Stock Returns and Financial Performance
Stock Returns and Financial Performance
Stock Returns and Financial Performance
1. Introduction
This study aims to examine the influence of good governance on corporate value, in which
the Stock Returns and Financial Performance act as the mediator of the relationship among
them. Financial performance is one of the factors that show the effectiveness and efficiency
of an organization in order to achieve its objectives. The effectiveness will be achieved if
management has the ability to choose the right destination or the right tool to achieve the
set goals. Efficiency is interpreted as a ratio (comparison) between input and output, which
in a certain input will result in an optimal output. For a company, improving financial
performance is a necessity so that the company’s shares remain attractive to investors. The
financial statements published by the company are a reflection of the company’s financial
performance. Financial statements are the final results of the accounting process that is
Received 3 October 2018
prepared with the aim of providing financial information for a company. Financial information Revised 12 March 2019
can be used by the users for investment decision making. Financial reports provide Accepted 16 June 2019
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governance (Moeljono, 2005). A survey conducted by Booz Allen in East Asia in 1998
showed that Indonesia had the lowest Corporate Governance index with a score of 2.88 far
below Singapore, Malaysia and Thailand by 8.93, 7.72 and 4.89, respectively. The low
corporate governance index in Indonesia is suspected to be the cause of the fall of these
companies.
Management consultant McKinsey & Co, carrying out a study in 1998, found that part of the
company’s market value in Indonesia listed on the capital market (before the crisis) turned
out to be overvalued.It was stated that around 90 per cent of the market value of public
companies is determined by growth expectation and the remaining 10 per cent is
determined by current earnings streams.For comparison, the value of healthy public
companies in developed countries is determined by the composition of growth expectation
of 30 per cent, and current earnings of 70 per cent which is the actual performance of the
company. Actually, there is “dishonesty” in the game on the capital market which is likely to
be carried out or regulated by those who are greatly benefited by the condition. Attention to
corporate governance was also mainly triggered by spectacular scandals such as Enron,
Worldcom, Tyco, London & Coononwealth, Poly Peck, Maxwell, and others. The collapse of
those public companies was due to the failure of the strategy and fraudulent practices of
top management which went on undetected for quite a long time because of the weak
independent supervision by corporate boards.
Recently, Indonesia has just gone through a reform of the financial services sector oversight
framework with the establishment of the Financial Services Authority (OJK), as mandated in
Law No. 21 of 2011 concerning OJK. This new financial sector oversight framework
emphasizes the importance of Indonesia to have a fundamentally and sustainable health
financial system which is able to protect the interests of consumers and society. The
implication of good corporate governance practices is one of the main contributors to
achieving this goal, which will lead to an increase in economic performance and sustainable
economic growth (OJK, 2014).
Starting in 2015, Indonesia is part of the ASEAN Economic Community; for this reason, there
is a need and encouragement to improve business practices carried out by companies in
Indonesia to be able to increase competitiveness. The strengthening of the competitiveness
of Indonesian companies, through the improvement of corporate governance practices, is
one way to spur financial and operational performance and increase investor confidence,
while providing access to incoming capital.
The aspects of corporate governance are based on the theories of Jensen and
Meckling (1976) in order to function as a medium to balance differences in interests
between management, shareholders and other stakeholders. Actually, the perspectives
contained in corporate governance contain the paradigm of shareholders and
stakeholders (interested parties). This difference refers to an understanding of the
conception of the company’s establishment goal so that influencing the needs of the
governance tools. This perspective changes the company’s mindset that companies
should pay attention to the interests of shareholders and stakeholders because their
activities will have an impact on the community considering the company has interests
with various parties in the external and internal environment of the company. Thus, the
relationship built should be based on the trust and refer to the business ethics in a
strategic-decision making.
A legal approach of corporate governance means that the key mechanism of corporate
governance is a protection of external investors, both shareholders, and creditors, through
a legal system, which can be interpreted by law and its implementation, even though the
reputation and ideas held by managers can assist in reaching for funds. Variations in law
and their implementation are the main things in understanding why companies in some
countries are easier to get funds than other companies.
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Agency theory says that in a company there is a conflict between the manager and the
owner of the company, for that there is a need for supervision of the management of the
company to work in the interests of the owner of the company, thus the agency costs
appear to reduce the risk of loss. In business decisions, there are two main financial
considerations, namely: risk and return (Bender and Ward, 2002). Every financial decision
presents certain risks and characteristics of certain returns, a combination of these
characteristics can increase or decrease the stock price of a company.
