TABLE OF CONTENT

TABLE OF CONTENT ................................................ 1

CHAPTER I ................................................................... 3
INTRODUCTION ......................................................... 3
1.1 Background ....................................................................................... 3
1.2 Problem Formulation ........................................................................ 12
1.3 Research Objectives .......................................................................... 15
1.4 Research Benefits .............................................................................. 16

CHAPTER II .................................................................. 18
LITERATURE REVIEW ............................................. 18
2.1 Theoretical Basis ..................................................................................... 18
2.1.1 Understanding Risk Management ........................................................ 18
2.1.1.1 Foreign Exchange Exposure ............................................................. 18
2.1.1.2 Transaction Exposure........................................................................ 19
2.1.1.3 Operational Exposure / Economical ................................................. 20
2.1.1.4 Accounting Exposure ........................................................................ 21
2.1.1.5 Understanding Hedging .................................................................... 22
2.1.2 Derivative Instruments for Hedging .................................................... 23
2.1.2.1 Future Contract ................................................................................. 24
2.1.2.2 Forward Contract .............................................................................. 25
2.1.2.3 Swap .................................................................................................. 26
2.1.3 Benefits of Hedging ............................................................................. 26
2.1.4 Disadvantage of Hedging ..................................................................... 28
2.1.5 Debt to Equity Ratio ............................................................................ 28
2.1.6 Financial Distress ................................................................................. 30
2.1.7 Growth Opportunity ............................................................................. 31
2.1.8 Liquidity ............................................................................................... 33

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2.1.9 Firm Size .............................................................................................. 34
2.2 Theoretical Framework and Hypothesis Formulation ............................ 35
2.2.1 Effect of Debt to Equity Ratio on Hedging Activities ......................... 35
2.2.2 Effect of Financial Distress on Hedging .............................................. 36
2.2.3 Effect Corporate Growth Opportunities on Hedging Activities .......... 36
2.2.4 Effect of Liquidity on Hedging Activities ........................................... 37
2.2.5 Effect of Firm Size on Hedging Activities........................................... 38
2.3 Research Model ...................................................................................... 38

CHAPTER III ................................................................ 39

RESEARCH METHODOLOGY ................................. 39
3.1 Research Variables and Operational Definition...................................... 39
3.1.1 Research Variables ............................................................................... 39
3.1.2 Operational Definition ......................................................................... 39
3.1.2.1 Hedging ............................................................................................. 39
3.1.2.2 Debt to Equity Ratio ......................................................................... 40
3.1.2.3 Financial Distress .............................................................................. 40
3.1.2.4 Corporate Growth ............................................................................. 41
3.1.2.5 Level of Liquidity ............................................................................. 42
3.1.2.6 Firm Size ........................................................................................... 42
3.2 Sample and Population ........................................................................... 43
3.3 Types and Sources of Data ..................................................................... 46
3.4 Data Collection Method .......................................................................... 46
3.5 Data Analysis Technique ........................................................................ 46
3.5.1 Descriptive Statistic Analysis .............................................................. 46
3.5.2 Logistic Regression Analysis ............................................................... 46

REFERENCES ............................................................... 51

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 CHAPTER I

INTRODUCTION

1. 1 Background

One characteristic of the era of globalization is characterized by free trade.

Free trade faced by increasing competition and market price fluctuations that

make uncertainty or business risks increasing in maintaining its business. Both

small, medium, and large businesses are competing to keep their business in

various ways to adjust to the conditions that occur.

According to Soekarto (in Djojosoedarso, 1999) risk is the uncertainty of

the occurrence of an event. Whereas According to Arthur Williams and Richard,

M.H (in Djojosoedarso, 1999) risk is a variation of the results that can occur

during a certain period. Risk is a loss due to unexpected events appearing

(Sunaryo, 2009). According to Emmet J. Vaughan and Curtis M. Elliott (in

Kertonegoro, 1996) his book Fundamentals of Risk and Insurance, the term risk

has been formulated in different definitions by insurers, namely:

1. Risk is chance chance (loss chance).

2. Risk is the possibility of loss.

3. Risk is uncertainty.

4. Risk is a deviation of reality from expected result (the dispersion of actual

from expected result).

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5. Risk is the probability that a result is different than expected (the probability

of any outcome different from the one expected). (Kertonegoro, 1996, p.1)

The risk has two characteristics, the first is the uncertainty of the

occurrence of an event, and the second is the uncertainty that if it happens will

cause harm (Djojosoedarso, 1999). From the above quotes, I can conclude that

Risk is a change or deviation from an expected or expected outcome, into

something uncertain, and may even make the estimate disappear or lose. Other

examples of this type of risk are the sharp and rapid depreciation of the rupiah

(the monetary crisis), a series of land, sea and air transportation accidents,

banking fraud and hot lapindo mud case.

An example of a loss is a company's finances in the financial statements of

a manufacturing company that indicates the company is getting a greater burden

due to foreign exchange exposure. In the financial statements stated that there are

losses due to foreign exchange rates that affect the amount of profits that should

be greater if not affected by the exchange rate of foreign currency. The impact of

foreign exchange losses can be felt widely, from the decline in corporate profits,

the decline in earnings per share, and followed by a decline in stock prices in the

stock market, if the decline in stock prices occurs, may affect the number of

investors to decline, and

The company will lose the funding channel. These risks cannot be directly

prevented from occurring, will certainly directly affect the condition of the

company, but the company can still handle the risks in various ways and

management of various ways of risk management is what is called risk

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management (Djojosoedarso, 1999). The management includes the following

measures:

1. Seeks to identify the elements of uncertainty and the types of risks facing the

business.

2. Strive to avoid and cope with all the elements of uncertainty, for example by

making good and careful planning.

3. Trying to know the correlation and consequences between events, so it can be

known the risks contained in it.

4. Seek to seek and take steps (methods) to deal with identified risks (managing

risks faced) (Djojosoedarso, 1999).

Traditional risk management focuses on risks arising from physical or

legal causes (such as natural disasters or fires, deaths, and lawsuits) Financial risk

management, on the other hand, focuses on risks that can be managed using

financial instruments (Wikipedia ) There are several ways that can be done (the

company) to minimize the risk of loss, among others.

 Preventing and reducing the possibility of incidents that result in losses, for

example: building buildings with anti-burning materials to prevent fire

hazards, fencing machines to avoid work accidents, maintaining and

deviating well on materials and products to avoid Risks of stealing and

damage, humanitarian approaches to prevent strikes, sabotage and confusion.

 Retention means to tolerate losses, to allow loss and to prevent disruption of

the company's operations as a result of the loss provided funds to cope (other

miscellaneous or unexpected expenses in the company's budget).

