Jurakunman.Vol.16 No.

2, Juli 2023 ISSN : 2086 – 681x (P)

www.jurakunman.stiesuryanusantara.ac.id ISSN : 2654 - 8216 (O)

THE INFLUENCE OF RISK ON THE VALUE OF COMPANIES IN THE

TEXTILE/GARMENT INDUSTRY LISTED ON THE INDONESIA
STOCK EXCHANGE 2020-2021

Selly Kudrati Ningsih1

1
Ahmad Dahlan University
Sellykudrati@gmail.com

Abstract
High company risk can lead to wrong investor decisions, as it can reflect a high
likelihood of company failure. Risk management becomes important to minimize
the adverse impact of risks on company operations and increase company value for
shareholder wealth. This research aims to examine the effect of risk on company
value in the Textile/Garment industry on the Indonesia Stock Exchange. The study
used secondary data with a quantitative descriptive analysis method using
STATA17 software. The sample size in this study was 18 companies. The results of
the study proved that business risk has a significant negative effect on the value of
Textile/garment industry companies listed on the Indonesia Stock Exchange. The
higher the business risk faced by a company, the lower its value.

Keywords: Risk, Company Value, Textile/Garment Industry, Indonesia Stock

Exchange.

INTRODUCTION
Background of the Study

In the past few decades, Asian companies have significantly increased their
international investment. Emerging markets in Asia have evolved and become more
integrated into the global economy, and investment barriers have significantly
decreased, increasing systemic risk exposure along with increasing volatility over
time (Chee-Wooi & Brooks, 2015). This volatility means that the business world
continues to face risks that can lead to failure (Evans & Thakorlal, 2004). Risks can
threaten business sustainability. Therefore, all companies should implement
appropriate risk management to minimize risks that have a negative impact on
business operations. The global financial crisis is one of the major issues related to
risks, as many countries lost income due to the collapse of global markets and
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limited trade, and poor liquidity (Cruz, 2002). Thus, risk management is an essential
part of corporate governance, a global concern, and is seen by many organizations
as a critically important strategy (Kommunuri et al., 2014).

Risk management is an important part of corporate governance. Risk

management is a systematic process for identifying, evaluating, controlling, and
monitoring the risks faced by an organization. The goal of risk management is to
minimize the risks that can affect the achievement of organizational goals, as well
as to ensure the long-term survival and growth of the company (COSO, 2017). Risk
management has become a global concern because companies today operate in a
highly complex and rapidly changing environment. Companies must face various
risks, such as operational risk, market risk, credit risk, liquidity risk, and
reputational risk. These risks can impact the business sustainability and the
credibility of the company in the eyes of the public and investors (Fraser & Simkins,
2016).

Different companies have different decisions when it comes to risk

assessment, and the success or failure of a company depends on its risk acceptance.
Companies strive to manage risks effectively so that they can have a positive impact
on returns and opportunities that reflect wealth enhancement for shareholders
(Alshubiri, 2015). Risk means the difference between actual events and expected
events, so companies try to minimize risks by making predictions and finding
strategies for risk acceptance.

There are several definitions of risk, but generally, the risk is defined as the
possibility of loss or uncertainty in achieving expected goals. Risks can arise from
various factors, such as market changes, operational failures, inability to pay debts,
or even reputational risks due to damaging actions (Hull, 2017). In facing risks,
companies strive to minimize risks by making predictions and finding strategies for
risk acceptance. This strategy can include the use of derivative financial instruments,
insurance, investment diversification, or other risk management (Brealey et al,
2017). However, it is also important to remember that reducing risk is not always
the best solution, especially if the risk is part of normal business activities. Some
risks can even provide benefits if managed well. Therefore, companies need to
consider risks carefully and make wise decisions in managing them (Power, 2004).

