The Impact of State vs Foreign Ownership and Corporate Governance

Ranking on Profitability and Firm Value of Banks

Tri Lestari

, Windu Mulyasari

Accounting Department, Universitas Sultan Ageng Tirtayasa, Jalan Raya Jakarta KM 4, Serang, Indonesia

Keywords: Banking Industry, Corporate Governance, Firm Value, Foreign Ownership, Profitability, State Ownership.

Abstract: The purpose of this study is to analyze the impact of state ownership (Gov), foreign ownership (foreign), and

corporate governance (CG) on profitability and the implication on firm value. This study hypothesizes that

profitability mediates the impact of Gov, foreign, and CG on firm value. The banking sector was chosen as

the object of the research because this sector is quite vulnerable to the global financial crisis. The population

of this study consists of banking companies listed on the Indonesia Stock Exchange (IDX) in the period of

2014-2018. Data were analyzed using multiple regression models and processed with SPSS software. The

results of the data analysis show that there are significant effects of CG and foreign on profitability, and

profitability and foreign on firm value. However, the sign of the foreign effect is negative. The mediating

effect of profitability only found on the effect of CG on firm value.

1 INTRODUCTION

The object of observation of this study is the banking

industry listed on the Indonesia Stock Exchange

(IDX). This study highlights the fundamental factors

of a company that determined the bank's

performance, which is the concern of previous

researchers. These factors are the implementation of

Corporate Governance (CG) and ownership structure.

Bank Indonesia (BI), the central bank of

Indonesia, issued the Bank Indonesia Regulation

No.13/1/PBI /2011 concerning the evaluation of the

soundness level of commercial banks. In this

regulation, banks are required to conduct self-

assessment of their CG implementation. This policy

was issued as a response to the weakness of CG

implementation in the Indonesian banking industry.

However, in 2013, BI imposed sanctions on four

banks with poor CG implementation. These four

banks are PT. Bank Mega Tbk, PT. Bank Panin

Syariah Tbk, PT. Bank Jabar Banten Tbk, and PT.

Bank Mestika Dharma.

The ownership structure is important to examine

because this factor is important in influencing

banking performance. Although the operation of the

company is carried out by management, all

management policies cannot be separated from the

influence of the owner because strategic decisions

taken by management must get approval from

shareholders. The ownership structure of companies

in Indonesia, on average, is still concentrated in the

majority owner. Banking in Indonesia, which is listed

on the IDX, is dominated by two majority ownership,

namely the government and foreign.

Previous studies (Sakai and Asaoka, 2003;

Premuroso and Bhattacharaya, 2007; Nurfaza et al.,

2017) have analyzed the effect of CG on firm

performance. Likewise, also, the ownership structure

of bank performance (Novado and Hartono, 2014).

However, the studies found different and inconsistent

results.

Meanwhile, some previous studies also linked the

influence of CG and ownership structure with firm

value (Kobeissi, 2010; Rahman and Reja, 2014;

Novado and Hartomo, 2014). A good CG

implementation should be captured as good news by

the market so that it can increase the value of the

company as measured by the market value of its

equity. Large foreign ownership is also often assumed

that there is better management in the company, so

the company will perform better. This condition will

ultimately be able to increase the value of the

company. However, these studies also provide

inconsistent results.

For these inconsistent results, this study is

interested in reexamining using CG measurements

that are different from previous studies. Furthermore,

Lestari, T. and Mulyasari, W.

The Impact of State vs Foreign Ownership and Corporate Governance Ranking on Proﬁtability and Firm Value of Banks.

DOI: 10.5220/0009960204690474

In Proceedings of the International Conference of Business, Economy, Entrepreneurship and Management (ICBEEM 2019), pages 469-474

ISBN: 978-989-758-471-8

469

this study also models that bank performance as

mediating the effect of CG and ownership structure

on firm value.

The results of this study provide the following

contributions: 1). To find out whether bank

ownership factors affect company performance and

value, 2) to find out whether the ranking of CG self-

assessment results is able to influence company

performance and value, 3) to find out whether the

bank's performance mediates the effect of ownership

and CG on the company's value.

The results of this study are expected to provide

benefits for 1) regulators, in making policies

regarding the supervision of the implementation of

CG and ownership structures in banks, 2) investors,

in using their voting rights to encourage management

to perform better and ultimately will increase the

value of the company.

This paper is organized as follows: the first

section provides the introduction of the research, the

2nd section provides a literature review, the 3rd

section shows the research method, the 4th section

documents the research findings and provides

discussion, and the 5th section concludes.

