector of industry since 1970 and

has gained constant attention bothdomestically and internationally. Indonesia has been not

only the biggest producer of coal, copper,gold, tin and nickel, but also the biggest exporter

of palm oil in agriculture industry (Indonesia Investments,2018a, 2018b). Generally, larger

plantations produce goods like rubber and palm oil that are mainly for export, while smaller

ones focus on satisfying the food demand on the locals. In Indonesia, the property industry

Saarce Elsye Hatane,

Stellania Supangat and

Josua Tarigan are all based

at Department of

Accounting, Universitas

Kristen Petra, Surabaya,

Indonesia. Ferry Jie is

based at School of

Business and Law. Edith

Cowan University,

Joondalup, Australia.

Received 23 February 2019

Revised 25 June 2019

Accepted 26 June 2019

PAGE 1362 jCORPORATE GOVERNANCE jVOL. 19 NO. 6 2019, pp. 1362-1376, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-02-2019-0071