Investors invest in companies to increase their wealth, which is reflected in

a high company value. Increasing the company's value can also increase
shareholder wealth. Shareholder wealth, represented by stock prices, reflects the
company's investment in assets, financing, and management decisions. However,
the company's goal of creating shareholder wealth by increasing the company's
value is not always fully achieved. This is due to internal problems, where the goals

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of the board and shareholders of the company often do not align. To increase the
company's value, internal problems must be minimized so that management can act
in line with the company's goal of increasing shareholder value.

In order to increase the value of a company, management must pay attention

to internal issues that can affect the company's performance and reputation. Internal
issues such as non-compliance with regulations, corrupt practices, conflicts of
interest, and lack of transparency can cause financial losses and a poor reputation
for the company (Gompers et al., 2003). When facing these internal issues,
management must act quickly and effectively to minimize their impact. One way to
do this is to strengthen good corporate governance, including applying principles
of transparency, accountability, independence, and effective oversight (Jensen,
2001).

In this context, management must act in line with the company's goal to
increase shareholder value. Management must be aware that the company's value is
closely related to its financial performance and reputation. Thus, management must
take appropriate actions to minimize risks and maximize the company's value
(Shleifer & Vishny, 1997). John et al. (2008) state a positive correlation between
risk-taking and company growth. This is because some believe that high risks result
in high returns. On the other hand, high company risk can also lead to wrong
investor decisions, as it reflects the likelihood of high company failure. Jajuga et al.
(2009) suggest that there are two different concepts of risk, namely the negative
concept where risk is related to threats and losses, and the neutral approach which
views risk as a threat and an opportunity.

Vu Chai and Do (2015) tested the effect of liquidity risk on stock returns
and found that liquidity risk is caused by (1) common movements between
individual stock liquidity and market liquidity, (ii) stock-specific factors, and (iii)
synchronicity of equity liquidity and market returns; considering individually or
collectively. The results highlight the importance of liquidity risk, especially when
market conditions deteriorate. Recent empirical evidence shows that effective risk
management can increase equity returns and shareholder value, but reduce cash
flow returns and volatility (Krause and Tse, 2016).

Garment companies are used as the research object because garment

companies are one of the most important industries in Indonesia. With many job
opportunities, the Indonesian garment industry has grown rapidly over the past few
decades. Therefore, the aim of this study is to test the effect of risk on the value of
companies in the Textile/Garment Industry in the Indonesia Stock Exchange in
2020-2021.

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Problem Identification
The problem identified in the background is the increasing international
investment of Asian companies and the increasing systemic risk exposure with the
volatility of emerging markets in Asia. This can pose risks that could endanger the
company's sustainability. The global financial crisis is also a major issue related to
risk and can result in loss of revenue for many countries. Therefore, risk
management is important to minimize risks that have a negative impact on the
company's operations and increase the company's value for shareholders' wealth.
However, internal issues can hinder the company's goal of increasing its value, and
high risk can also lead to wrong investor decisions. In addition, liquidity risk is also
important in the garment industry in Indonesia and can affect the company's value.

LITERATURE REVIEW AND HYPOTHESIS

Literature Review
Corporate Risk

According to COSO ERM (2004), the risk is the possibility of an event that
affects the achievement of a company's objectives. Risk involves uncertainty,
unexpected possibilities, and missed opportunities. From a financial perspective,
the risk is defined as the risk that a company will not achieve its growth objectives
(Harris-Jones and Bergin, 1998). Corporate risk is the possibility or probability of
loss, disruption, or threat to a company's objectives, processes, products, and
resources (Mangkunegara, 2014).

Corporate risk is the possibility or probability of financial loss or uncertainty

in the operational activities of a company (Hillson & Murray-Webster, 2012). Risks
can originate from various factors such as market uncertainty, regulatory changes,
operational risks, financial risks, and others. Corporate risk must be effectively
managed to ensure the survival and growth of the company (Jorion, 2007).
Corporate risk management involves identifying, assessing, and controlling
potential risks. The aim is to reduce the possibility of risks or the negative impact
that may occur if such risks materialize (Pinto et al, 2010).