2 LITERATURE REVIEW AND

HYPOTHESIS DEVELOPMENT

2.1 State versus Foreign Ownership,

Profitability, and Firm Value

Government ownership is measured as the percentage

of the number of shares of companies owned by the

government. Whereas foreign ownership is measured

as the percentage of shares owned by foreign

institutions and individuals.

An opinion says that banks whose shares are

majority-owned by the government will perform

worse than non-government banks. This opinion is

based on that in general, and government banks are

involved in the interference of political interests in

their decision making (Kumara and Yasushi, 2011).

Meanwhile, another opinion suggests that banks

owned by foreign parties have advantages, namely

innovation and better risk management, and access to

wider financial markets (Bonin et al., 2005). This

opinion is supported by the results of Cornett (2009),

which concludes that state-owned banks in Asian

countries generally underperform compared to non-

government banks. So are the results of research

Kobeissi (2010) and Rahman and Reja (2014), which

found a significant negative effect of government

ownership on bank profitability.

The results of previous research on the effect of

foreign ownership on banks' performance show

inconsistent findings. Kobeissi (2010) and Heryanto

(2012) research found significant positive influences,

while Xu and Hu (2013) and Rahman and Reja (2014)

found the opposite results.

For banks in Indonesia, these opinions and

findings are supported by the results of Chalid's

(2013) study, which concluded that state banks have

lower profitability and efficiency levels than national

private banks. However, there are also studies that

find different things. For example, Sabrina and

Muharam (2015) found that government ownership

and foreign ownership both positively influenced

profitability, while Novado and Hartomo (2014) did

not find any significant effect from the two variables.

Based on these arguments, this study proposes

these two hypotheses:

: ownership structure affects the profitability of

banks.

: ownership structure affects the firm value of

banks.

2.2 Corporate Governance, Profitability

and Firm Value

Premuroso and Bhattacharaya (2007) show that the

profitability of companies measured as ROE and

NPM have a significant positive relationship with

good corporate governance. So that the better the

management of the company, the company will be

more able to produce better returns.

Maksum (2005) states that good corporate

governance implementation makes a better decision-

making process, then will produce optimal decisions.

Hence, it will improve efficiency and create a

healthier work culture. The results of this study also

support the results of previous studies conducted by

Sakai and Asaoka (2003), which empirically proved

that the implementation of good corporate

governance would positively influence company

performance. Likewise, the results of Premuroso and

Bhattacharaya's research (2007) show that CG has a

significant positive effect on profitability.

Siallagan and Machfoedz (2006) argue that CG is

a system that can regulate and control the company so

that it can provide increased corporate value to

shareholders. The implementation of Good Corporate

Governance is believed to increase the value of the

company. Good Corporate Governance is a system

that can regulate and control the company so as to

provide increased corporate value to shareholders.

ICBEEM 2019 - International Conference on Business, Economy, Entrepreneurship and Management

470

Herawati (2008) and Wahyudi (2010) found that

CG is able to influence firm value. However, different

results found Nurfaza et al. (2017) which shows that

CG measures are not able to have a significant effect

on firm value.

So, the next hypotheses are:

: corporate governance affects the profitability of

banks

: corporate governance affects the firm value of

banks

2.3 Profitability and Firm Value

Profitability is the level of profit achieved by the

company when carrying out its operations. Better

profitability growth means the prospect of the

company in the future is considered better as well.

According to the signaling theory, it is good news for

the market. If the company's ability to generate profits

increases, the share price will also increase (Husnan,

2001: 317). Rising stock prices reflect good company

value for investors. Suharli (2006) states that the

value of shares will increase if the value of the

company increases marked by a high rate of return on

investment to shareholders.

The rate of return on investment to shareholders

depends on the profits generated by the company. The

high level of profit generated, it means that the

prospect of a company to carry out its operations in

the future is also high so that the company's value

which is reflected in the company's share price will

also increase.

Soliha and Taswan (2002) suggest that high

profits will give an indication of a good company

prospect so that it can trigger investors to participate

in increasing share demand. Furthermore, increasing

stock demand will cause the value of the company to

increase. This phenomenon shows that the level of

profitability is an incentive for increasing the value of

the company.

