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Abstract
This study examined the roles of disclosure of Islamic Social Reports and Good
Corporate Governance in moderating the relationship of financial performance and
company’s value. Panel data of this study was gathering from companies listed on the
Jakarta Islamic Index in the year of 2011 – 2015 and was then analyzed using regression
model. The findings showed that financial performance positively influence firm’s value.
More interestingly, good corporate governance moderated the relationship of financial
performance and company’s value. Meanwhile, empirical data showed that Islamic Social
Report didn’t moderate the relationship financial performance and firms value.
Keywords: Islamic social report, good corporate governance, financial performance and
company’s value
Introduction
An information disclosure in accounting can be seen as a communicative method by which
corporate activity is reported in the public sphere (Kuasirikun & Sherer, 2004). Disclosure of
accounting information is perceived as a motivational tool to stimulate actions of decision
makers (Bedford, 1973). Investors need a variety of information to assess firm financial
performance and position for the purpose of making economic decision. Companies need to
take into account the various demands of decision makers in the environment in which they
operate. Companies are responsible for providing all parties with relevant information
concerning the ways of the companies create profit.
The information required by outside parties is generally related to the company’s
financial condition and performance. However, the current demand on accounting
information are widespread not only related to financial position and performance but also
related to those concerning employees, society and environmental issues (Hannifa, 2002).
Companies are assumed to have wider responsibilities (beyond economic responsibility) and
must fulfill the changing expectations of society. Therefore, corporate disclosure policies
need to change because of changes in the values, norms, belief, and attitudes of individuals
in the society, including Moslem society. This implies that the need for information within
the Moslem community may be different from that of the secular community.
The Moslem community expects companies to disclose certain information
voluntary to assist Moslem decision makers in meeting their spiritual needs (Haniffa &
Cooke, 2000). Such information includes information relating to the social responsibility to
the public because the disclosure of this information may affect their spirituality. Moslem
society will feel safe and confortable if they invest their money in companies that conduct
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the benefit of shareholders. The reason is that the management will gain an advantage if the
company earns profit. In fact profit is one of the company's performance benchmarks. The
higherof the company earn profit the higher the company’s performance. This will eventually
affect the increase in corporate value. It is important for companies to disclose information
about managerial ownership as a reflection of good corporate governance mechanism.
In addition to good corporate governance information, investors also need information
on corporate social responsibility. Disclosure of social responsibility is information about the
activities of companies that deal with the community. Disclosure of corporate social
responsibility is seen as important for both conventional companies and Islamic laws-based
ones. Companies claiming that they operate their business in Islamic ways are expected to
perform their activities in accordance with Islamic law and society. Information relating to
these activities can be included in the corporate social responsibility report.
Social responsibility is a responsibility of companies for generating profit by
protecting the environment, caring for employees, being ethical in commerce, and engaging
in community activities(Dusuki & Abdullah, 2007). Hannifa (2002)emphasizedthat the basis
of the social responsibility of Islam is to realize socio-economic justice (alfalah) and to
recognize the fulfillment of obligations to God, the society and the individual concerned, by
the parties involved in the economic activity. The parties involved in economic activities
should discloses how the company fulfills its obligations in accordance with sharia, including
corporate legal transactions, zakat to beneficiaries, sodaqah (charity/rewards), wages, the
purpose of any business venture and initiative to protect environment
The framework of social responsibility reporting in accordance with the Qur'an and
Hadith is known as Islamic Social Report (ISR) (Hannifa, 2002). Disclosures of transactions
in accordance with the Qur'an and Hadith include the disclosure of corporate transactions
relating to transactions that have been free from the elements of usury, speculation and
gharar, and revealingzakat, the status of Sharia compliance and social aspects such as
sodaqoh, waqof, qordulhasan, up to the disclosure of worship in the corporate environment.
The provision of the information aims to increase the value of the company.
Companies operating in Islam can be seen in the Jakarta Islamic Index. Jakarta
Islamic Index (JII) was established on July 3, 2000 by PT Bursa Efek Jakarta in cooperation
with PT Danareksa Investment Management (PT DIM). Jakarta Islamic Index (JII) is a stock
index for stocks that meet the criteria of sharia. The purpose of establishing the Jakarta
Islamic Index is to increase investor confidence to invest in sharia-based stocks and provide
benefits to investors in running Islamic sharia to invest in the stock exchange.