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 Controlling risks, hedging (futures trading) to tackle the risks of scarcity and

fluctuations in raw material prices / helpers required.

 Transferring / transferring the risk to another party, that is by entering a

contract (insurance) with the insurance company to certain risk, by paying a

certain amount of insurance premiums that have been set, so that insurance

companies will compensate if indeed there is a loss in accordance with the

agreement (Djojosoedarso, 1999).

This type of risk can be recognized by a company by first measuring the

exposure that a company can experience. Exposure is an object that is vulnerable

to risk and affects company performance if the predicted risk actually occurs. The

most common exposures relate to financial measures, such as stock prices,

earnings, sales growth and so on.

One way to minimize financial risk is by hedging or hedging method as

already mentioned by Djojosoedarso (1999) as one of the ways to overcome risk.

Hedging or in English is called a hedge in the financial world can be interpreted

as an investment made especially to reduce or eliminate the risk on another

investment. Hedging is a strategy created to reduce the incidence of unexpected

business risks, in addition to the possibility of profiting from such investments.

The principle of hedging is to cover the loss of the initial asset position with the

advantage of the position of the hedging instrument. Before hedging, hedger only

holds a number of initial assets. After hedging, hedger holds a number of initial

assets and hedging instruments are called hedging portfolios (Sunaryo, 2009).

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 For example, before hedging, hedger has 100 risk. After hedging, the risk

of hedging portfolio is 20. Hedging can reduce risk by 80. It is said that hedging

effectiveness is 80 percent. Of course the risk reduction is not free. Decrease in

risk coupled with a decrease in profits. The implication is if the asset position

Initially, the position of the hedging instrument suffers a loss or is called

the hedging cost, consequently the gain from the initial asset position closes the

losses from the position of the hedging instrument (Sunaryo, 2009).

Hedging activities are conducted using derivative instruments, derivatives

are contractual agreements between two parties to sell and purchase a certain

amount of goods (commodities and securities) on a certain future date at a price

already agreed upon at the moment. Note that underlying instruments in

derivatives are not limited to financial assets, such as stocks, warrants, and bonds,

but may be present in commodities, precious metals, stock indices, interest rates,

and exchange rate (Utomo 2000). Derivative products also include types of risk

that can be diverted by hedging activity.

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 In table above is a graph of fluctuations in the value of Bank Indonesia

interest rate period 2006-2010 with observation per 3 months. The central bank

interest rate or BI Rate is the policy interest rate that reflects the stance or stance

of monetary policy stipulated by the Indonesian bank and announced to the public

(bi.go.id). The BI Rate is announced by the Board of Governors of Bank

Indonesia at each monthly Board of Governors Meeting and implemented in

monetary operations conducted by Bank Indonesia through liquidity management

in the money market to achieve the operational targets of monetary policy.

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When viewed from the declining rate of interest rates continue to decline, and

suddenly increased sharply although not reaching the highest point in the graph,

from the lowest point makes some companies complicated by these conditions

associated with interest-rate loans related to the interest rate Reference from Bank

Indonesia.

If the rate is fluctuating it is going to make the l

This figure above is the fluctuation chart of the rupiah against the Dollar

for the period. In the figure graph is the price of the Rupiah against one US

Dollar. The exchange rate is the price of a currency against another currency or

the value of a currency against the value of another currency (Salvatore, 1997).

Exchange rate fluctuations also affect inflation and output, and become an

important consideration of monetary policy makers. When the Rupiah falls in

value or the Dollar currency appreciates, the price of imported goods becomes

more expensive which will directly raise the price level and inflation (Mishkin,

9
2008). Type of risk of exchange rate fluctuations included in foreign exchange

exposure, foreign exchange exposure will be experienced by companies that make

payments and / or receive revenues in foreign currencies (Yuliati, 2002).

From the period of April 2015 to July 2015 did not experience significant

fluctuations, although exchange rate fluctuations continue to occur. In the period

of September 2015, the Rupiah currency depreciated against the Dollar or Dollar

appreciation of the Rupiah currency, with the previous value in July 2015 valued

at around Rp 13,246/$ to almost Rp 14,802 /$

If there is a company by entering into an agreement in September while

the maturity period, the company will pay more money for transactions than it

should be. But not so if the company uses one of the derivative instruments as a

hedging activity to cover the losses that would arise from the risk of depreciation

of the Rupiah currency.

In Figure above is a graph of World Oil price fluctuations expressed by

Dollar per barrel period July 2015-Dec 2016. Fuel or Oil World is one of the most

needed commodities in life, the industry desperately needs the role of fuel,

fluctuations in fuel prices can affect the overall economic condition because of the

importance of that role, especially in terms of price stability, if fuel price levels

10
fluctuate, Can lead to price uncertainty, resulting in complications of decision-

making for consumers, businesses, and governments (Mishkin, 2008).

In the period of July 2015 world oil price of $ 48.94 and continues to

fluctuate until the highest point in May 2016 period of $ 50,9 such a continuous

fluctuation can make the economy unstable due to the company will raise the

price of goods because the cost of production is more expensive due to rising fuel

prices . Risks associated with rising world fuel prices can be minimized by the use

of derivative instruments as hedging activities.

In addition to being driven by external factors, the company is also

encouraged to engage in hedging activities due to several internal factors. Several

studies have been conducted to determine the internal factors of firms that

influence hedging activity with derivative instruments. In a study conducted by

Nguyen and Faff (2003) states that companies prefer to use derivatives if the

value is large and have more debt in the capital structure. While in research

conducted by Triki (2005) debt has a negative effect on hedging activity.

Then research conducted by Nance, Smith, and Smithson (1993) that

financial distress positively related to hedging activity. While research conducted

by Triki (2005) financial distress relate negatively to hedging, then research

conducted by Guniarti (2011) also think so, that is financial distress relate

negatively to hedging.

Then research conducted by Nance, Smith, and Smithson (1993) states that

companies that do hedging have a greater chance of corporate growth. While

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research conducted by Ameer (2010) that growth opportunities companies have a

negative effect on hedging activities.

Subsequent to a study by Clark and Judge (2005) states that another factor

explaining hedging decisions is the level of liquidity. While research conducted

by Spano (2005) states that the liquidity variable has a negative result on hedging

activity in the company.

Then in research conducted by Nguyen and Faff (2003) Large variable

size companies tend to prefer using derivative instruments for hedging activities.

While research conducted by Triki (2005) states that the company will do hedging

if there is a decrease in the size of the company.

Therefore, because of the above calculation, there is still an empirical

phenomenon related to the basic reference data for conducting hedging or

underlying products in order to make the above instruments as a consideration of

the company to conduct hedging activities or not

Doing hedging activity and there is still a research gap hence more

research is needed about it. Based on the background description, the title taken in

this research is "Analysis of Factors that influence the use of derivative

instruments as Hedging decision making."

