Determinants of Firm Value on Mining Companies in Indonesia

Annisa Fitri

, Eka Nuraini Rachmawati

, Hasiholan Serasi Sinamo

and Randi Saputra

Master of Management Program Student Islamic, University of Riau, Indonesia

Master of Management Program at the Islamic, University of Riau, Indonesia

Faculty of Economic and Business Student Islamic, University of Riau, Indonesia

Keywords: Capital Structure, Profitability, Hedging Decisions, Managerial Ownership and Firm Value.

Abstract: The purpose of this study was to analyze the determinants factors that influence the firm value of mining

company in Indonesia. The factors namely capital structure, profitability, hedging decisions and managerial

ownership. The population in this study are mining companies listed on the Indonesia Stock Exchange for the

2016-2021. The sampling technique used was a purposive sampling method, which obtained a sample of 41

companies. The type of data used is secondary data obtained from the company's annual report on the

Indonesia Stock Exchange. The data analysis in this study used multiple regression analysis. The results

showed that all independent variables simultaneously affected firm value. But partially, capital structure,

hedging decisions, and managerial ownership do not have a significant effect on firm value, while profitability

has a significant effect on firm value.

1 INTRODUCTION

The company is a form of business entity that has the

goal of maximizing profit by utilizing labor, capital,

and resources. Maintaining the company's operations

is very important for its sustainability, especially

when it comes to the welfare of its owners. The goal

of companies that have gone public is to generate

profits and increase shareholder prosperity by

increasing the value of the company. The maximum

value of the company can be seen from the share

price, this is the company's goal in addition to getting

maximum profits, the welfare of shareholders and

company owners (Hartono, 2009: 124).

According to Wiagustini (2010: 8), the buyer will

use the value of the company as the basis for payment

when selling it. When the company value is high, the

prosperity received by shareholders will also be

higher.

According to Salvatore (2011: 9) the factors that

affect investors' perceptions of the company are seen

from the value of the company, because company

value is an indicator used to assess the company as a

whole.

There are also determinants of firm value, namely:

capital structure, profitability, company growth,

funding decisions, dividend policies, investment

decisions, and company size. These factors have a

consistent relationship and influence on firm value

(Salvatore, 2011:11).

According to Prasetia et al (2014) through stock

returns, firm value can be measured because the goal

of investors to invest is to get high returns with a

certain level of risk.

Mint Ha and Minh Tai (2017) define capital

structure as the comparison of long-term debt and

total equity. Modigliani & Miller (1958) is the one

who put forward the theory of capital structure which

explains that the value of the company will increase

if the interest costs for using debt so as to reduce tax

payments. the conclusion that firm value is influenced

by capital structure.

Profitability is the company's ability to make a

profit. The higher the company's management, the

higher its profit level (Sutrisno, 2012). The stock

price will rise as investors increase the number of

purchases of company shares that are highly

profitable. High stock prices which have an impact on

the high value of the company.

According to Ross, Westerfield, Jordan, Lim &

Tan (2016: 344), international transactions can lead

to foreign currency exposure risks or currency

exchange rate fluctuations. This risk affects the

company's cash flow, which has an impact on its

value. With hedging, companies can be protected

from fluctuations in foreign exchange. This is in line

Fitri, A., Rachmawati, E., Sinamo, H. and Saputra, R.

Determinants of Firm Value on Mining Companies in Indonesia.

DOI: 10.5220/0012697200003798

Paper published under CC license (CC BY-NC-ND 4.0)

In Proceedings of the 2nd Maritime, Economics and Business International Conference (MEBIC 2023) - Sustainable Recovery: Green Economy Based Action, pages 187-194

ISBN: 978-989-758-704-7

187

with research conducted by Niswatuhasanah and

Hendratno (2020), Henny and Prima (2018), Amrie

Firmansyah, Eko Bayu Dian Purnama (2020),

Zaminor, et al (2021), hedging with derivative

instruments has a positive effect on company value.

Amrie and Eko (2020) research shows that hedging

with derivative instruments does not have any impact

on company value.

The process of maximizing firm value will have

an impact when there is a conflict of interest between

the agent (the management) and the principal (the

company), which is often referred to as the agency

problem. In practice, agents or management often

have different interests and goals from the principal,

agents or management often deviate from the

company's main goals and are more concerned with

their personal interests. The agent's actions will incur

additional costs for the company and affect the value

of the company. In an effort to minimize conflicts

between managers and shareholders or agency

problems, namely with a supervisory mechanism that

can align these interests which results in the

emergence of agency costs. The use of institutional

and managerial ownership of shares is a way to

reduce agency costs.