Jakarta Islamic Index serves as a guide for investors who want to invest their funds
based on Islamic law without fearofthe usury fund. The Jakarta Islamic Index also serves as a
benchmark for performance in choosing a halal stock portfolio. This study aims to
investigate the influence of financial performance on the corporate value of the companies
listed on the Jakarta Stock Index. Secondly, the study was intended to examine the roles of
the Islamic Social Report and good corporate governance in moderating the relationship of
financial performance and corporate value of the companies.
Literature review
The financial performance, firm value, Islamic social report and corporate governance can be
explained by agency theory, where there is a contractual relationship between principals and
agents. The principal is a party that provides benefits to other parties, and agents to perform
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Corporate governance is a set of processes, practices, policies, rules and institutions
that influence the management and control of a company. The corporate governance also
involve the relationships between the stakeholders and the company’s management
objectives. The main parties in corporate governance are shareholders, management and
board of directors.
Corporate governance deals with creating a balance between the company economic
and social goals including aspects of resource use, the use of power accountability and the
enterprises behaviour efficiently in their social environment (Aras & Crowther, 2009).
Companies need to implement good corporate governance because the owner of the capital
has an interest in the company by obtaining a return on their investment. Corporate
governance mechanism will determine every aspect of the company's management role and
strive to remain balanced and develop control mechanisms to increase shareholder value and
other stakeholder satisfaction. Companies need to run the governance effectively and
efficiently.
Factors influencing good corporate governance implementation consist of internal
and external factors(Daniri, 2005). External factors are some factors that come from outside
the company that greatly affect the successful implementation of good corporate
governance, are: a) the existence of a good legal system to ensure the enforcement of a
consistent and effective legal supremacy, b) support for good corporate governance
implementation from public sector/government institution which is expected to also
implement good corporate governance and clean governance towards good governance, and
c) there are examples of the best practices of corporate governance that can be an effective
and professional corporate governance implementation standard. While internal factors are
the driving force for the successful of corporate governance practices originating from within
the company. Some internal factors are a) The existence of a corporate culture that supports
the corporate governance implementation in the mechanism and management work system
in the company, b)Various company’s regulations and policies refer to the application of
corporate governance values, c) The company's risk control management is based on
corporate governance standard rules, d) The existence of an effective audit system within the
company to avoid any deviations that may occur, and e) The existence of information
disclosure for the public to be able to understand every movement and management steps in
the company so that the public can understand and follow every step of the development
and dynamics of the company from time to time.
The most effective and efficient corporate governance mechanism is how to decrease
the occurrence of interest conflicts and ensuring that the company achieves its goals. This can
be done by establishing rules and mechanisms that effectively direct the company's operational
activities and the ability to identify those with control different interests. Internal control
mechanisms within the company include share ownership and control structures undertaken by
the commissioner’s board (Iskander & Chamlou, 2000). Through ownership mechanisms, the
effectiveness of corporate resource management can seen from market reaction to earnings
announcement. Stock ownership enables the principal to control the management through the
process of preparing and publishing financial statements.
The board of commissioners is part of corporate governance mechanism (Beiner,
Drobetz, Schmid, & Zimmermann, 2003). The board of commissioners supervises and
advises the directors. The board of commissioners take personal responsibility for the
company's losses. The board of commissioners acts for the company's interest and other
stakeholders. The board of commissioners' capability to supervise is a positive function of
Hypotheses development
1. Financial performance and corporate value
Financial performance is seen as an indicator of the success of a company. Financial
performance can be seen from financial ratios of the company and can be used as an
investment evaluation tool. Thus financial ratios may reflect the level of corporate value,
because financial ratios reflect useful information in the capital market through disclosure
mechanism. The company has to disclose information of the company both financial
andnon-financial one. All information and future prospects about the company is
expected to affect the corporate value. Corporate value is determined by the earnings
power of the company's assets (Modigliani & Miller, 1958). The higher earnings power
the more efficient of the asset turnover or the higher profit margin obtained by the
company. This will finally have an impact on the corporate value. The arguments are
supported by findings of Nuryaman (2015), Wijaya and Linawati (2015), Alghifari et al.
