Stock returns and financial performance as mediation variables in the influence of good corporate governance on corporate value
| Pages | 1289-1309 |
| DOI | https://doi.org/10.1108/CG-10-2018-0308 |
| Date | 04 September 2019 |
| Published date | 04 September 2019 |
| Author | Suhadak Kurniati |
| Subject Matter | Strategy |
Stock returns and financial performance
as mediation variables in the influence
of good corporate governance on
corporate value
Suhadak Kurniati
Abstract
Purpose –This paper aims to examine theinfluence of good governance on corporate value, in which
the stockreturns and financial performanceact as the mediator of the relationshipamong them.
Design/methodology/approach –This research was conducted on companiesgo public listed on the
Indonesia Stock Exchange and was included in 2011 to 2017 LQ45 index list, with samples taking a
purposive sampling approach through four criteria. Data analysis using WarpPLS with indicator
approachesare formative (mutually exclusive betweenindicators).
Findings –The findings are as follows: good corporategovernance has a significant influence on stock
returns in a negative direction; good corporate governance has no significant influence on financial
performance; good corporategovernance has no significant influence on companyvalue; stock returns
have a significant influence on financial performancein a positive direction; financial performancehas a
significant influence on stock returns with a positive direction; stock returns significantly influence the
value of the company in a positive direction; financial performance has a significant influence on the
companyvalue in a positive direction.
Originality/value –The novelty in this study is that the relationship between stock returnsand financial
performance is reciprocal, which is the relationship among variables that affect each other (back and
forth causality), in which in the previousstudy, the relationship between variables is only one direction;
besides, the previous study conductedan analysis to find out the influence of good corporate on stock
returns,company value and financial performanceseparately, with mixed results.
Keywords Governance, Financial performance, Corporate value, Stock return
Paper type Research paper
1. Introduction
This study aims to examine the influence of good governance on corporate value, in which
the Stock Returns and Financial Performance act as the mediator of the relationship among
them. Financial performance is one of the factors that show the effectiveness and efficiency
of an organization in order to achieve its objectives. The effectiveness will be achieved if
management has the ability to choose the right destination or the right tool to achieve the
set goals. Efficiency is interpreted as a ratio (comparison) between input and output, which
in a certain input will result in an optimal output. For a company, improving financial
performance is a necessity so that the company’s shares remain attractive to investors. The
financial statements published by the company are a reflection of the company’s financial
performance. Financial statements are the final results of the accounting process that is
prepared with the aim of providingfinancial information for a company. Financial information
can be used by the users for investment decision making. Financial reports provide
Suhadak Kurniati is based
at the Brawijaya University,
Malang, Indonesia.
Received 3 October 2018
Revised 12 March 2019
Accepted 16 June 2019
Expression of Concern: The
publisher of Corporate
Governance is issuing an
Expression of Concern for the
following article Kurniati, S.
(2019), “Stock returns and
financial performance as
mediation variables in the
influence of good corporate
governance on corporate
value”, published in Corporate
Governance, Vol. 19 No. 6,
pp. 1289-1309, to inform
readers that credible concerns
have been raised regarding the
authorship of this paper. An
investigation is ongoing and is
currently unresolved. Further
information will be provided by
Corporate Governance as it
becomes available.
DOI 10.1108/CG-10-2018-0308 VOL. 19 NO. 6 2019, pp. 1289-1309, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1289
’relatively raw’data. Financial managers need information (processed raw data). The goals
achieved depend on who needs information, and when the informationis needed.
According to Brigham et al. (2007), if you want to maximize the value of a company,
management must take advantage of existing strengths and improve weaknesses in the
company. Financial analysis shows company’s performance comparison with other
companies, especially those engaged in the same industry and trends evaluation of the
company’s financial positionso far.
This study will help management to identify weaknesses and take corrective steps. An
investor who wants to buy company share with a long-term orientation will see the
company’s ability to generate profits, future prospects, and the risk of investment in the
company. An analyst, in case of interpreting and analyzing financial statements, requires a
certain size. The measure that is often used in the financial analysis is “ratio.” According to
Ross et al. (2009), there are five types of financial ratios frequently used, namely, liquidity
ratio, activity ratio, leverage ratio, profitability ratio and market value ratio. According to
Brigham et al., return on equity (ROE) is one of the most important ratios used to measure
the level of a company’s profitability. ROE is net income for shareholders divided by total
shareholder equity. Shareholders certainly want to get a high rate of return on the capital
they invest, and ROE shows the level they earn. If ROE is high, the stock prices also tend to
be high, and an action increasing ROEis likely to also increase stock prices.
A capital market for the communityis one of the means to invest money. Investments which
were initially carried out in the form of deposits, gold, land, or houses can now be made in
the form of stocks and bonds (securities). If investment in the form of a house or land
requires hundreds of millions of rupiah, then the investment in the form of securities can be
done with only no more than 5 million rupiahs. Hence, the capital market is a goodmeans to
invest in amounts that are not too large for most people, if the capital market runs well,
honestly, the growth is stable, and the price is not too turbulent, so this facility will bring
prosperity to the community. In fact, the capital market in Indonesia does not contribute
much to the economy, there are many price frauds, and several cases likeBank Duta, Bank
Pikko, and many delistings so that the capital market is not managed properly (Samsul,
2006).
Practitioners and academics agree that one of the causes of this situation is the low
awareness and understanding of the principles of good corporate governance in
companies in Indonesia (CGPI report, 2004), while Asian Development Bank (ADB)
concludes that there are two causes of economiccrisis in Asia, including Indonesia, namely
the supervision mechanism of the board of commissioners and the audit committee in the
company does not function effectively in protecting the interests of shareholders, thus the
application of the concept of good corporate governance in Indonesia is expected to
increase the professionalism and welfare of shareholders without ignoring the interests of
stakeholders.
It is difficult to deny, over the past ten years, good corporate governance has become
increasingly popular. The term is not onlypopular but also placed in a respectable position.
First, good corporate governance is one of the keys of the company’s success to grow and
be profitable in the long run, while winning global business competition. Second, the
economic crisis in Asian and Latin American regions, which is believed to occur, is due to
the failure of good corporate governanceimplementation (Daniri, 2005).
In 1999, East Asian countries whichwere equally affected by the crisis began to experience
recovery, except Indonesia. It must be understood that global competition that occurs is no
longer between countries, butbetween companies in those countries. Therefore, recovering
or the continued deterioration of a country’s economy depends on each company. This
understanding opens the horizon that companies in Indonesia have not been properly
managed. In a sense, companies in Indonesia never implemented good corporate
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