Managerial ownership is ownership of shares by

management, specifically the board of commissioners

and the company's board of directors. The managerial

team is a group that plays a role in decision-making

in the company. Managerial share ownership is

believed to encourage management to act in

accordance with shareholder wishes, which can

ultimately lead to an increase in company value.

Formulation of the Problem

The problem formulation for this study is as follows:

Do capital structure, profitability, hedging

decisions, and managerial ownership have a

significant effect on the company value of

mining companies listed on the Indonesia Stock

Exchange in 2016-2021?

Research Purposes

Based on the description of the background of the

problem, the purpose of this study:

To determine the effect of capital structure,

profitability, hedging decisions and managerial

ownership on firm value in mining companies

listed on the Indonesia Stock Exchange in 2016-

2021.

2 LITERATURE REVIEW

2.1 Agency Theory (Agency Theory)

Jasen & Meckling's (1976) agency theory explains

agency relationships, in which the management and

control of resources is governed by managers (agents)

and owners of economic resources (principals) who

are bound by a set of contracts (nexus of contracts).

Agency theory explains the separation of the

management function (manager) from the ownership

function (shareholders) in the company. According to

Wongso (2012) agency relationships occur when one

or more people hire other people to provide services

and then give decision-making authority to agents

(managers) and cause information asymmetry

between managers and shareholders. According to

Suseno (2012), agency problems are caused by the

fact that management owns more information than

shareholders.

2.2 The Value of the Company

Producing goods and services for sale by organizing

and combining various resources is the meaning of

the company (Salvatore, 2005). The company's

theory aims to maximize short-term profits. However,

in practice, companies often sacrifice short-term

profits to increase profits for the future or long-term.

The theory of the company (theory of the firm) now

assumes that the main goal of the company is to

maximize the wealth or value of the company.

2.3 Determinants of Firm Value

Several determinants of company value (Selvi and

Ita, 2019) include capital structure, probability,

company growth, funding decisions, dividend policy,

company size, and hedging.

• The capital structure is a balance between

long-term debt and equity owned by the

company.

• Profitability is the ability of the company to

generate profits from its operational

activities.

• The company's growth is an indicator that

the company gets an increase in profits every

period and is sustainable.

• Funding decisions are decisions regarding

capital structure, namely regarding the

determination of the composition of debt

and equity.

MEBIC 2023 - MARITIME, ECONOMICS AND BUSINESSINTERNATIONAL CONFERENCE

188

• Dividend Policy is a decision to determine

the right profit allocation between dividend

payments and adding to the company's

retained earnings balance.

• Investment decisions are a combination of

types of assets determined by the company,

tangible and intangible used to produce

goods or services.

• The size of the company is seen from the

total assets owned and can be used as

company operations.

• Hedging is a company's way of minimizing

the risk of changes in foreign currency

exchange rates that will affect the company's

costs and income.

2.4 Effect of Capital Structure on Firm

Value

The capital structure is a very important part of a

company. Company activities are carried out based

on the use or utilization of the capital structure. Dhani

& Utama (2017) state that own capital and capital

with obligations are the notions of capital structure.

Large-scale companies require very large sources of

funds and may require capital or funds from outside

investors.

The capital structure is a financial structure that

combines debt and equity over a long period of time.

Whether capital structure is good or bad is a very

important issue for companies because it has a direct

effect on the company's financial position which

ultimately affects company value (Brigham F. &

Houston, 2010). According to Yuliana, et al (2013)

there is a link between capital structure theory and

changes in capital structure to firm value assuming

constant investment decisions and dividend policies.

The optimal capital structure for the company can be

achieved by maximizing the company's stock price,

as suggested by Brigham Dah Houston (2013). The

optimal capital structure is the company's funding

mix that can maximize its value.

The results of previous research show different

results on the variable capital structure, such as

research by Heven & Fitty (2016) finding that capital

structure has a simultaneous effect on firm value,

while research by Dedi & Nurhadi (2019) found that

capital structure does not affect firm value.

2.5 Effect of Profitability on Firm

Value

Profitability is the ability of a company to generate

profit from its operations. Profitability is the standard

of success for a company. Apart from being an

indicator of the effectiveness and efficiency of

resource use, profitability is also a reference for

investors in investing. Therefore, profitability

becomes a fundamental aspect for the company .