The essence of corporate governance can be traced through two sides, namely the
theoretical-academic dimension and historical practice. The theoretical-academic
dimensions of corporate governance arise from the initial concept of a separation between
shareholders and management. This concept gives a rise to agency theory as proposed by
Jensen and Meckling (1976). Agency problems arise because of differences in interests
and asymmetric information between shareholders and management and other interested
parties, as well as the inability to write complete contracts for all agents/groups.
Asymmetrical information creates a problem of moral danger when managers have the
initiative to pursue their own interests at the expense of shareholders. Asymmetrical
information also creates an adverse selection problem when investors cannot see the true
economic value of the company. Imperfect information about the quality of management
and the economic value of the company results in a greater agency risk charged to
shareholders. Rational investors ask for a premium because they bear agency risk, which
effectively increases the company’s capital costs.
Corporate governance terminology appears as a tool, mechanism and structure used to
check managerial behavior that is self-serving, limits opportunistic behavior of managers,
improves the quality of company information and arranges relationships between all parties
so that their interests can be accommodated in a balanced manner. Interests interaction
arranged in a company also requires intention, trust, integrity, genuine effort and willingness
from all company organizers. The purpose of checking self-serving behavior is to improve
the operational efficiency of the company. Tools that are used to reduce self-serving
behavior and improve accountability cannot be efficient, if these tools hinder the
improvement of company performance. Based on the practical-historical dimension,
various events experienced by the business world both abroad and domestically have
encouraged good corporate governance practices. Those events were stockmarket
crashes in 1929 in the United States, the financial crisis of savings and loans, Bank of credit
and commercial international scandals, and the crisis in Asia in early 1997.
Gogineni et al. (2010) explained that at the time of the ownership functions separation and
the company management so there will be vertical and horizontal agency problems. Vertical
agency problems occur because managers as agents obtain authority from shareholders
as principals to manage the company, but the decisions made are not in accordance with
the interests of shareholders. Whereas horizontal agency problems occur because among
the majority shareholders have control in the company’s decisions by exploiting minority
shareholders.
Vertical agency problems can occur due to the managerial share ownership, both in high
and low ownership proportions. Morck et al. (1988) found that the high proportion of
managerial share ownership led to entrenchment behavior, namely the decision of
managers who prioritized their interests by overriding the interests of other shareholders, as
with the small proportion of managerial ownership, in making a decision, the manager is not
oriented to maximize company’s value. Wen and Jia (2010) explained that the proportion of
managerial ownership is small; managers will collude with institutional shareholders as
controlling shareholders to utilize company resources for their benefit.
In Indonesia, vertical agency problems occur such as information asymmetry (Alwy and
Schech, 2004), an action to manipulate earnings (Herawati, 2008), excessive use of debt
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(Wiliandri, 2011), and are reluctant to distribute free cash flow in the form of dividends to
shareholders (Mai, 2010). Horizontal agency problems in developing countries including
Indonesia are due to the presence of concentrated ownership in institutional shareholders,
which in turn encourages controlling shareholders to expropriate minority shareholders
(Alwy and Schech, 2004). In addition, controlling shareholders can collaborate with
managerial authorities by overriding the interests of other shareholders or taking advantage
of the controlling power (Wen and Jia, 2010). On the other hand, institutional shareholders
as controlling shareholders can more effectively monitor managerial behavior because they
are more capable and have professional resources than individual shareholders (Lotto,
2013).
Signaling theory says that a good quality company will intentionally signal to the market, so
the market is expected to be able to distinguish good and bad quality companies. In order
to create an effective signal, it must be able to be captured by the market and perceived
well. A good quality company is shown through good corporate governance; this will later
provide a signal by submitting financial reports and governance information that the
company has achieved in a certain period of time in a timely manner. Signals given by good
quality companies are considered good news, while signals given by companies with poor
quality are considered bad news.
The return expected by investors in the form of dividends and capital gains, according to
the Residual Theory of Dividends, the company sets a dividend policy after all profitable
investments have been financed. The dividend paid is “residual” after all profitable
investment proposals have been financed (Hanafi, 2012). According to the residual
dividends theory, financial managers will take the following steps:
䊏 establishing optimum capital budgeting. Receiving (implementing) all investment
proposals that have a positive NPV;
䊏 determining the number of shares needed to finance the new investment while
maintaining the ideal capital structure (target);
䊏 using internal funds to fund the funding needs of these shares; and
䊏 paying dividends only if there are remaining funds from internal funds, i.e. after all
investment proposals with a positive NPV are funded (Hanafi, 2012, p. 372)
Companies that are still in the growth stage will need large funds to expand their business,
one of the sources of funds that can be used is the profits obtained. If the company within is
expanding its business uses profits, it will reduce the amount of dividend distribution.