Here are some types of corporate risk:

 Market risk: Risks that arise from market fluctuations such as changes in
interest rates, exchange rates, stock prices, and commodities (Hull, 2017).
 Credit risk: Risks that arise from the inability of others to meet financial
obligations, such as loans or bill payments (Saunders & Cornett, 2014).
 Operational risk: Risks that arise from operational failures or violations of
company procedures and policies (Bodnar et al, 2010).
 Liquidity risk: Risks that arise from a company's inability to meet financial
obligations or obtain the necessary financial resources (Brealey et al, 2017).
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 Reputation risk: Risks that arise from reputational damage to the company
due to actions or events that are detrimental (Fombrun, 1996).

The concept of risk can be divided into two different approaches, namely the
negative approach and the neutral approach. The negative approach regards risk as
a threat and potential loss that may occur. In this approach, the risk is considered
something that should be avoided and minimized. Risk is seen as something
negative and potentially harmful to the company. In this context, management tries
to identify and reduce risks, as well as create contingency plans to address possible
risks (Hillson, 2014). The neutral approach regards risk as something that can be a
threat or an opportunity. In this approach, the risk is seen as an uncertain event with
unpredictable outcomes.

Risk is seen as something that can be beneficial if managed properly. In this

context, management tries to manage risks in a proper way to produce profits
(Institute of Risk Management, 2002). Both approaches have their own advantages
and disadvantages. The negative approach allows companies to focus on identifying
and reducing risks but may hinder the company's ability to exploit new business
opportunities. The neutral approach allows companies to manage risks properly and
exploit new business opportunities but may overlook potential losses that may occur
(Lupton, 2013). As part of risk management, it is important to understand both of
these risk approaches and choose the appropriate approach for the company. This
can help the company increase its value and minimize the risks associated with
business activities.

Company Value

The primary goal of a company is to maximize the value of the company's

capital, which is the present value of the expected future profits of the shareholders.
According to this definition, the value of the company is maximized only if the
expected utility is maximized over time (Dolenc et al., 2014). Pfarrer (2010) states
that when a company creates value for its stakeholders, it can also create value for
its shareholders.

Company value is a concept that refers to the estimation or prediction of the

market price or economic value of a company. Company value reflects the level of
confidence and belief of investors and the market in the performance and future
potential of the company (Damodaran, 2012). Company value can be calculated
using various methods, such as valuation ratios, fundamental analysis, or
discounted cash flow (DCF) methods. The method used will depend on the

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characteristics and conditions of the company, as well as the purpose of calculating

the company's value (McKinsey & Company, 2020).

A high company value indicates that the market and investors have strong
confidence in the performance and future potential of the company, making the
company an attractive investment. Conversely, a low company value indicates that
the market and investors have low confidence in the performance and future
potential of the company, making it a less attractive investment (Penman, 2013).

Company value is a quantitative measure of the market value or price of a

company, reflecting the overall health and performance of the company. The
concept of company value is based on the financial economics approach, which
views the company as an entity that can be valued and traded in the market.
Generally, company value consists of two components: equity value and debt value,
which each reflect the value of the shares held by shareholders and the value of the
debt held by creditors (Fernandez, 2021).

The types of company value commonly known include (Pratt et al, 2019):

1. Market value - is the value of the company calculated based on the stock
price of the company in the stock market. Market value reflects the market's
perception of the company's performance and future prospects.
2. Book value - is the value of the company calculated based on the total value
of assets minus the total value of liabilities of the company. Book value
reflects the intrinsic value of the company.
3. Liquidation value - is the value of the company if all its assets are sold
separately at market prices and all its debts are paid. Liquidation value is
usually lower than market value and book value, because company assets
are often not sellable at market prices like on the balance sheet.
4. Replacement value - is the value of the company if all its assets are revalued
based on the cost of replacing the assets with new ones. Replacement value
is usually higher than book value because the cost of replacing assets with
new ones is usually higher than the price of old assets.

The determination of the type of company value used depends on the purpose of its
use.