Profitability growth can increase the trust and

interest of potential investors who will invest in a

company because the goal of investors investing is to

get optimal returns from the investments made. The

value of the company will increase when investors

respond positively to the stock price.

One way to find out how far the rate of return from

an investment in a company is going is to look at the

company's profitability. Investors will invest their

funds in companies that are included in the category

of companies that provide benefits in the future by

buying shares of these companies so that this will

push share prices higher.

Haugen and Baker (1996) proved that the greater

the profit distributed from the profitability of a large

company, the more it will increase the value of the

company. This is supported by research conducted by

Baihaqi, Geraldina, and Wijaya (2021), which found

that profitability has a significant positive effect on

company value.

2.6 Hedging Decisions on Firm Value

According to Ayuningtyas and Santi (2019), foreign

exchange exposure is a level of sensitivity to changes

in the real value of assets, operating income and

liabilities expressed in domestic currency to changes

in exchange rates that cannot be anticipated.

Exposure to changes in exchange rates is divided into

three types, namely: transaction exposure, economic

exposure, and accounting exposure.

Actions to reduce risk and exposure are known as

hedging, changes in foreign exchange rates will cause

exposure (Ayuningtyas and Santi, 2019). According

to some researchers, hedging with derivatives is one

way to increase firm value. The use of hedging with

the use of derivative instruments can reduce the risk

of increasing company value.

Through the use of derivatives in an effort to

control corporate risk and also to protect against

uncertainty, another use for using derivatives is to

reduce risks caused by poor diversification of human

and capital capital. invested in the company. An

increase in firm value is connected to a reduction in

risk based on risk aversion, as shareholders want to

invest in certain returns (Gastineau and Kritzman,

1999). So, reducing risk through hedging can increase

the value of the company. This is in line with research

conducted by Zaminor, Razali, and Anwar (2021),

Determinants of Firm Value on Mining Companies in Indonesia

189

who found that hedging using derivatives has a

significant positive effect on company value. In

contrast to the research conducted by Amrie and Eko

(2020) the results of hedging with derivative

instruments have no effect on company value.

2.7 The Effect of Managerial

Ownership on Firm Value

Managerial ownership is a situation where the

manager has company shares in the company he

manages or it can also be called that the manager is a

company shareholder. Managerial ownership

becomes an interesting matter when associated with

agency theory. In agency theory, the relationship

between managers and shareholders is shown by the

relationship between agents and principals

(Schroeder et al. 2001). Where the agent (manager)

is given responsibility by the principal (shareholder)

to run the business in the interest of the principal.

The interests of internal parties and shareholders

can be linked to the existence of managerial

ownership, so that decisions taken by management

will be better and the impact will increase the value

of the company. The ability to monitor company

activities is affected by the size of managerial

ownership (Endraswati, 2012).

This is supported by several studies that aim to

explore the relationship between managerial

ownership and firm value. Zaminor, Razali and

Anwar (2021) found that managerial ownership has a

positive effect on firm value, in companies engaged

in derivative positions on the Malaysian stock

exchange in 2012-2017. However, in research

conducted by Wida and Suartana (2014), it was stated

that managerial ownership has no effect on firm

value.

3 RESEARCH METHODOLOGY

3.1 Type, Location and Time of

Research

The type of research used is to use quantitative

research methods. The location of the research was

carried out in the Building of the Faculty of

Economics and Business, Riau Islamic University, Jl.

Kaharuddin Nasution No.113, Marpoyan, Pekanbaru,

Riau with research data obtained from the official

website of the Indonesia Stock Exchange

(www.idx.co.id). The time of the research was carried

out from November 2022 to May 2023.

3.2 Population and Research Sample

The research sample used is 56 companies listed in

the mining sector on the Indonesia Stock Exchange in

2016-2021. The sampling technique in this study used

purposive sampling with the criteria of companies

listed on the Stock Exchange and reporting financial

reports consistently. The final sample results included

in the criteria are 41 companies.

3.3 Data Collection Sources and

Methods

This study utilizes secondary data that is derived from

company consolidated financial statements. The data

was obtained from the 2016 -2021 financial report

data base published by the Indonesia Stock Exchange.

Documentary data collection technique, by taking

from the second source which is available on the

official website of the Indonesia Stock Exchange

www.idx.co.id.

3.3 Data Analysis Method

The method used to analyze the data in this study is

multiple regression using the EVIEWS 10 tool.