According to Bender and Ward (2002), companies that are in the growth stage tend to set a
relatively small dividend payout ratio compared to companies that are at the maturity stage.
Fuenzalida et al. (2013) examined the influence of good corporate governance on stock
returns in Peru. These research results indicate that the companies which announce in good
corporate governance index produce positive abnormal returns, Rani et al. (2013) found a
strong influence of Corporate Governance Score on Indian company stock returns
measured using Abnormal Return, Brammer et al. (2009) states conversely, corporate
governance has a negative effect on stock returns measured using Abnormal return. While
Chen et al. (2004) found a significant positive effect of corporate governance on stock
returns as measured by using expected return, but Drobetz et al. (2003) found a negative
influence. Kouwenberg et al. (2014) found an interesting finding that the poor governance
portfolio has a significant effect on the high returns measured using realized returns,
compared to good portfolio corporate governance.
Chaghadari (2011) found corporate governance (board independence, CEO duality,
ownership structure, and board size) as a mechanism that helps to align management
objectives with stakeholders to improve company’s performance (ROE and ROA).
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Kyereboah-Coleman (2007) found that corporate governance (CEO Duality, Board Size,
Frequent of Board Meeting, Size of Audit Committee, Audit Committee Independence,
Organizational Size, Organizational Age, Institutional Share Holdings) has a significant and
positive influence on company’s performance as measured by ROA and ‘Tobin’s Q.
Mashayekhi and Bazaz (2008) found that corporate governance (Board Size, Board
Independence, CEO duality, Institutional Directors) has a negative influence on financial
performance (Tobin’s Q, ROE, ROA, EPS and Annual Stock Returns).
Some studies examine the relationship between good corporate governance and company
value. Wahab et al. (2007) examined 440 companies listed on the Malaysia Exchange, they
found a significant increase in corporate governance (Corporate Governance index) and
gave a large influence on shareholder wealth measured using Market to book value of
equity. Connelly et al. (2012) found that corporate governance (Board Size, Board
Independence) has a negative influence on company value (Tobin’s Q, ROA, Firm Size,
Capital Expenditures, Financial Leverage, Corporate Index, and Family Ownership). Jauhar
(2014) found that corporate governance (The proportion of Independent Audit committees,
the proportion of Independent Commissioners) has a significant and positive effect on
company value (MBR, Tobin’s Q, and Closing Price). Unlike (Wulandari and Widaryanti,
2008; Sulong and Mat Nor, 2008) stated that good corporate governance has no influence
on company value.
Johnson et al. (2005) investigated companies included in the Inverstorability Responsibility
Research Center (IRRC) having governance index and stock returns from the Center for
Research in Security Price (CRSP), they found a significant effect of stock returns
(Abnormal Return) on company’s performance (Tobin’s Q) . Jiao (2010) found that stock
returns (Stock returns) have a positive effect on company’s performance (NPM, Sales
Growth, Tobin, s Q, Size, Age, B/M Ratio).
Riley et al. (2003) in his study found that accounting earnings (EPS) significantly related to
stock returns. Alwathainani (2009) in his research shows that the consistency of growth in
the past company’s financial performance can predict future returns. But it is different from
the research conducted by Trueman et al. (2003) who found little evidence that returns can
be explained well by disclosed earnings reports. Lehn and Makhija (1996) in their study
found that financial performance (EVA, MVA, ROA, ROE, and ROS) has a positive effect on
Stock Returns. Sharma’s (2009) research result shows that the financial performance (ROA,
MVE, BVE, B/M ratio) has a non-significant effect on stock returns.
Huang et al. (2011) in their study found that investors need to seriously assess corporate
governance when making investment decisions because good governance does not only
have a positive effect on stock returns but also can stabilize stock prices during a crisis.
Jiao’s (2010) research result shows that the higher the stock returns, the higher the trust of
shareholders, so that the company’s value gets better (Tobin’Q and B/M Ratio). Johnson
et al. (2005) found that there is a significant effect of stock returns on company value.