: Profitability affects the firm value of banks

As explained in the previous hypothesis

development, ownership structure, and CG influence

the profitability of the firm's value, and profitability

also affects the firm's value. Therefore, this study

proposes the mediating effect hypothesis as follow:

: profitability mediate the effect of ownership

structure and CG on firm value of banks

3 RESEARCH METHOD

The sample includes 31 banks listed on the

Indonesian Stock Exchange from 2014 to 2018. This

research uses data pooling results in 155

observations. Nine observations were omitted due to

data outliers; hence, the final sample consists of 146

observations. The data were obtained from the annual

reports of the banks that downloaded from the

website of the Indonesia Stock Exchange.

Independent variables are corporate governance

(CG), government ownership (Gov), foreign

ownership (Foreign). The dependent variable is the

firm value (PBV) and profitability (RoA) as an

intervening variable. Corporate governance measured

as the score of corporate governance self-assessment

of the bank. Government ownership measured as a

percentage of company shares owned by the

government. Foreign ownership measured as

percentage shares owned by foreign investors or/and

foreign institutions. Profitability is proxied by return

on assets. Firm value is proxied by price to book

value. This study uses the firm size that proxied by

the natural log of total assets as the control variable.

This study used path analysis by estimating two

regression models, as follow:

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Where:

PBV: price to book value of equity

RoA: return on asset

CG: score of corporate governance self-assessment,

the smaller score indicates a better CG

implementation.

Gov: government ownership, the percentage of shares

held by the government.

Foreign: foreign ownership, the percentage of shares

held by foreign institutions/individuals.

TA: log natural of total assets

For Model (1), this study regresses the score of

corporate governance self-assessment, government

ownership, and foreign ownership on profitability.

While, for Model (2), this study regress profitability,

the score of corporate governance self-assessment,

government ownership, and foreign ownership on

firm value. Company size is added as the control

variable for both models. Then, this study employed

the Sobel test to check the mediating effect of

profitability and test the sixth hypothesis.

The Impact of State vs Foreign Ownership and Corporate Governance Ranking on Proﬁtability and Firm Value of Banks

471

4 RESULTS AND DISCUSSION

4.1 Descriptive Statistics

Table 1 shows the descriptive statistics of the data

consisting of minimum, maximum, mean, and

standard deviation for all variables. Firm size (LnTA)

has the highest standard deviation. Meanwhile, the

profitability (RoA) is the lowest.

Table 1: Descriptive statistics

N Min Max Mean

Std.

Dev.

PBV

146 0.025 5.890 1.399 1.040

ROA

146 -0.011 0.031 0.012 0.008

146 1.000 3.020 1.917 0.437

Gov

146 0.000 0.800 0.145 0.270

Forei

146 0.000 0.980 0.369 0.336

146 28.010 34.755 3.607 1.652

PBV is the price to book value of equity, RoA is the return on

Assets, CG is the score of corporate governance self-assessment,

Gov is the percentage of shares held by the government, Foreign is

the percentage of shares held by the foreign

institutions/individuals, and TA is the Log natural of total assets.

4.2 Regression Analysis

Table 2 shows the adjusted R square and F value for

the model (1) and (2). The results in both models

show a significant F value. Table 3 and Table 4

present the coefficient variable, t statistics, and

significant value as the results of the regression model

(1) and (2). Then, Table 5 figure out the output from

the Sobel test.

For model (1), this study found that CG, foreign

ownership, and size have a significant effect on

profitability. Meanwhile, from the model (2), this

study found only profitability and foreign ownership,

which have significant effects on firm value. From the

Sobel test result, this study found that profitability has

a significant value to mediate the effect of CG on firm

value.

Table 2: Goodness of Fit Model

Adj.

R Square F Sig.

Model (1)

0.308 17.097 0.000

Model (2)

0.074 3.303 0.008

Table 3: Regression Analysis Results of Model (1)

Coef. t-stat Sig.

CG --

>RoA

-0.004 -2.373 0.019

Gov --

>RoA

0.000 0.895 0.372

Foreign-->

RoA

0.000 -1.816 0.072

TA -->

RoA

0.002 5.067 0.000

***

RoA is the return on Assets, CG is the score of corporate

governance self-assessment, Gov is the percentage of shares held

by the government, Foreign is the percentage of shares held by the

foreign institutions/individuals, and TA is the Log natural of total

assets.

Table 4: Regression Analysis Results of Model (2)

Coef. t-stat Sig.