Table 1: Descriptive Statistical Analysis.

Variable

Min

Max

Means

std.

Deviation

The value of the

company

-20,397

18,761

1,268

2,842

Capital Structure

-15435

57,15

-62.92

984.46

Profitability

-187,201

57,614

-0.422

12,546

Hedging

decisions

0.292

0.455

Managerial

ownership

67,440

4,368

11,994

The data analysis used in this study is descriptive

statistical analysis and multiple regression analysis.

The information provided in the descriptive statistics

is minimum, maximum, mean and standard deviation.

The results of the descriptive analysis based on

table 1, that the lowest company value is -20.397,

which is owned by PT. Energi Mega Persada Tbk and

the highest company value is 18,761 which is owned

by PT. Atlas Resources Tbk. The average company

value is 1.268, which shows that the average stock is

being traded at an overvalued price (above book

value). The standard deviation of 2.842 indicates that

MEBIC 2023 - MARITIME, ECONOMICS AND BUSINESSINTERNATIONAL CONFERENCE

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the distribution of company value data is greater than

the average value.

The capital structure variable has the lowest value

of -15435 which is owned by PT. Capitalinc

Investment Tbk and the highest value of 57.15 is

owned by PT. Capitalinc Investment Tbk. The

average capital structure of companies in the study

was -62.92, which shows that companies rely more

on debt in their operational activities. The standard

deviation of 984.46 indicates that the distribution of

capital structure data is greater than the average value.

The profitability variable has the lowest value of -

187.21 where the company that has this value is PT.

Capitalinc Investment Tbk and the highest value is

57,614 and is owned by PT. Capitalinc Investment

Tbk. The average profitability of companies in this

study is -0.422 and this shows that mining sector

companies during this study period have not been

able to generate maximum profits for their

companies. The standard deviation of profitability is

12.546 which indicates that the distribution of

profitability is greater than the average value.

The hedging decision variable in this study is

determined by ordinal data, with 1 being the

company's use of hedging and 0 being the company's

lack of use of hedging.

The managerial ownership variable has the lowest

value of 0 and the highest value is 67.44 and the

company that has the highest value is PT. Bayan

Resources Tbk. The average managerial ownership of

companies in this study is 4.368 and this means that

in mining companies only about 4% of the total

managerial companies own shares in the company

they lead. The standard deviation of managerial

ownership is 11.99%, indicating that the distribution

of managerial ownership is large.

Multiple Regression Analysis

Based on the results of testing multiple regression

analysis the regression equation obtained is as

follows: PBV = 0.627 + 0.078 X

+ 0.235 X

+ 0.119

+ 0.023 X

+ ei

Analysis of the Coefficient of Determination

Based on the Adjusted R Squared value of 0.102102,

the conclusion that can be made is that all

independent variables in this study have an influence

of 10.21% on the dependent variable, while the

remaining 89.79% is explained by other variables not

included in this study.

Hypothesis Testing Analysis

Table 2: T test.

Variables

coefficient

std. Error

t-Statistics

Prob.

0.627221

0.241806

2.593897

0.0113

LOGDER

0.078329

0.103524

0.756629

0.4515

LOGROE

0.235512

0.075102

3.135898

0.0024

DECISION_

HEDGING

0.119739

0.207804

0.576211

0.5661

LOGKM

0.023677

0.029406

0.805165

0.4231

Based on table 2 above, the conclusions that can

be made are as follows:

1. The DER variable has a positive but not

significant effect on firm value based on a

probability value that is greater than 0.05.

2. The ROE variable has a significant positive

effect on firm value based on its probability

value which is less than 0.05

3. The hedging decision variable has no significant

positive effect on firm value based on a

probability value greater than 0.05.

4. Managerial Ownership variable has no

significant positive effect on firm value based

on its probability value which is greater than

0.05.

Table 3: Test F.

R-squared

0.144356

Mean dependent

var

0.111990

Adjusted R-

squared

0.102102

SD dependent var

0.896901

SE of

regression

0.849881

Akaike info

criterion

2.568940

Sum squared

residue

58.50613

Schwarz criterion

2.711635

Likelihood logs

-105.4644

Hannan-Quinn

criter.