Varaiya et al. (1987) found that financial performance has a significant effect on company
value, this is consistent with the research conducted by Ghosh and Ghosh (2008) finding
that profitability ratios have a significant and positive effect on company value. In contrast to
the research conducted by Manaje (2012), it shows that financial performance has a
negative relationship with company value.
Based on the previous research result, it can be concluded that there has been a fairly
fundamental gap regarding the influence of good corporate governance on stock returns,
the influence of good corporate governance on financial performance, the influence of good
corporate governance on company value, the influence of stock returns on performance
finance, the influence of financial performance on stock returns, the influence of stock
returns on company value, and the influence of financial performance on company value.
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This has created a gap that provides an opportunity to do a more in-depth study of these
variables.
This research is basically extended replication from the previous studies. The novelty in this
study is that the relationship between stock returns and financial performance is reciprocal,
which is the relationship among variables that affect each other (back and forth causality),
in which in the previous study, the relationship between variables is only one direction,
besides, the previous study conducted an analysis to find out the influence of good
corporate on stock returns, company value, and financial performance separately, with
mixed results. The diversity of the results is influenced by the different locations of the
company (country), type of industry, research period, and the analytical methods used.
2. Theoretical review
This study examined seven influences among variables. The theory that becomes the basis
for testing the influence among variables will be explained next.
2.1.1 Agency theory. Agency theory (Jensen and Meckling, 1976) is a theory that studies
how to design contracts that can motivate rational agents to act on behalf of the principal
when the interests of the agent are contrary to the interests of the principal. If both parties
(owners and agents) have a conflict of interest, where the agent does not always act in
accordance with the interests of the owner, then this conflict can be minimized through
agency cost, namely the sum of the costs of supervision by the owner through the board of
commissioners, institutional ownership, and public ownership in terms of dividend
distribution and supervision of share prices. Regarding agency problems, the concept of
good corporate governance is expected to be a tool that gives investors’ confidence that
they get a return on invested funds. Shleifer and Vishny (1997) stated that good corporate
governance concerns how investors control managers to provide benefits and behave
honestly in the management of company resources. Messier et al. (2000) revealed that a
good corporate governance system is needed so that managers can be supervised and
guided in investing and managing corporate resource; therefore, corporate governance
consists of all relevant parties, processes, and activities placed to ensure the accuracy of
the management of company assets.
2.1.2 Residual theory of dividend. Residual theory of dividend states that the company sets
a dividend policy after all profitable investments have been financed. A company still in the
stage of growth usually requires large funds to expand their business, one source of funds
that can be used is the profits obtained. If the company within is expanding its business
using profits, it will reduce the amount of dividend distribution (Bender and Ward, 2002).
2.1.3 Empirically testing the clientele effec.t The clientele effect theory states that the group
(clientele) of different shareholders will have different preferences for the company’s
dividend policy. The argument underlying Miller and Modigliani regarding the existence of
the clientele effect is that investors expecting current income from investments will buy
shares from the company that pays high dividends, while investors who do not need cash
income now will invest their funds in companies that pay low dividends. The consequences
of the arguments from Miller and Modigliani lead to:
䊏 The company has set a certain dividend payment policy that can attract the attention of
the clientele consisting of investors who like such dividend policies.
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䊏 The tax rate difference between dividends and capital gains may lead to the tendency
for each company to attract certain clientele consisting of investors who have biases in
dividend policy or dividend payments (Brigham, 1995).
2.1.4 The theory of power. There are two main competing powers within the company,
namely shareholders and managers. Managers exactly have the power to make all
decisions on behalf of the company, while the shareholders have the power to determine
the direction of the company through their voting rights. Shareholders also have a tendency
to work together to form a ruling group because the concentration of ownership can reduce
agency problems between shareholders and managers. If the manager also serves as a
shareholder, the greater the power in the company. The greater the ownership by one party
(institution, management, or block), the most dominant party can determine company
policy, for example in determining dividend distribution and stock price (Smith and Watts,
1992):
H1. Good corporate governance has a significant influence on stock returns.
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2.4 The influence of stock returns on financial performance
There are two theories that form the basis of the influence of stock returns on financial
performance:
2.4.1 Residual theory of dividend. The return expected by investors are in the form of
dividends and capital gains, according to the Residual Theory of Dividends, the company
sets a dividend policy after all profitable investments have been financed. Dividends paid
are “residuals” after all profitable investment proposals have been financed (Hanafi, 2012).
This residual dividends theory is supported by Bender and Ward (2002) which states that
companies that are in the growth stage tend to set a dividend payout ratio which is relatively
smaller than companies that are at the maturity stage.
