Azizah, Amiril (2020) The Impact of Corporate Governance, Risk Management and Corporate Reputation on Firm Value: An Indonesian Case. PhD thesis, Victoria University.

Abstract

Corporate governance has gained importance over the past decade due to the poor financial state of affairs of many companies. Good corporate governance (GCG) is perceived to increase firm value by reducing agency costs and by building investors’ confidence. Moreover, good corporate governance is expected to reduce the risk of fraud and corporate collapse, and to create wealth by improving financial performance. Previous studies have addressed the role of good corporate governance mechanisms in increasing firm value in many countries, but there has been limited research done in the Indonesian case and also limited work on factors which may mediate the relationship between corporate governance and firm value. Working with theories of corporate governance derived from Calder (2008), this research elaborates corporate governance based on agency theory, stewardship theory and market theory, applied to some Indonesian financial and non-financial companies. Thus the objective of this study is to investigate, for the Indonesian case, whether corporate governance mechanisms and risk management influence firm value and whether corporate reputation mediates the relationship between the variables. Indonesia is an emerging country in which many firms are trying to improve their reputation in order to increase their capital value, either through higher profits or through capital market mechanisms leading to increase firm value. The research is based on 36 listed finance and non-finance companies in Indonesia, with a research panel data period from 2007 to 2012. The data were collected during field visits and followed up by telephone discussions and email contacts. The research identifies three key measurement issues underlying the conceptual framework. (1) Corporate governance mechanisms are measured, firstly, by three aspects of the audit committee: the number of audit committee members, the number of independents on the audit committee, and the number of audit committee members with financial expertise. Two relevant characteristics of the board of directors are highlighted: the number of independent board members and size of the board. We also use auditor quality and the extent of auditor change (auditor rotation) as aspects of corporate governance. (2) Risk management is measured by the variables of risk disclosure and leverage. (3) Corporate reputation is measured by bond rating. The control variables used in the empirical model are industry sector and firm size. The purpose of the research is to provide insight into how corporate governance might improve firm value, protect the shareholders’ interests and maximise shareholders’ value. There are two central findings from this study. Firstly, in terms of direct relationships between GCG variables and firm value as measured by Tobin’s Q, three variables related to the audit committee (the number of independent audit committee members, audit quality (Big 4) and auditor change) have significant positive effects on firm value. Other aspects of GCG are not significant, and the results are quite different, and generally less significant, if firm value is measured by return on assets (ROA), although auditor change is still positive and significant. The results imply that the nature and quality of the audit committee are important factors influencing firm value in Indonesia. Secondly, when other methods are used to investigate whether corporate reputation (measured by the bond rating) acts as a mediating variable between GCG variables and the firm value, we find that these three variables, plus the number of audit committee members, have a significant impact on firm value (measured by Tobin’s Q) mediated by corporate reputation. This finding both confirms the impact of audit committee variables in contributing to firm value and the mediating role of corporate reputation. The central limitation of this study is that it is based on a relatively small sample of observations – 216 firm-year observations over a six-year period – with only limited power to discriminate between competing hypotheses. With new data becoming available, further research to test these findings on a much larger sample would be valuable.

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