RoA --

>PBV

30.805 2.577 0.011

CG -->PBV

0.054 0.249 0.804

Gov --

>PBV

-0.005 -1.355 0.178

Foreign-->

PBV

-0.008 -2.682 0.008

***

TA -->

PBV

0.034 0.449 0.654

PBV is the price to book value of equity, RoA is the return on

Assets, CG is the score of corporate governance self-assessment,

Gov is the percentage of shares held by the government, Foreign is

the percentage of shares held by the foreign

institutions/individuals, and TA is the Log natural of total assets.

Table 5: Results of Sobel Test

Sobel t

stat. Sig

CG-->RoA-->PBV

-216.632 0.030 **

Gov-->RoA-->PBV

0.932 0.351

Foreign-->RoA-->PBV

0 1

PBV is the price to book value of equity, RoA is the return on

Assets, CG is the score of corporate governance self-assessment,

Gov is the percentage of shares held by the government, and

Foreign is the percentage of shares held by the foreign

institutions/individuals.

4.3 Discussion

Regression results from the model (1) show a

significant effect of CG, foreign ownership, and total

assets on RoA. The first implication of this result is

that the better the implementation of CG, the higher

the profitability achieved by the bank. Remember that

a smaller CG self-assessment score indicates better

CG quality. This finding supports the results of

ICBEEM 2019 - International Conference on Business, Economy, Entrepreneurship and Management

472

research by Sakai and Asaoka (2003) and Premuroso

and Bhattacharaya (2007), which concluded that the

implementation of CG would be able to support

companies to achieve good performance.

This study found no significant effect of

government ownership on bank profitability.

Meanwhile, foreign ownership has a negative

influence on profitability. This result shows that the

sample of banks used in the study, the greater the

foreign ownership has lower financial performance.

This finding does not support the opinion that

foreign-owned banks perform better, and banks

owned by the government perform worse. This result

is in line with the findings of Novado and Hartomo

(2014).

Regression results from the model (2) show that

only profitability and foreign ownership have a

significant effect on firm value. Meanwhile, CG,

government ownership, and company size were

unable to influence firm value significantly.

As predicted, profitability has a significant

positive effect on firm value. This finding confirms

the signaling theory, which states that good

profitability is a positive signal for the market, so

when profitability achieved by banks improves, it will

be reflected in an increase in its stock price. These

results support the results of the study of Sumarno et

al. (2016) and Makhdalena (2016). This study

concluded that the profitability of companies has an

important role in influencing the value of companies

in Indonesia.

Meanwhile, CG does not have a significant

influence on firm value. But this influence becomes

significant when mediated by profitability. This effect

can be inferred from the Sobel test results (Table 5),

which show that the Sobel test value is significant on

the effect of RoA meditation on the influence of CG

on PBV. These results answer the findings of

previous studies, which found no significant effect of

CG on firm value (Nurfaza et al., 2017). This can be

interpreted as when the market finds that the CG

implementation of a company is good, but

profitability is not good, then that signal can not

influence the market decisions.

The results for the effect of ownership on firm

value also show different results. The effect of

government ownership on company value is not

significant, while foreign ownership has a negative

effect. These results are linear with the effect of these

variables on profitability. Foreign ownership has a

negative effect on profitability, as well as its effect on

the value of the company.

5 CONCLUSIONS

Good governance in the bank industry is very

important to implement. As an industry that receives

public trust to manage their finances, banks must have

accounting systems and procedures. Management

guarantee from the banking industry is influenced by

the monitoring function in the banking sector. This

monitoring function can be seen from the ownership

structure and corporate governance. This study aims

to obtain evidence of whether corporate governance,

the ownership structure of the bank industry, affects

profitability, and corporate value.

The results of this research show that there is a

significant effect of CG, foreign ownership, and total

assets on profitability. The better implementation of

CG will have an impact on higher profitability

achieved by the bank. However, this study does not

found the impact of government ownership on bank

profitability. Meanwhile, foreign ownership has a

negative influence on profitability. This result shows

that the sample of banks used in the study, the greater

the foreign ownership has lower financial

performance.

This study also found that profitability and foreign

ownership have a significant effect on firm value.

Meanwhile, CG, government ownership, and

company size were unable to influence firm value

significantly. This study found a mediating effect of

profitability on the effect of CG on firm value.

This study subject to several limitations. First, the

study only uses a proxy of profitability. Using more

than one indicator of profitability may give different

insights. Second, this study observes the ownership

structure as the monitoring functions of the

management. This variable does not impact

significantly on firm value. Further study can develop

other variables of monitoring function of the bank

that may effect firm value.

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