2.4.2 Signaling theory. Signaling theory (Ross, 1977) is about how companies should signal
to report users, in the form of information about what the manager has done in realizing the
owner’s desires. Signals can be in the form of stock returns, or other information which
states that the company is better than other companies.
H4. Stock returns have a significant influence on Financial Performance
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elderly people are taxed lighter), then shareholders who are imposed tax higher prefer
capital gains because they can delay payment of taxes. This group prefers if the company
shares a small dividend.
The argument underlying Miller and Modigliani regarding the existence of the clientele
effect is that investors who want current income from investment will buy shares in
companies that pay high dividends, while investors who do not need cash income now will
invest in companies that pay low dividends. This consequence of Miller’s argument and
modification led the company to establish a certain dividend policy, which then drew from
the clientele consisting of investors who like such dividend policies, and the tax rate
difference between dividends and capital gains might lead to a tendency for each company
to attract attention of certain clientele which consists of investors who have a tendency to
dividend policy or dividend payment (Brigham, 1995).
The existence of groups with different views on dividends and capital gains can be
explained through Gordon’s thoughts about bird in the hand theory. This group prefers to
get current income in the form of dividends so they want companies to distribute large
amounts of dividends This group considers the risks and the certainty of return that will be
received based on the understanding that current income in the form of dividends is more
valuable than capital gains because it minimizes risk and reduces uncertainty. Other
groups based on Litzenberger and Ramaswamy’s thinking about tax preference theory
tend to dislike dividend payments and like capital gains for some reasons related to taxes
for higher dividends compared to capital gains. Another consideration of this group is that
companies with low dividend payments so the retained earnings will be reinvested in
profitable investment projects in the future. If you use this assumption, then the value of the
company’s shares will increase. The difference in the current value shares with the shares
value in the future is what causes investors to tend to like capital gains.
H6. Stock returns have a significant influence on Company Value
3. Methodology
This research was conducted on companies go public listed on the Indonesia Stock
Exchange and was included in 2011 to 2017 LQ45 index list. The companies chosen to be
included in the LQ45 list as research objects are with consideration that the company
shares generally have a certainty of return and have good market performance and
corporate fundamentals (blue chips stock). The LQ45 index only consists of 45 shares
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selected through various selection criteria, so that it will consist of stocks with high liquidity
and market capital and have good growth prospects and financial conditions, besides, the
companies included in the LQ45 consist of various moving companies in various sectors, so
that it is expected to represent companies listed on the Indonesia Stock Exchange.
As many as 84 populations (Issuers) listed on the Stock Exchange throughout 2011-2017,
with samples taking a Purposive Sampling approach through 4 criteria, namely consecutive
registered, publish financial statements, distribute dividends, and those who have
implemented good corporate governance. From the calculation results, it is obtained that 25
companies which meet the criteria, and the size of the observation is 7 25 = 175
observations.
Exogenous variables are variables that affect endogenous variables, both those with
positive effects and negative effects (Ferdinan, 2006). The exogenous variable used in this
study is good corporate governance (X) with the following indicators: The proportion of
independent commissioners (X1.1), institutional ownership (X1.2), managerial ownership
(X1.3), public ownership (X1.4).
Exogenous and endogenous variables used in this study are stock returns and financial
performance, with following indicators:
䊏 stock returns (Y1) with following indicators: abnormal return (Y1.1), dividend yield (Y1.2);
and
䊏 financial performance (Y2) with following indicators: free cash flow (Y2.1), return on
assets (Y2.2), ROE (Y2.3).
Endogenous variable of this research is Company Value with following indicator: Company
Value (Y3) with following indicators:
䊏 market to book value of equity (Y3.2); and
䊏 price earning ratio (Y3.3).
Data analysis using WarpPLS with indicator approaches are formative (mutually exclusive
between indicators), and structural models as presented in Figure 1.
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4. Results and discussion
There are seven influences between the variables tested; in this study, they will be
discussed as follows:
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result is not in accordance with the theory and previous research which becomes the basis
for the formulation of the hypothesis.
Agency theory proposed by Jensen and Meckling (1976) with the principle of basic thinking
that states the separation of managerial functions and share ownership of the company. If
both parties have a conflict of interest, where the agent does not always act in accordance
with the interests of the owner, then this conflict should be minimized through agency cost,
namely, the sum of the costs of supervision by the owner through the board of
commissioners, institutional ownership, and public ownership as tools, mechanisms,
structures that are used to check self-serving managerial behavior. The purpose of
checking self-serving behavior is to improve the operational efficiency of the company
which in turn can improve the company’s financial performance. However, in practice,
independent commissioners appointed for supervisory and advisory duties do not work
optimally, as well as managerial ownership, because the proportion of ownership is still so
small so having not been able to align the interests of management and shareholders.