(2013), and Ulupui (2007) describing that return on assets has a positive effect on the
corporate value. Thus, the alternative hypothesis is proposed as follow:
HI: Financial performance positively affects corporate value
2. Financial performance, Islamic social report and corporate value
Several studies on financial performance and corporate value indicate the inconsistency
of the results. Wijaya and Linawati (2015), Alghifari et al. (2013), and Ulupui (2007)
found that return on asset (ROA) had a positive effect on corporate value. But other
studies such as Susianti (2013), Sussanto and Carningsih (2013), Mutmainah and
Anggitasari (2012) and Setyorini (2011) found that return on asset (ROA) has no effect
on corporate value. The conflicting findings implies that there should be other factors
moderating the relationship. Therefore this study included the disclosure of Islamic social
report as a moderating variable. This is because the company seeks to maximize
corporate value by disclosing more information on financial statements. In addition to the
mandatory financial information, the company also discloses voluntary ones. With the
disclosure of Islamic social report, shareholders will provide companies with a positive
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appreciation as reflected on the increase in company’s stock price. This increase implies
the increase in corporate value. Hence, this study proposed the following hypothesis:
H2: The Islamic social report disclosure strengthens the relationship of financial
performance and corporate value.
3. Financial performance, good corporate governance and corporate value
Managerial ownership as a proxy of good corporate governance implementation is the
percentage of shares owned by directors, managers, and commissioners board. According
to agency theory, the separation between ownership and management of a company can
lead to agency conflicts as principals and agents have conflicting interests in maximizing
their own utility. Haruman (2008)pointed out that differences in interests between
management and shareholders, management will be cheating and unethical behaviour
that harms shareholders. It is needed a control mechanism that can align management
interests with to stocks prices.
Managers who also act as shareholders will increase the corporate value because
such increase will increase their wealth as a shareholder. The increase of the corporate
value will attract investors in investing their money to the company. Shareholders are
more likely to choose companies that have good and stable financial performance. Utama
and Yadnya (2016),Wijaya and Linawati (2015), Pd, Ak, and Hermawati (2014)and
Mutmainah and Anggitasari (2012) found that good corporate governance moderates the
relationship of financial performance and corporate value. Consequently, this study
claimed the following hypothesis:
H3: Disclosure of good corporate governance increases the relationship of financial
performance and corporate value
Research method
The population of this study is companies listed on the Indonesian Sharia Stock Index which
is consistently listed in the Jakarta Islamic Index for the period December 2011 to December
2015. The companies included in the calculation of the Jakarta Islamic Index from the period
of January 2011 to December 2015 and have full financial statements are 10 companies
which indicated on table 1:
Table 1: List of shares included in the calculation of the Jakarta Islamic Index (JII) and has a
complete financial report from 2011 to 2015
No Code Share
1 AALI Astra Agro Lestari Tbk
2 ASII Astra International Tbk
3 ASRI AlamSutera Realty Tbk
4 INTP Indocement Tunggal Prakarsa Tbk
5 KLBF Kalbe FarmaTbk
6 LSIP London Sumatra Indonesia Tbk
7 SMGR Semen Indonesia (Persero) Tbk
8 TLKM Telekomunikasi Indonesia (Persero) Tbk
9 UNTR United Tractors Tbk
10 UNVR Unilever Indonesia Tbk
Data analysis in this research consisted of descriptive analysis and multiple linear
regression analysis. Descriptive analysis was used to describe variables consisting of mean
value, and standard deviation. While multiple linear regression analysis in this research was
used to test the research hypothesis. Hypothesis testing was performed through several
stages of classical assumption test, simultaneous significance test and statistical test
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1. Company performance
71,51 AALI
ASII
ASRI
39,73 40,38 40,18 37,20 INTP
KLBF
LSIP
SMGR
Based on the financial performance curve (ROA), it can be seen that Unilever
Indonesia Tbk Company had the highest Return on Asset among other companies
starting from 2011 to 2015. While AlamSutera Realty TbkCompany had the lowest
return on asset among the companies listed in JII during 2011 - 2015.
2. Corporate Value
Figure 2: The corporate value curve listed in Jakarta Islamic Index 2011 - 2015
Based on the corporate value chart, it can be seen that Unilever TbkCompany
has the highest corporate value among other companies and Astra International
TbkCompany has the lowest corporate value among other companies listed in JII in
2011-2015. The majority of investors prefers to invest in Unilever Company
compared to other companies listed on the Jakarta Islamic Index.
Based on the graph above, the company that discloses the highest Islamic
Social Report is the Cement Indonesia PerseroTbkCompany and the lowest Islamic
social report disclosure is AlamSutera Realty Tbk Company. The disclosure of
Islamic social reports for companies listed on JII during 2011 - 2015 was still seen to
be minimal even though these companies had been categorized as sharia companies
by the capital market authority and financial institutions. Differences in levels of
disclosure of social responsibility of every company could be caused by internal and
external factorsof the company. One of the internal factors was the nature of the
operations and policies of the management of each company. While one external
factor was the pressure from the stakeholders of each sharia company to implement,
report and disclose social responsibility in accordance with the provisions of shariah.