1.2 Problem Formulation

During a company operates, risks inherent in the company still comes to

overshadow the company. The derivative products derived in Table and graph in

section 1.1 indicate the fluctuations in the risks faced by the company, thereby

12
increasing the uncertainty in the company against risks. Therefore, systematic and

strategic risk management is required to deal with the fluctuation of these risks,

one of them by using derivative instruments as hedging activities. Then there is

the research gap of previous studies as shown in table below:

no Variable Researcher Research result

1. DER toward 1. Nguyen dan Positively related

Hedging Faff (2003) toward hedging

decision

2. Triki (2005) Negatively related

toward hedging

decision

2. Financial Distress 1. Nance Smith Financial distress

toward Hedging dan Smithson has a positive

(1993) effect

Against hedging

decisions

2. Triki (2005) Financial distress

has a negative

effect

Against hedging

decisions

3. Guniarti Financial distress

(2011) has a negative

13
 effect

Against hedging

decisions

3. Growth 1. Nance Smith Growth

Opportunity dan Smithson Opportunity is

toward Hedging (1993) influential

Positive response

to hedging

decisions

2. Ameer Growth

(2010) Opportunity is

influential

negative response

to hedging

decisions

4. Liquidity toward 1. Clark and Liquidity has a

Hedging Judge (2005) positive effect

Against hedging

decisions

2. Spano Liquidity has a

(2005) negative effect

Against hedging

decisions

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 5. Firm Size toward 1. Nguyen dan Company size is

Hedging Faff (2003) influential

Positively to

hedging decisions

2. Triki (2005) Company size is

influential

Negatively to

hedging decisions

The formulation of the problem from this research is the existence of

empirical phenomenon or business phenomenon related fluctuations in state

derivative products used by the company as a fundamental reason to control risk

by using hedging decisions. Then there is still a research gap from previous

research, based on the above, it can be formulated problem in this research are:

1. How does the debt rquity ratio (DER) affect Hedging decisions?

2. How is the effect of financial distress on Hedging decisions?

3. How does the growth opportunity affect the Hedging decision?

4. How does the liquidity of firms affect Hedging decisions?

5. How does firm size affect Hedging decisions?

1.3 Research Objectives.

1. To analyze the effect of Debt Equity Ratio on the use of derivative

instruments as Hedging decisions

15
2. To analyze the effect of financial distress on the use of derivative instruments

as Hedging decisions

3. To analyze the effect of the company's growth opportunities on the use of

derivative instruments as Hedging decisions

4. To analyze the effect of the company's liquidity level on the use of derivative

instruments as Hedging decisions

5. To analyze the effect of firm size on the use of derivative instruments as

Hedging decisions

1.4 Research Benefits

1. For the Company: The results of this study are expected to be a reference for

companies to take strategic steps in making decisions to protect the value of

investments that have been issued.

2. For Investors: The results of this study are expected to be a reference in the

selection of companies that will implement funds that Investors have,

because it can know which companies are indeed responsive in protecting its

investment.

3. For Academics: the results of this study are expected to be a good reference

in developing further research and become a guide to broaden the knowledge

insight, especially in the field of Financial Management.

1.5 Systematics Writing

This research consists of 5 chapters with systematics of writing as follows:

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 1. Chapter I Introduction

This chapter covers background, problem formulation, objectives, research,

research benefits, and systematics of writing.

2. CHAPTER II Literature Review

This chapter covers the theoretical foundations of research, the results of previous

research, the framework of thought, and the hypothesis.

3. CHAPTER III Research Methodology

This chapter includes research variables, operational definitions, types and

methods of data collection, research population, and analytical methods.

17
 CHAPTER II

LITERATURE REVIEW

2.1 Theoretical basis

2.1.1 Understanding Risk Management

Risk is a loss due to an unwanted event arises. Risks are identified based

on the underlying cause, ie risk due to market price movements (eg, stock prices,

exchange rates or interest rates) are categorized as market risk. Risk due to default

counterpay partners (default) is called credit risk (default). Meanwhile, the risk of

failure or failure of people or systems, processes or external factors is called

operational risk (Sunaryo, Financial Risk Management, 2009). Risk management

has three stages: identifying, measuring, and managing risk. Financial institutions

or investors can manage risk by: reducing risk, for example by hedging, providing

self-insurance reserves and transferring risk to third parties with derivative

instruments. Banks may transfer credit risk to other parties using credit derivatives

(Sunaryo, Financial Risk Management, 2009).

2.1.1.1 Foreign Exchange Exposure

Foreign exchange exposure is the sensitivity of changes in the real value of

assets, liabilities or operating income declared in the domestic currency against

unanticipated exchange rate changes (Levi, 2001). Foreign currency exposures

will be experienced by companies conducting and / or receiving revenues in

18
foreign currencies (Yuliati, 2002).

Judging from the impacts and effects, there are three kinds of foreign exchange

exposures:

2.1.1.2 Transaction Exposure

The transaction exposure measures the change in the value of the

transaction as there is a difference between the foreign exchange rate at the time

the transaction is agreed upon and when the transaction is settled / fulfilled. So

this exposure is related to transactions of existing transactions, but not yet due

(Yuliati, 2002).

The value of the company's cash inflows received in various

denominations of foreign currency will be determined by the foreign exchange

rate, upon receipt of the converted to the desired currency. Likewise with outflow

cash paid in foreign currency denominations, its value will depend on the foreign

exchange rate when payment will be made. Transaction exposures may occur due

to the use of credit transactions or borrowed funds that are repayable in foreign

currency. The measurement of transaction exposure can be done through two

stages:

1. Projecting receipts and expenditures in each foreign currency, over a period

of time (eg per month, per year, etc.)

Calculates the overall exposure of all net receipts and expenditures.

For a large company with multiple subsidiaries, the calculation of transaction

exposure should be based on the overall projection of revenues and expenditures

19
after the consolidation. This is necessary to avoid the company from reddancing

the business of risk-taking (hedging). Transaction exposures may be made by

entering into hedging foreign exchange contracts or pursuing specific operating

strategies (Madura, 2006). Foreign currency hedging contracts can be made in

forward markets, futures markets, money markets, options, and swap agreements.

2.1.1.3 Operational Exposure / Economical

Operating exposures measure any change in the present value of the

company due to changes in operating cash flows, due to unexpected changes in

the foreign exchange rate. Operational exposure analysis aims to determine the

impact of changes in foreign exchange rates (unexpected) on operating activities

and competitive position of the company. Operating exposures have similarities

with transaction exposures, which are related to changes in cash flows due to

fluctuations in foreign exchange rates. However, operating exposures have a

wider range of transaction exposures and their impact on the company's more

fundamental existence of transaction exposure and accounting exposure (Yuliati,

2002).