This research results confirm several previous studies about the effect of good corporate
governance on financial performance. The study conducted by Kyereboah-Coleman (2007)
show that CEO ownership and institutional ownership can increase profitability and provide
a positive signal to investors. Bauer et al. (2008), through their research results, show that
companies that govern governance well have better company performance than
companies that manage the company poorly. Chaghadari’s (2011) research results show
that corporate governance has a positive effect on company performance. Wahyu (2013)
the results of his research show that corporate governance has an effect on financial
performance. Other studies show different results, such as the study conducted by Fallatah
and Dickins (2012) showing that corporate governance has no influence on financial
performance. Jauhar’s (2014) research results show that corporate governance has a
significant and negative influence on financial performance.
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that corporate governance has an influence on company value. Wahyu’s (2013) research
result reveals that corporate governance has a positive influence on company value. Jauhar
(2014) the results of his research show that corporate governance has a positive effect on
company value.
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performance. Conversely, if the profits obtained by the company are relatively small, it can
be said that the company is less successful or poor performance.
Return on assets (ROA) is one of the important elements of profitability. This ratio shows the
company’s ability to make efficient use of assets for the company’s operations. Return on
assets provides an overview to investors about how the company converts money invested
in net income. Therefore, ROA is an indicator of a company’s profitability in using its funds
to generate net income. The higher the ROA, the more effective the company’s
performance will be, and will further increase the attractiveness of the company to investors
and thus have an impact on increasing the company’s stock price.
The results of this study confirm several previous studies on the influence of financial
performance on stock returns. The influence of financial performance on stock returns has
been empirically proven by several researchers. Those studies were conducted by Lehn
and Makhija (1996) revealing that all variables show a positive relationship with the stock
returns, a study conducted by Riley et al. (2003) show that accounting earnings significantly
influence stock returns, and Alwathainani’s (2009) research results show that the
consistency of the company’s past financial performance growth can predict future returns.
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results show that the higher the stock returns, the higher the trust of shareholders, so that
the performance and value of the company get better.
Table I The summary of conformity and incompatibility of research results with theory
No. Theory Hypothesis result
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䊏 Managerial ownership as one of the indicators of good corporate governance variables
is expected to help to unify interests between managers and shareholders so
managers share directly the benefits of decisions taken and also bear the losses as a
consequence of making wrong decisions. That argumentation indicates the importance
of managerial ownership in the company ownership structural, but the research result
produce managerial ownership data which is still very small, of the 22 companies
studied, only 6 companies have managerial share ownership with an average of under
1 per cent.
䊏 Public ownership as one of the indicators of good corporate governance variables
indicates public confidence in the company that can have a great strength in
influencing the company through mass media in the form of criticism or comments, the
research result shows that public ownership data is quite large with an average of 38.35
per cent, exceeding the minimum 7.5 per cent limit determined by the ISE, but not
strong reflecting the closeness of the relationship with good corporate governance.
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4. Stock returns have a significant influence on financial performance in a positive
direction, meaning that the greater the stock returns, the greater the financial
performance. These research results confirm signaling theory (Ross, 1977) about how
companies should signal to report users, in the form of information about what has been
done by managers in realizing the wishes of shareholders. The implication of the
dividends signaling model is that dividend changes should be followed by changes in
profitability in the direction of the same relationship. The result of the study conducted
by Johnson et al. (2005) and Jiao (2010) show that there is a significant influence of
return on Financial performance.
6. Stock returns significantly influence the value of the company in a positive direction,
meaning that the greater the stock returns, the greater the value of the company The
results of this study confirm the bird in the hand theory (Gordon et al., 2012 and Lintner,
1956) which states that a high dividend policy will increase the company value because
of the uncertainty of cash flow in the future. A study conducted by Akhigbe et al. (1993),
Jiao (2010) shows that stock returns have a significant influence on company value.
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Further reading
Hiraki, T., Inoue, H. and Masuda, H. (2003), “Corporate governance and firm value in Japan: evidence
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1.0”.
Corresponding author
Suhadak Kurniati can be contacted at: kurniaty.ub@gmail.com
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