In addition, the disclosure of social responsibility by sharia was voluntary.There is
no standard on the implementation of social responsibility in sharia, and there is no
standard on the principles of disclosure of social responsibility in sharia so that the
disclosure of corporate social responsibility was not the same.
AALI
1,12 1,12
ASII
ASRI
INTP
KLBF
LSIP
0,51 0,51 0,51 SMGR
TLKM
UNTR
UNVR
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In line with the Good Corporate Governance curve, the figure showed that
Cement Indonesia (Persero) Tbk had the greatest Corporate Governance among the
listed companies in the Jakarta Islamic Index from 2011 to 2015. While the lowest
Corporate Governance was Kalbe FarmaTbk. This meant that the ownership of shares
by the management in Semen Indonesia (Persero) Tbk more than other listed
companies in the Jakarta Islamic Index. In contrast, Kalbe FarmaTbk had less share
ownership compared to other listed companies in the Jakarta Islamic Index.
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 4,161 ,937 4,439 ,000
Performance 2,625 ,729 1,190 3,598 ,001
Performance_ISR -,008 ,008 -,290 -1,011 ,317
Performance_GCG 2,278 ,668 ,954 3,412 ,001
a. Dependent Variable: Corporate value
Source: SPSS output from processed secondary data
Simultaneous regression test with F test showed F value of 5,330 with significance
level 0,003. This means that company performance, and moderating variable (Islamic
social report and good corporate governance) influence to corporate value. While t test
can be explained as follows:
1. The effect of financial performance to corporate value
Hypothesis 1 which states that financial performance had a positive effect on
corporate value, was accepted. It was based on the value of t arithmetic of 3.598
with p value 0.001. If p value was less than 0.05, then the hypothesis was accepted.
Financial performance was the fundamental information used to make investment
and credit decisions. Thus, the information had a value that was marked by a
positive response to the company stock market price. This supports research
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means the disclosure of good corporate governance moderated the relationship
between financial performance and corporate value. Investors will invest in a
company by paying attention to information about the good corporate governance.
It meant in investing, investors will see the financial performance of a company if
the corporate governance is good. The higher the financial performance of a
company make the investor interest to invest in the company higher in which it will
have an impact on increasing the corporate value.
Based on the research results above, it indicates that companies should
implement good corporate governance as a requirement, not just compliance with
existing regulations. This is because there are long-term benefits in the
implementation of good corporate governance. They arebeing able to increase the
interest of investors to invest in the company and being able to improve the
company's reputation. In the implementation of good corporate governance, there
are several corporate governance mechanisms that need to be do. The corporate
governance mechanism used in this research was managerial ownership. Ownership
of management over common shares owned by the company is also one of factors
that can increase the corporate value. Manager’s ownership as the company
administrator will be different from the interests of shareholders. Managers can take
the necessary action to increase their personal interests against the efforts to
maximize corporate value.
Managerial ownership is essential for management in order to act as the
interest of the company. One of the interests is to increase the corporate value.
Directors/Managers and commissioners who are also shareholders will try to
increase the corporate value. Director / manager will lead the company while the
board of commissioners will also conduct supervision and give advice to the
directors for the interest of the company. It is because by increasing the corporate
value,it will increasethe wealth of shareholders as well. By increasing corporate
value, will attract investors in investing in the company. The corporate value will
increase if the ownership of the management of the company's shares is increasing.
The management will try as much as possible in increasing profit. Increased profit
of a company is one of indicators that show the occurrence of financial performance
improvement. The improvement of financial performancewill increase the
attractiveness of investors and potential investors to invest their capital into the
company. Increasing investor interest in investing shares in a company indicates that
corporate value is increasing.
Conclusion
Based on the statistical test results and discussion that has been described above, it was
concluded that the company's financial performance which was proxied by the return on
assets (ROA) affect the corporate value. The company's financial performance could increase
the corporate value, if the governance expressed in the financial statements showed good
governance. The good governance was revealed in the disclosure of good corporate
governance. Good corporate governance can be realized if the company’s shares are owned
by managers, directors and commissioners. With such managerial ownership, managers and
directors will make every effort to increase profits. Increased corporate earnings will increase
the return on assets of the company that will result in corporate value increased. Likewise,
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