Changes in exchange rates can affect all operations of the company, such

as marketing, finance, production and purchasing activities. This will ultimately

determine the competitiveness and value of the company. Here what counts is the

unpredictable change in foreign exchange rates, not the foreseeable. Changes in

foreign exchange rates that have been allegedly included in corporate planning

(Levi, 2001).

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 The key to success in managing the operational exposure well is the

management's sensitivity in recognizing the imbalance in the conditions of parity

and its readiness in preparing the appropriate strategic steps to react to the

condition. The best step management can take is to diversify the company's base

of operations and corporate spending internationally. Operational diversification

diversifies sales, location of production facilities and raw material procurement

sources to several countries. Meanwhile, diversified spending means seeking

funds in more than one capital market and in more than one type of currency.

2.1.1.4 Accounting Exposure

Accounting exposure does not result in changes to the company's real cash

flow. This exposure arises when a company creates consolidated financial

statements from all its subsidiaries scattered in various countries (Yuliati, 2002).

The preparation of consolidated financial statements has two main objectives.

First to know the overall financial performance of the company, secondly to

evaluate the financial performance of the subsidiary. By comparing the financial

statements of each subsidiary, management can know the financial performance

of each subsidiary. This information is very useful for formulating competitive

strategies and resource allocation to each subsidiary. The way in which to manage

accounting exposure is the balance sheet hedge. It attempts to neutralize the

exposure by balancing the wealth and liabilities of the company, in the opposite

direction. In addition to the hedge balance sheet, there is also another technique of

contractual hedge but the results obtained often involve speculative elements.

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2.1.1.5 Understanding Hedging

Hedging or hedging, or hedge is a very popular term in futures trading.

Where hedging is one of the economic functions of futures trading, namely the

transfer of risk. Hedging is a strategy to reduce the risk of loss caused by price

fluctuation.

According to T. Sunaryo (2009) the principle of hedging is to cover the

loss of the initial asset position with the advantage of the hedging instrument

position. Before doing hedger only hold a number of initial assets. After hedging,

the hedger holds a number of initial assets and a certain number of hedging

instruments. A portfolio consisting of initial assets and hedging instruments is

called a hedging portfolio. This hedging portfolio has a lower risk than the initial

asset.

According to Paul Merrick (1998) as quoted by Kusmanto, hedging or

hedge is defined as follows: "A hedge is one or more traders perfomed in order to

protect an existing market exsposure against market movement". So basically

hedging is a way of producers or investors to protect the position of an asset or

(underlying assets) from the risk of market changes.

According to F.R. Edward (1991) as quoted by Leuthold, Raymod M, et al (1989)

understanding of hedging is technically a process to take a position in the futures

market opposite to positions held in the physical market in the same number of

contracts. Individuals or firms that do hedging on futures trading, are called:

"hedger". Hedger has a main business in the physical market (cash market), while

their activity on futures market to minimize the risk of unfavorable price

22
fluctuations. By doing these activities the targeted benefit can be realized, or if

deviated, the deviation is not too far away. Therefore the process of hedging

requires special skills.

2.1.2 Derivative Instruments for Hedging

Derivative instruments can be classified into options, forward, futures, and

swaps, with derivative instruments derived from stocks, interest rates, bonds,

exchange rates, commodities, and indices. (Sunaryo, Financial Risk Management,

2009) Option (Option) Is a derivative contract with option (right) to sell or buy

something as stated in the contract. Many of the options are traded on the options

exchange, but often the option is just a personal agreement between the company

and the bank (Marcus, 2006).

Option is said to be a derivative effect which means it will only have value

whilst connected to the financial asset in question each type of option has a certain

market life, so that if its market life is up, the derivative effect is of no value. The

meaning of financial assets here are like ordinary shares, bonds, and convertible

bonds (Ang, 1997). The options contain two types:

1. The Option Option (Put Option) is a negotiating instrument that allows the

owner to sell a certain effect at a specified price within a certain period of

time.

2. The Option Option (Call Option) is an instrument of negotiation which

allows the owner to purchase a certain effect at a certain price within a

certain timeframe (Ang, 1997).

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 An example of an option contract is as follows:

Petrochemical Perfume, Inc., is concerned about the potential for rising

crude oil prices which is one of their key raw materials. To protect itself against

rising prices, the company bought a 6-month buy option to buy 1,000 barrels of

crude oil at an exercise price of $ 40. This option costs $ 1 per barrel.

If the price of crude oil is above the $ 40 exercise price, when the option is

due, the company will use the option and accept the difference between the oil

price and the exercise price. If the price of oil falls below the exercise price, the

option will be exhausted and of no value. If the price of oil falls from the exercise

price, for example $ 30, the holder of the buy option does not have to use the buy

option, because it is above the market price, if the option holder executes the

option, the company will lose by buying above market price.

The essence of the option is that a person who has entered into an option contract

may use the right or not to exercise the option right to execute an agreement.

2.1.2.1 Future Contract

It is an exchange of trade pledges to buy or sell an asset in the future at a

predetermined price. Suppose there is a wheat farmer, there is a concern that the

price of wheat may fall to the lowest point, then the farmer to contract futures

against wheat. With the contract the farmer agrees to send a certain amount of

wheat, in a given month at a predetermined price. At maturity the farmer must

24
provide a certain amount of grain at a predetermined price to the contract buyer

(Marcus, 2006).

Wheat farmers will be lucky if, the market price is due under the futures

contract price, because the buyer of the contract must pay more than the market

price, but the wheat farmer will lose if the market price matures above the futures

contract price. The difference between futures and options is if the option contract

holder has the choice of whether he will make the delivery or not, whereas the

futures contract is a definite promise to send wheat at a fixed selling price.

2.1.2.2 Forward Contract

It is the agreement to buy or sell an asset in the future at an agreed price. A

forward contract is a tailored future contract. Example of forward contract

implementation on company. Computer Parts Inc., has ordered memory chips

from its Japanese suppliers. The bill of ¥ 53 million must be paid on July 27. The

company may arrange with its current bank to buy forward this yen amount for

July 27 delivery at a forward price of ¥ 110 per dollar. Therefore, on July 27,

Computer Parts paid the bank ¥ 52 million / (¥ 110 / $) = $ 481,818 and received

¥ 53 million, which could be used to pay its Japanese suppliers. By forwarding $

481,818 for ¥ 53 million, the cost of the dollar is locked. Note that if the company

has not used forward contracts to protect itself and the dollar depreciates during

this period, the company will have to pay a larger dollar amount. For example, if

the dollar depreciates to ¥ 100 / dollar, the company must exchange $ 530,000

with ¥ 53 million needed to pay its bills (Marcus, 2006).