Hypothesis
The Impact of Business Risk on Firm Value

In finance theory, the value of a firm depends on its performance and the
risk it faces (Chang et al., 2014). Rayan (2008) showed that leverage is negatively
related to firm value, and an increase in leverage can decrease firm value. This is
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because high levels of debt reflect the possibility that a firm may not be able to pay
it, increasing risk and leading to lower market valuations for the firm. Wet (2006)
showed that significant value is unlocked when the optimal gearing level is
approached. Modigliani and Miller (1961) concluded that increased equity costs
have a negative impact on economic value added (EVA) because they result from
increased firm debt. This means that firms with high levels of debt may have higher
equity costs, such as higher interest payments, which can reduce firm value.
Kommunuri et al (2014) found that firms that manage risk well can increase
shareholder value. Risk management can provide a solid foundation for firms to
improve their corporate governance quality and create greater shareholder value.
Risk management can also enhance organizational function efficiency and enable
the capital market to respond to the risks faced by firms. Stakeholder value is
threatened when organizational risk portfolios continue to change without
appropriate governance mechanisms to manage them. Based on the explanations
above, the following hypotheses can be developed:

Ha: Business risk has a significant negative effect on company value.

Ho: Business risk does not have a significant negative effect on company value.

Research Methodology
Research design

Research design is a plan or strategy used to collect and analyze data in

order to answer research questions that have been formulated. This research is a
quantitative descriptive study that examines the relationship between two variables,
namely the influence of the Risk variable on the Company Value in the
Textile/Garment Industry Companies on the Indonesia Stock Exchange in 2020-
2021. Data will be processed using STATA17 software.

Population and Sample

Population refers to the complete group or entirety of objects or individuals

that share the same characteristics or attributes and are the focus of statistical
research. The population in this study is all companies in the Textile/Garment
Industry listed on the Indonesia Stock Exchange. A sample is a subset of the
population selected for testing in a research study. The sample is chosen to represent
the population in a systematic and objective manner so that the results of the study
can be applied back to the population in general. The sampling criteria for this study
are based on the availability of data, resulting in a sample size of 18 companies.
The study period is 1 year, from 2020 to 2021.

Data collection techniques

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Data collection techniques refer to the methods or approaches used to

gather the necessary information or data for a research study. In this study, the data
collection technique used is secondary data collection. The secondary data used in
this study are the business risk, price book value (PBV), and Degree of Operating
Leverage (DOL) data. These data are obtained from the financial statements and
annual reports of the selected companies in the textile/garment industry listed in the
Indonesia Stock Exchange. The Price-to-Book Value (PBV) ratio is a financial
metric that compares a company's market price per share to its book value per share.
The formula for PBV is:

PBV = Market Price per Share / Book Value per Share

Where:
 Market Price per Share is the current price of a single share of the company's
stock on the stock market.
 Book Value per Share is the total value of the company's assets minus its
liabilities, divided by the total number of outstanding shares.

In general, a PBV ratio of less than 1.0 indicates that the stock is undervalued, while
a ratio greater than 1.0 indicates that the stock is overvalued.

The Degree of Operating Leverage (DOL) is a financial metric that measures the
sensitivity of a company's operating income to changes in its sales revenue. The
formula for DOL is:

DOL = % change in Operating Income / % change in Sales Revenue

Where:
 % change in Operating Income is the percentage change in a company's
operating income resulting from a percentage change in sales revenue.
 % change in Sales Revenue is the percentage change in a company's sales
revenue.

The DOL shows how a change in sales revenue affects a company's operating
income. A high DOL indicates that the company's operating income is more
sensitive to changes in sales revenue, which means that the company has a higher
fixed cost level than variable costs. Conversely, a low DOL indicates that the
company's operating income is less sensitive to changes in sales revenue, which
means that the company has a higher level of variable costs compared to fixed costs.