2.626368

F-statistics

3.416391

Durbin-Watson

stat

0.517626

Prob(F-

statistic)

0.012397

Based on table 3 above, it can be seen from the

probability value of the F-statistic of 0.012397 and

this value is less than 0.05, it can be concluded that

Determinants of Firm Value on Mining Companies in Indonesia

191

all the independent variables in this study

simultaneously (simultaneously) have a significant

effect on firm value. Based on the calculated f-value

of 3.4163 which is greater than the f-table value of

2.41, the conclusion also states that the independent

variables simultaneously have a significant effect on

firm value.

Effect of Capital Structure on Firm Value

Simultaneously or together, capital structure has a

significant effect on firm value. The effect of capital

structure on firm value is partially positive, but not

significant for mining companies listed on the

Indonesia Stock Exchange. This positive influence is

in accordance with the theory of capital structure,

whereby the use of debt for accelerating company

development activities due to insufficient company

capital will make investors think that the company

has good business prospects in the future. This can

happen if the company is able to optimize its

operational activities and achieve returns that are in

line with the target. This research is supported by

research conducted by Dedi & Nurhadi (2019) which

found that capital structure has no effect on firm

value.

Effect of Profitability on Firm Value

Partially, profitability has a positive and significant

effect on the firm value of mining companies listed

on the Indonesia Stock Exchange. Simultaneously or

jointly profitability also has a significant effect.

This research is supported by research conducted

by Baihaqi, Geraldina, and Wijaya (2021), which

found that profitability has a significant positive

effect on firm value. This shows that the higher the

profitability of the company, the company's stock

price will increase and will also increase the value of

the company.

Hedging Decisions on Firm Value

Simultaneously or jointly, hedging decisions have a

significant effect on the company value of mining

companies listed on the Indonesia Stock Exchange.

Hedging decisions partially have a positive effect but

not significant. These positive results are supported

by hedging theory. When companies transact with

foreign companies and payments for these

transactions use foreign currency, there will be

differences in future receipts and differences in future

debt payments, therefore hedging is a solution to this

problem. The use of hedging is that we companies

receive payments on receivables from foreign

companies against domestic companies at the same

time as when the transaction occurred. Likewise with

debt, domestic companies pay their debts in the future

in the same amount as when the transaction occurred.

When you do not hedge, the potential for the

company to suffer losses will be even greater. These

insignificant results are caused by hedging which is

unable to reduce the risk of fluctuations in interest

rates and commodity prices which have a significant

effect on firm value, but hedging has a positive effect

on firm value when applied to exchange rates. Amrie

and Eko (2020) research supports this research, which

shows that hedging with derivative instruments has

no effect on company value.

The Effect of Managerial Ownership on Firm

Value

Simultaneously, managerial ownership has a

significant effect on the firm value of mining

companies listed on the Indonesia Stock Exchange.

Managerial ownership partially has a positive effect

on firm value, but it is not significant. The positive

influence is in line with agency theory, which requires

management to run the business in the interests of

shareholders. Maximizing company resources is one

of the decisions that managers must make. Investors'

views on large managerial ownership in a company

are responsible for this insignificant result. The

managers or directors will arrange it in a manner that

ensures the company's financial reports are equally

effective. The number of shares that directors or

managers can own is already regulated by every

company. To avoid creating a negative premise for

companies where managers have stakes in the

companies they lead. This research is supported by

research conducted by Wida and Suartana (2014),

which states that managerial ownership has no effect

on firm value.

4 CONCLUSION

There is a positive but not significant influence on the

capital structure variable partially on firm value. So

that any changes in the capital structure will not

significantly affect the value of the company. When

the ratio of the company's capital structure is high,

this indicates that the company will also make

payments to investors who own the company's shares,

this will cause stock prices to tend to be stable and the

company's value will also be stable.

There is a positive and significant effect on the

profitability variable partly on firm value. So that any

changes that occur in profitability will significantly

affect the value of the company. Mining companies

MEBIC 2023 - MARITIME, ECONOMICS AND BUSINESSINTERNATIONAL CONFERENCE

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that have high profitability will also have high share

prices and this will increase the value of the company.

The hedging decision variable has a positive but

not significant impact on the firm value. So that any

changes that occur to the company's hedging

decisions do not significantly affect the company's

value.

The value of the firm is not significantly affected

by the managerial ownership variable. So that any

changes in managerial ownership do not significantly

affect the company's value.

Based on the probability value of the F-statistic in

this study, it shows that all independent variables,

namely capital structure, profitability, hedging

decisions and managerial ownership, simultaneously

have a significant effect on firm value. Based on the

results of the calculations, it can be concluded that all

independent variables have a simultaneous effect on

the firm value.

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