25
2.1.2.3 Swap

It is arranged by both parties to exchange a flow of cash flow for another

stream. Swap interest rates, the company will pay or swap swap fixed payments

for other payments that are tied to the interest rate. So if the interest rate rises,

increases the interest expense of the company on its floating interest, the cash

flow from the swap deal will also rise, closing its exposure (Marcus, 2006).

Swap is an agreement between two parties to exchange cash flows

periodically for a certain period in the future according to agreed rules. For

example, a swap between A and B. Fixed-for-floating swap requires A to pay a

periodic cash flow based on a fixed interest rate of 5.5 percent of 100 (USD) to B,

whereas B pays on a certain floating interest rate to A. Further , A receives a

floating rate and pays a fixed interest rate. Instead, B receives a fixed interest rate

and pays a floating interest rate. The reference number 100 (USD) is called

notional swap. In interest rate swaps for A and B are the same, ie 100, therefore,

notional does not need to be exchanged at the end of the swap period. (Sunaryo,

Financial Risk Management, 2009).

2.1.3 Benefits of Hedging

Hedging provides several economic benefits for both producers,

manufacturers, processors, exporters, and consumers (BAPPEBTI, 1997) as

follows:

A. Hedging is a means to reduce or minimize the risk of price when a price

change is not in accordance with the expected, called "risk insurance".

26
 B. For producers or commodity owners, hedging is a marketing tool (a

marketing tool). By hedging, farmers can determine the selling price of their

products, before, during, and after harvest through the futures market. They

can determine an amount of revenue to be earned in the future by storing the

product for later sale.

C. For commodity processors such as prosseco or miller, hedging is a

purchasing tool (a purchasing tools). Through the futures market they

determine the purchase price of raw materials to be processed in the future,

so it can set the cost of production and finally can definitely set the selling

price for the future.

D. With the hedging of the creditor (bank) more dare to give credit to the

producers or owners of commodities that have menghedge commodities.

Because by doing so, the owner of the commodity has minimized the risk of

price fluctuations of the commodity to be produced or the purchased

material, so the targeted profit is more certain and this is a bank guarantee

that the money given can be returned and the interest can be paid. Usually

banks only provide 50 percent of working capital for products or inventories

that are not dihedge, while for those who do hedging get credit 90 percent of

working capital.

Through hedging, the final consumer will be charged a lower and stable selling

price this is because both producers and processeors are able to minimize costs

due to adverse price fluctuations, as well as the opportunity to enlarge operting

capital.

27
2.1.4 Disadvantages of Hedging

In addition to the benefits gained, hedging also has some losses that must

be faced hedger (BAPPEBTI, 1997), namely:

A. Base risk Price developments in the physical market are sometimes not

correlated fairly (unidirectional) with the futures market, so the risks are not

in accordance with previous planning.

B. Cost

By hedging there is a cost burden for the hedger, among others, freight

costs, bank interest costs, gedgung costs, insurance costs, margin payments

and transaction costs. Therefore, hedger must consider these costs before

hedging.

C. Incompatibility between physical condition and futures

This happens because the quality and number of dihedged products is not

always the same as the quality and number of standard contracts traded.

Therefore, hedger required to be able to adjust these differences by way of

hedging in accordance with the volume of production.

2.1.5 Debt to Equity Ratio (DER)

Debt to Equity Ratio (DER) reflects a company's ability to fulfill its

obligations indicated by some part of its own capital or equity used to repay debt.

Debt to Equity Ratio (DER) is the ratio between total debt owned by the company

with total equity. Mathematically Debt to Equity Ratio (DER) can be formulated

as follows (Ang, 1997).

𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
DER= 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

28
 Total debt is the total liabilities (both short-term and long-term debt),

while the total shareholder's equity is the company's own total capital. This ratio

shows the composition or capital structure of the total loan (debt) to total capital

owned by the company. The higher Debt to Equity Ratio (DER) shows the

composition of total debt (short-term and long-term) is greater than the total

capital itself, resulting in greater impact on the outside company (creditor) (Ang,

1997).

The high debt ratio makes the company has many funding alternatives in

funding all kinds of corporate activities, both from operational needs and

expansion needs that make the company bigger. The availability of these funds

facilitates cash flow that supports all sorts of activities to respond to market

demand and increase profitability. However, this raises new problems of rising

bankruptcy costs, agency costs, higher interest rate returns, and the creation of

information asymmetry in accordance with the statements of Franco Modigliani

and Milton Miller (MM Theory).

With the increasing of problems according to MM theory, the exposure of

foreign exchange transactions, for example the company borrows in US dollars

($), when the condition of the rupiah exchange rate against the Dollar depreciates,

therefore the company must pay more because the depreciation of the rupiah And

the risk of default is greater, can increase the big expenses due to the use of debt

larger than the proportion of capital owned.

These risks are not impossible, because the fluctuations in economic

conditions make the uncertainty greater, therefore companies need to perform risk

29
management to divert the risks that may arise. This is in accordance with the

opinion of the higher level of debt or Debt Equity Ratio it will be the greater

hedging decision making done to reduce the adverse impact of risks Nguyen and

Faff (2003), Spano (2004), and Klimczak (2008).

2.1.6 Financial Distress

Financial Distress is a measure that indicates difficulties in repaying debt

to creditors, or it can be called the measure of a corporate bankruptcy

(Wikipedia). One measure of financial distress can be explained from the

calculation of Z-Score proposed by Edward I. Altman. In 1968 Altman examined

the benefits of financial statements as a measure of performance in predicting

bankruptcy and bankruptcy trends of the company, now known as the Altman Z-

Score. Altman started out with 22 ratios that seem to intuitively make sense as

predictors of bankruptcy. After the research runs, he excludes a ratio that

contributes at least contribution to model reinforcement. Ultimately, it produces a

model of mathematical equations that contain only five elemental ratios

(Sudiyatno, 2010).

The form of equations for the basic Altman model is as follows:

Z = X1 + X2 + X3 + X4 + X5

Where,

Z = Overall Index

𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
X1 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

30
 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
X2 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝐸𝐴𝑇
X3 =𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦

X4 = 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
X5 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Companies that have low Z-Score value indicate the company is not

healthy, or the trend of bankruptcy is high, it makes the company will be more

careful in managing its finances, making it more possible to find a risk transfer

mechanism that is hedging decision.

So when the Altman Z-Score value decreases the firm will be prompted to

make a hedging decision so it can be seen that the relationship between Altman Z-

Score value with hedging decision is negatively related. This is in accordance

with research conducted by Triki (2005), and (Guniarti, 2011).

