Improve Corporate Governance

Oct 13, 2025 by pynkocean.com 70 views

The Effect of Corporate Governance on Company Value: A Study of Banking Companies Listed on the IDX

Introduction

Corporate Governance plays a vital role in determining the value of a company, especially in the banking sector. It is a system of rules, practices, and processes by which a company is directed and controlled. Good corporate governance is expected to increase investor confidence, which in turn can have implications for increasing company value. This study aims to analyze how various aspects of corporate governance - which are measured through institutional ownership, the independence of the Board of Commissioners, the Audit Committee, the Board of Directors, and the audit quality - affect the company's value. In addition, this research also explores how profitability functions as a moderating variable in this relationship.

Research Background

Good corporate governance is essential for the success of a company. It is a key factor in attracting investors, improving financial performance, and increasing company value. In the banking sector, corporate governance is particularly important due to the high level of risk involved in banking activities. The banking sector is a critical component of the financial system, and good corporate governance is essential to maintain the stability and integrity of the financial system.

This study includes 43 banking companies listed on the Indonesia Stock Exchange (IDX) during the 2015-2017 period, using purposive sampling techniques to get 41 companies as representative samples. The study focuses on the banking sector because it is a critical component of the financial system, and good corporate governance is essential to maintain the stability and integrity of the financial system.

Research Methodology

Data obtained from 41 companies for three years were processed to 123 samples to be analyzed. This study uses multiple linear regression analysis to test the effect of corporate governance on company value, as well as residual tests to examine the role of profitability as moderating variables. The study also uses purposive sampling techniques to select the sample companies.

Results and Findings

The results showed that the corporate governance measured by institutional ownership, the independence of the Board of Commissioners, the Audit Committee, the Board of Directors, and the audit quality had a significant influence on the company's value simultaneously. However, partially, only institutional ownership, audit committee, board of directors, and audit quality that contribute significantly to company value. Interestingly, the independence of the Board of Commissioners did not show a significant effect.

On the other hand, profitability as a moderating variable is unable to moderate the relationship between corporate governance and company value. This finding shows that although profitability is important for the company, it does not function as a factor that strengthens the relationship between corporate governance and company value.

Additional Analysis and Explanation

A good corporate governance creates greater transparency and accountability, which is expected to attract more investors. For example, institutional ownership can be an indicator of the company's stability, because institutions tend to invest in companies that are well managed and low risk. Meanwhile, the Audit Committee and the Board of Directors have an important role in maintaining the integrity of financial statements and strategic decisions.

However, the fact that the independence of the Board of Commissioners has no significant effect shows the need for further evaluation of the effectiveness of the functions of the council in these companies. This could be caused by external factors that influence the ability of the Board of Commissioners in carrying out their duties effectively.

Conclusion

This study concluded that Corporate Governance plays an important role in increasing company value, although not all components have the same impact. Audit quality, audit committee, and institutional ownership have proven to be a key factor, while the independence of the Board of Commissioners requires more attention. On the other hand, profitability does not function as a moderating variable, which indicates the need for a deeper understanding of how various elements of corporate governance and financial performance interact with each other.

Through this research, banking companies are expected to pay more attention to aspects of corporate governance to increase their attractiveness in the eyes of investors, so that it has a positive impact on the company's value.

Recommendations

Based on the findings of this study, the following recommendations are made:

Improve Corporate Governance: Banking companies should pay more attention to aspects of corporate governance, such as institutional ownership, audit committee, and board of directors, to increase their attractiveness in the eyes of investors.
Enhance Transparency and Accountability: Companies should create greater transparency and accountability by disclosing more information about their corporate governance practices and financial performance.
Develop Effective Board of Commissioners: Companies should develop an effective Board of Commissioners that can make strategic decisions and maintain the integrity of financial statements.
Monitor Profitability: Companies should monitor their profitability and adjust their strategies to improve their financial performance.

Limitations of the Study

This study has several limitations, including:

Sample Size: The sample size of this study is limited to 41 companies, which may not be representative of the entire banking sector.
Data Availability: The data used in this study is limited to three years, which may not be sufficient to capture the long-term effects of corporate governance on company value.
Measurement Error: The measurement of corporate governance and company value may be subject to error, which can affect the accuracy of the findings.

Future Research Directions

This study provides several avenues for future research, including:

Longitudinal Study: A longitudinal study that examines the effects of corporate governance on company value over a longer period of time.
Industry-Specific Study: A study that examines the effects of corporate governance on company value in a specific industry, such as the banking sector.
International Study: A study that examines the effects of corporate governance on company value in different countries and cultures.

By addressing these limitations and exploring new research directions, future studies can provide a more comprehensive understanding of the effects of corporate governance on company value.
Frequently Asked Questions (FAQs) about the Effect of Corporate Governance on Company Value

Q: What is corporate governance, and why is it important?

A: Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It is essential for the success of a company, as it helps to attract investors, improve financial performance, and increase company value.

Q: What are the key components of corporate governance?

A: The key components of corporate governance include:

Institutional ownership: The percentage of shares held by institutional investors, such as pension funds and mutual funds.
Independence of the Board of Commissioners: The percentage of independent directors on the Board of Commissioners.
Audit Committee: The committee responsible for overseeing the company's financial reporting and auditing processes.
Board of Directors: The group of directors responsible for making strategic decisions and overseeing the company's operations.
Audit quality: The quality of the company's financial reporting and auditing processes.

Q: How does corporate governance affect company value?

A: Corporate governance has a significant impact on company value. Companies with good corporate governance practices tend to have higher stock prices, better financial performance, and increased investor confidence.

Q: What is the role of profitability in corporate governance?

A: Profitability is an important aspect of corporate governance, as it affects the company's ability to generate cash flows and pay dividends to shareholders. However, our study found that profitability does not function as a moderating variable in the relationship between corporate governance and company value.

Q: What are the implications of this study for banking companies?

A: This study has several implications for banking companies, including:

Improve corporate governance: Banking companies should pay more attention to aspects of corporate governance, such as institutional ownership, audit committee, and board of directors, to increase their attractiveness in the eyes of investors.
Enhance transparency and accountability: Companies should create greater transparency and accountability by disclosing more information about their corporate governance practices and financial performance.
Develop effective Board of Commissioners: Companies should develop an effective Board of Commissioners that can make strategic decisions and maintain the integrity of financial statements.

Q: What are the limitations of this study?

A: This study has several limitations, including:

Sample size: The sample size of this study is limited to 41 companies, which may not be representative of the entire banking sector.
Data availability: The data used in this study is limited to three years, which may not be sufficient to capture the long-term effects of corporate governance on company value.
Measurement error: The measurement of corporate governance and company value may be subject to error, which can affect the accuracy of the findings.

Q: What are the future research directions for this study?

A: This study provides several avenues for future research, including:

Longitudinal study: A longitudinal study that examines the effects of corporate governance on company value over a longer period of time.
Industry-specific study: A study that examines the effects of corporate governance on company value in a specific industry, such as the banking sector.
International study: A study that examines the effects of corporate governance on company value in different countries and cultures.

By addressing these limitations and exploring new research directions, future studies can provide a more comprehensive understanding of the effects of corporate governance on company value.