2.1.7 Growth Opportunity

A high Growth Opportunity shows the company's opportunity to move

forward, so to answer that opportunity, the need for large amounts of funds to

finance that growth in the future will be much needed. Therefore the company

will retain the revenue earned for reinvestment and at the same time the company

will be expected to continue to rely on funding through larger debt (Baskin,

1989). This will be different if the company has a low growth opportunity rate so

that it does not require external financing.

31
 Growth Opportunity variable measurement proxy in this research is

comparison between MVE (market value of equity) and BVE (book value of

equity). Mathematically can be formulated as follows:

𝑀𝑉𝐸
Growth Opportunity = 𝐵𝑉𝐸

Or

𝐸𝐴𝑇
MVE = 𝐸𝑃𝑆 x Closing Price

BE = Total Assets – Total Liabilities

The market value or the Market Value of Equity obtained from the

calculation element of its net profit to decline in value when the company is

experiencing financial difficulties due to various expenses of the types of risks

such as fluctuations in foreign currency risk, commodity price of raw materials

has increased so that the cost of production more large, thus lowering the rate of

profit. While the calculation of book value of equity is expected to have a smaller

value because it indicates that the use of debt on the company is relatively small

and can increase the value of book value of equity, as revealed by Aretz (2009).

High Corporate Growth Opportunities indicate an improved market value

among other companies, it makes the company confident to use external funds for

the use of company growth, in addition to making potential investors willing to

invest funds to companies that have a high growth opportunity of the company,

because Assessed can be a good investment vehicle.

32
 The value of the company's proxy growth opportunities that the larger the

company makes more use debt as a source of funds (Chen, 2006). Companies that

are experiencing rapid growth tend to choose debt as a source of funding rather

than companies that have a slow rate of growth, as revealed by Weston and

Brigham (1984). Increased debt in the company, of course, will increase the risk

of companies such as default due to bankruptcy, foreign exchange exposure. Thus,

firms with high growth opportunity growth opportunities tend to use hedging

decisions to protect their companies (Nance, Smith, and Smithson, 1993).

2.1.8 Liquidity

Liquidity is the company's ability to fulfill the obligations that must be met

immediately (Sutrisno, 2000). Liquidity is to demonstrate the ability of a company

to meet its obligations at the time of billing, a company capable of fulfilling its

financial obligations just in time means the company is in a "liquid" state

(Munawir, 1981).

The liquidity ratio that measures the company's short-term liquidity ability

is proxied by the current ratio. Current assets generally include cash, securities,

accounts receivable, and inventories. Current liabilities or current liabilities

consist of current liabilities, short-term note receivables, maturities of less than

one year, tax accruals and other accrued expenses (mainly salary).

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current Ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

The high CR value of a company will reduce uncertainty for investors, but

indicates idle cash will reduce the profitability of the company, resulting in

33
smaller ROA (Priharyanto, 2009). If the level of profitability decreases indicates

the company is not able to use the funds at maximum to get profit or profit.

2.1.9 Firm Size

The size of a company makes the decision different. The size of the

company can affect the ease of a company in obtaining sources of funding both

external and internal (Short and Keasy, 1999). The bigger a company is, the

greater the risk, and the more hedging activities to protect their assets. Because

the impact of a risk in larger companies has more impact, they will impose a

tighter risk management than small firms.

Firm Size is proxied through:

Firm Size = In Total Assets

The size of the company is seen from the total assets owned, the greater

the assets owned, the more carefully the company stepped up an activity in the

company. Larger firms certainly have more extensive operational activities and

are more at risk because the possibility of transacting to different countries will

involve several different currencies. In its activities there will be transaction

exposure due to fluctuations in foreign exchange rates. For that larger company

will do more hedging decision making in order to protect the company from risk

(Nance, Smith & Smithson; 1993, Judge; 2002,2003, Nguyen and Faff; 2002,

Spano 2004, and Guniarti; 2011).

34
2.2 Theoretical Framework and Hypothesis Formulation

2.2.1 Effect of Debt to Equity Ratio on Hedging Activities

The use of debt is believed to be able to leverage the company's ability to

improve the company's performance. The availability of funds is able to run the

company for various needs, such as operational needs, business expansion, and

others. Due to the fulfillment of these funds, then the company can gain greater

benefits. However, the higher the proportion of the debt to own capital, it will

affect the larger risk magnitude.

The use of larger debt compared to the quantity of the capital poses a new

problem of rising bankruptcy costs, agency costs, higher interest rate returns, and

the creation of information asymmetry in accordance with the statements of

Franco Modigliani and Milton Miller (MM Theory). With this increasing risk,

companies need to make strategic decisions related to risk management in order to

escape the company from the existence of these risks that can make the company

bankrupt. One of the actions in risk management is the use of derivative

instruments for hedging activities (Clark, Judge, Ngai; 2006 and Batram, Brown,

and Fehle; 2006). The higher the debt-to-equity ratio of the company, the greater

the hedging that needs to be done to reduce the adverse effects of the ratio, the

greater the level of debt to equity ratio the firm receives, the greater the chances

for the company to make decisions Hedging Nguyen and Faff (2003), Spano

(2004), and Klimczak (2008).

H1: Debt to Equity Ratio has a positive effect on hedging decision

35
2.2.2 The Effect of Financial Distress on Hedging

Altman Z-Score is a performance measure in predicting bankruptcy and

bankruptcy trends. If the value of the calculation shows a low number, then the

company is included in the company that has the possibility of bankruptcy, it

makes the company will be more careful in managing its finances, making it more

possible to find a risk transfer mechanism that is hedging activity.

So when the Altman Z-Score value decreases the company will be driven

to do hedging activity so it can be seen that the relationship between Altman Z-

Score value with hedging activity is negatively related. This is in accordance with

research conducted by Triki (2005) and (Guniarti, 2011).

H2: Financial Distress negatively affects Hedging decisions

2.2.3 The Effect of Corporate Growth Opportunities on Hedging Activities

Companies with high growth opportunities indicate that the company has a

probability to grow and be favored by potential investors, in order to respond to

the opportunities already demonstrated, the company needs additional funds, in

order for the company to grow. One way to get the source of funds quickly to

finance the growth of companies is to enter the source of debt into the capital

structure of the company. Companies that have rapid growth tend to use debt as a

larger source of funding than companies with slow growth (Baskin, 1989, Weston

and Brigham, 1984).

Debt is one of the effective ways to get a quick cash injection, but it will

bring new impacts, namely the additional risk of using the debt, such as

36
fluctuations in a commodity, foreign exchange, and interest rates. The greater the

company's growth opportunities, while encouraging debt increasing from external

parties and the higher the risk of financial difficulties the hedging actions carried

out will also be more and more. In accordance with the results of research

conducted by Nance, Smith, and Smithson (1993) states that firms with high

growth opportunity rates will increasingly engage in hedging activities in an effort

to protect against adverse risks.

H3: The level of Company's Growth Opportunity has a positive effect

against hedging decisions

2.2.4 The Effect of Liquidity on Hedging Activities

The liquidity ratio measures the company's short-term liquidity capability

projected by the current ratio. Current ratio is one of liquidity ratio that aims to

see the amount of current assets relative to current debt.

The high CR value of a company will reduce uncertainty for investors, but

indicates idle cash will reduce the profitability of the company, resulting in

smaller ROA (Priharyanto, 2009). If the level of profitability decreases indicates

the company is not able to use the funds at maximum to get profit or profit. The

existence of a transaction exposure exacerbates the decline in profitability, since

transaction exposure affects the short-term cash flow of the firm, if the transaction

payments are made using the foreign exchange rate denomination, the value will

be greater if the foreign currency appreciates against the domestic currency, so the

risk increases. Thus the higher the value of liquidity, the lower the hedging

37
activity performed because the risk of financial difficulties that appear tend to be

low and vice versa (Spano, 2004).

H4: Liquidity has a positive effect on hedging decisions

2.2.5 The Effect of Firm Size on Hedging Activities

Similarly, Rapid Growth will create risks that disrupt the company's

activities. Firm size is so, the greater a company, then the company's activities not

only involve domestic trade, but also using foreign business ties. Business

relationships with companies located abroad are usually associated with trade

agreements, debt loans, competition, and others. Operations covering various

countries will result in foreign exchange exposure and the risk of currency

exchange rate fluctuations.

The bigger a firm the greater the risks arise, the more likely the company

to do hedging. Larger firms will do more hedging activities than smaller size firms

(Nance, Smith, and Smithson, 1993; Judge, 2002, 2003, 2006; Nguyen and Faff,

2002, 2003, 2007; Spano, 2004).

H5: Firm Size has a positive effect on hedging decisions.

2.3 Research Model

DER (+)

Financial
Distress (-)
Growth Hedging
Opportunity

Liquidity (+)

38
Firm Size (+)
 CHAPTER III
RESEARCH METHODOLOGY

3.1 Research Variables and Operational Definition

3.1.1 Research Variables

This study analyses the factors that influence the decision making of

hedging activities within a company. This study uses risk management theory

used to protect companies from bankruptcy or loss, hedging or hedging is one

alternative in risk management. Basically, the purpose of hedging is to protect an

asset (underlying asset) of a price change by using a derivative instrument. This

research uses dependent variable that is hedging or hedging, and independent

variables are DER, Financial Distress, Growth Opportunity, Liquidity, and firm

size.

3.1.2 Operational Definition

Here are the variables that being used in this research:

3.1.2.1 Hedging (Y)

Hedging, or hedge is a very popular term in futures trading. Where

hedging is one of the economic functions of futures trading, namely the transfer of

risk. Hedging is a strategy to reduce the risk of loss caused by price fluctuation.

Hedging itself uses derivative instruments such as options, futures contracts,

forward contracts, and swaps. In this study, looking at the consolidated annual

39
financial statements of automotive and allied products listed on the Indonesian

Stock Exchange for the period 2015-2016, if the company uses derivative

instruments as hedging activities, it is given a number 1 as a category that the

company engages in hedging activities, and is assigned a number 0 if the company

does Use the derivative instrument as a hedging activity.

3.1.2.2 Debt to Equity Ratio (DER) (XI)

Debt to Equity Ratio (DER) reflects the ability of a company to fulfil its

obligations as indicated by some part of its own capital or equity used to repay

debt. Debt to Equity Ratio (DER) is the ratio between total debt owned by the

company with total equity. Mathematically Debt to Equity Ratio (DER) can be

formulated as follows (Aang, 1997)

3.1.2.3 Financial Distress

Financial Distress is a measure that indicates difficulties in repaying debt

to creditors, or it can be called a corporate bankruptcy measure (Wikipedia). One

measure of financial distress can be explained from the calculation of Z-Score

proposed by Edward I. Altman. Mathematically Financial Distress can be

formulated with Z-Score method as follows:

40
Where:

3.1.2.4 Corporate Growth (X3)

High Corporate Growth Opportunities indicate an improved market value

among other companies, it makes the company confident to use external funds for

the use of company growth, in addition to making potential investors willing to

invest funds to companies that have a high growth opportunity of the company,

because Assessed can be a good investment vehicle. The value of the growing pro

fit of growth opportunities makes the company use more debt as a source of funds

(Chen, 2006). Company growth is a comparison between MVE (market value of

equity) and BVE (book value of equity). Mathematically can be formulated as

follows:

41
Where:

3.1.2.5 Level of Liquidity (X4)

Liquidity is the company's ability to fulfil the obligations that must be met

immediately (Sutrisno, 2000). Liquidity is indicating the ability of a company to

fulfil its obligations at the time of billing, a company capable of fulfilling its

financial obligations just in time means the company is in a liquid state.

Current Ratio = Current Assets / Current Liabilities

3.1.2.6 Firm Size (X5)

The size of a company makes the decision is different. The size of the

company can affect the ease of a company in obtaining sources of funding both

external and internal (Short and Keasy, 1999). The bigger a company the risk is,

the greater the risk, the more hedging activities to protect their assets.

Firm size can be proxy through:

Firm Size = In Total Asset

Variable identification and operational definition detail shown in this table:

No Variable Definition Measurements

1 Hedging Activity Use of derivative Do Hedging = 1

42
 instruments for hedging Do not Hedging = 0

facilities

2 Debt to Equity Ratio The ratio between Total Total Liabilities / Total

Liabilities and Total Equity

Equity

3 Financial Distress Company Performance Altman Z – Score

Measurement

4 Growth Opportunity Comparison between GO = MVE / BVE

MVE (market value of

equity) and BVE (book

value of equity)

5 Liquidity The ratio between current CR = Current Asset /

assets and current Current Liabilities

liabilities is proxied

through Current Ratio

6 Firm Size The overall ratio of total Firm Size = In Total Asset

assets

3.2 Sample and Population

Population refers to a set of people or objects that have similarities in one

or more things and form the underlying problem in a particular research (Santoso

and Tjiptono, 2001). The population in this study is a manufacturing company

43
with type of Automotive and Allied Products listed in Indonesia Stock Exchange

with period of period 2015 - 2016.

The type of company that will be the population of research is on the type

of automotive and allied product with several considerations, namely:

1. The number of competitors in the industry, making the company should be

able to minimize risk as effectively as possible, given consumers can move

to other products quickly. This makes the company much use of risk transfer

facilities such as hedging or hedging. So the possibility of companies to do

hedging activities is greater than the type of company other than automotive

and allied product.

2. Companies that are in the automotive and allied product type of population

are more often transacting with foreign parties, such as raw material

shipments, equipment delivery, and so forth. This resulted in the exposure of

foreign exchange transactions in various transactions on the company that

have the opportunity to do hedging activities.

3. Type of company automotive and allied product has the largest percentage

of hedging usage compared to type of company in manufacture product, that

is from 18 population in can sample amounting to 15 companies that meet

the criteria, there are 8 companies doing hedging activity, that is equal to

50,3% sample used.

Determination of selected sample from population that is company which

fulfil some criteria with purposive sampling method. The purposive sampling

technique is sampling based on the following criteria:

44
 1. A manufacturing company with Automotive and Allied Products type listed

on Indonesia Stock Exchange in period 2015 - 2016.

2. The Automotive and Allied Products Company continuously reports

financial data for the period 2015-2016.

The research sample could be seen in this table below:

N0 Name of Company Information

1 PT. Astra International Tbk Hedging

2 PT. Astra Otoparts Tbk Hedging

3 PT. Gajah Tunggal Tbk No hedging

4 PT. Goodyear Indonesia Tbk No hedging

5 PT. Hexindo Adiperkasa Tbk Hedging

6 PT. Indomobil Sukses Hedging

International

7 PT. Indospring Tbk No hedging

8 PT. Intraco Penta Tbk Hedging

9 PT. Multi Prima Sejahtera Tbk No hedging

10 PT. Multistrada Arah Sarana No hedging

Tbk

11 PT. Nipress Tbk No hedging

12 PT. Polychem Indonesia Tbk No hedging

13 PT. Selamat Sempurna Tbk Hedging

14 PT. Tunas Ridean Tbk Hedging

45
15 PT. United Tractors Tbk Hedging

3.3 Types and Sources of Data

The data used in this study is secondary data containing independent and

dependent variable data made by manufacturing companies listed on the BEI

during 2015 - 2016. Financial statement data obtained from the office of Capital

Market Information Centre (PIPM) is located at Jl. M. H. Thamrin No. 152,

Semarang.

3.4 Data Collection Method

Data collection methods used primarily by documentary study of the

annual financial statements and their notes from IDX for 2015 - 2016. For the

purposes of the analysis, pooled data (pooled data) for 2 years from the sample

company is used, where the results obtained As many as 75 observations.

3.5 Data Analysis Technique

3.5.1 Descriptive Statistics Analysis

The collected data will be analyzed with descriptive statistics first before

another analysis is performed. Descriptive statistical analysis is done to know the

description / description of the data.

3.5.2 Logistic Regression Analysis

Logistic regression is done when the researcher wants to test whether the

probability of occurrence of dependent variable can be predicted with the

46
independent variable (Ghozali, 2007). Logistic regression analysis technique does

not require assumption of data normality and test of classical assumption on

independent variable. Logistic regression does not have the normality assumption

of the independent variables used in the model, meaning the explanatory variables

do not have to have normal distributions, linear, or have the same variant in each

grip. Gujarati (2003) states that logistic regression ignores heteroscedastic

meaning that the dependent variable does not require homoscedastic for each

independent variable.

Logistic regression is used because it has some aspects of excess, hair et al

(1995) states that the first logistic regression relies on the accuracy of the

assumption of multivariate normality and the similarity of covariance variants of

all group matrices, where this situation is difficult to find. Secondly, even if this

assumption is found, many researchers prefer logit analysis because logit analysis

equals regressions with straightforward statistical tests and logistic regression

methods have the ability to combine nonlinear influences. Thirdly, logistic

regression is similar to discriminant analysis but more precisely used in certain

conditions such as abnormal data, there is multicollinearity between independent

variables and violation of other classical assumptions.

Kuncoro (2001) also said that logistic regression has several advantages over

other analytical techniques:

1. Logistic regression does not have the assumption of normality and

heteroscedasticity over the independent variables used in the model so that

47
 no classical assumption test is required even if the independent variable is

more than one.

2. The independent variable in logistic regression can be a mixture of

continuous, district, and dichotomous variables.

3. Logistic regression does not require the limitations of its independent

variables.

4. Logistic regression does not require independent variables in the form of

intervals.

Common model of logistic regression by Hair et al (1995):

Or

Where:

 P = Probability of the dependent variable

 E = Natural logarithm

 B0 = Regression constant

 B1, b2, …, bn = Regression coefficient

 X1, X2, …, X3 = Independent variable

48
Analysis of logistic regression model testing (Ghozali, 2006; Kuncoro, 2001;

Gujarati, 2003):

1. Assess the regression model.

Logistic regression is a regression model that has been modified so that its

characteristics are not the same anymore with a simple or multiple

regression model. Therefore, the determination of significance is statistically

different.

In assessing logistic regression models (including probit and tobit) can be

judging by Hosmer and Lemeshow's goodness of fit testing. This test is

performed to assess the hypothesized model for empirical data to match or

fit the model. If the Hosmer and Lemeshow's goodness of fit test is equal to

or less than 0.05 then the null hypothesis is rejected. Whereas if the value is

greater than 0.05 then the zero hypothesis cannot be rejected means the

model is able to predict the observed value or match the data.

Ho = model hypothesized fit with data

Ha = hypothesized model is not fit with the data

2. Assessing the overall model (overall model fit)

To assess the whole model is indicated by log likehood value (value -2 log

L) that is by comparing the value of -2 log L in the beginning (block number

= 0) where the model only insert constants with -2 log L after entering free

variable mode (block number = 1). If value -2 log L block number = 0>

value -2 log L block number = 1 then show good regression model. Log

likeness on logistic regression is similar to the term "sum of square error" in

49
 the regression model so that the decrease in log likehood shows better

regression model.

3. Testing regression coefficients

The regression coefficient test is performed to test how far all the

independent variables included in the model have an influence on the

dependent variable. Test results obtained from SPSS program in the form of

table variables in the equation. From the table obtained value coefficient

value wald statistic and significance.

To determine the acceptance or rejection Ho can be determined by using

wald statistic and probability value (sig) by way of wald statistic value

compared with chi square table whereas probability value (sig) is compared

with 5% significance level (α) with criterion:

a) Ho can not be rejected if wald statistic <chi square table and probability

value (sig)> level significance (α). This means that Ha is rejected or the

hypothesis stating the independent variables affect the dependent

variable is rejected.

b) Ho can be rejected if wald statistic> chi square table and probability

value (sig) <level significance (α). This means that Ha is accepted or

the hypothesis that the independent variable has an effect on the

dependent variable is accepted.

4. The regression coefficient can be seen from the value of B in the table view

of variables in the equation. The sign derived from the B value expresses the

influence of the independent variable on the dependent variable.

50
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