Hypothesis Testing
Hypothesis testing is the statistical decision-making process used to
determine whether the hypothesis proposed in the research can be accepted or

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rejected based on the collected data. This study uses Simple Linear Regression to
analyze the data with STATA software version 17 as the analysis tool. The use of
regression aims to test the direct effect of risk on firm value. To test the hypothesis,
this study uses the following model:

DOLit = β0 + β1 PBVit + e

Explanation:
DOL = Company Value
PBV = Company Risk
β0 = Constant
β1 = Coefficient of PBV
e = Error term

RESULT AND DISCUSSION

Results

The research sample was selected based on the researcher's criteria for data
availability, which consisted of 18 textile/garment companies listed on the
Indonesia Stock Exchange.

Table 1
Research Sample Data
Company Code Company Name
UCID PT. Uni-Charm Indonesia Tbk
TFCO PT. Tifico Fiber Indonesia Tbk
PBRX PT. Pan Brothers Tbk
ZONE PT. Mega Perintis Tbk
BELL PT. Trisula Textile Manufacturer Tbk
SSTM PT. Sunson Textile Manufacturer Tbk
TRIS PT. Trisula International Tbk
STAR PT. Buana Artha Anugerah Tbk
MYTX PT. Asia Pacific Investama Tbk
ERTX PT. Eratex Djaja Tbk
ARGO PT. Argo Pantes Tbk
POLU PT. Golden Flower Tbk
SBAT PT. Sejahtera Bintang Abadi Textile Tbk
POLY PT. Asia Pasific Fibers Tbk
ESTI PT. Ever Shine Textile Tbk
CNTX PT. Century Textile Industry Tbk

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HDTX PT. Panasia Indo Resources Tbk

UNIT PT. Nusantara Inti Corpora Tbk

Descriptive Statistics

This study presents descriptive statistics which are intended to provide an

overview of the research variables used. Descriptive statistics is a statistical analysis
method used to describe or summarize data in a simpler and more understandable
form. Below are the descriptive statistics for this study.

Table 2
Descriptive Statistics
Variabel Mean Std. Dev Min Max
DOL -8.53 34.73 -137.48 20.17
PBV -142.50 3120.27 -10048.59 7881.30
Source: STATA17

Table 2 shows the distribution of data for each variable. The companies in the
sample are considered to be high-risk. The high standard deviation indicates that
the data has high variability or is widely spread from the mean value. This can be
seen from the standard deviation value of 34.73 with a mean of -8.53. The sample
companies have a wide range of values, with a minimum value of -137.48 and a
maximum value of 20.17. The wide range of values indicates a large variation in
data between the minimum and maximum values.

Direct Effect Test Result

Table 3
Linear Regression Result
Variable Coef Sig. Desc.
Constant -8.634702 -0.0066092 Significance
PBV -0.0007231 -26.50311 Significance
Source: STATA17

Based on the data in the table above, the regression model can be formulated as
follows:

DOL = -8.634702 - 0.0007231 PBV +e

Based on the analysis results, it can be concluded that business risk has a significant
negative effect on company value with a significant value of -26.503 (-26.503 <

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0.05). The negative coefficient indicates that a decrease in business risk leads to an
increase in company value.

Discussion
The analysis results indicate that business risk has a negative and significant
effect on the value of textile/garment companies listed on the Indonesia Stock
Exchange. This is in line with the trade-off theory, which states that the more debt
a company has, the higher the risk of bankruptcy and the lower the company's value.
The trade-off theory suggests that companies should determine the appropriate level
of debt to achieve a balance between the cost of debt and the benefits of debt
financing. The trade-off theory can explain the relationship between debt and the
value of the company (Kim & Lee, 2009).

In the context of business risk, the more debt a company has, the greater the
risk of the company having difficulty paying off the debt if it experiences financial
problems or changes in business conditions. The higher the business risk of a
company, the more difficult it is for the company to obtain funding through debt
(Campello et al, 2004). This can lower the credibility and reputation of the company,
as well as affect the stock price and value of the company. Therefore, companies
need to consider business risk when determining the appropriate level of debt to
minimize the risk of bankruptcy and maximize the value of the company.
Companies should choose a lower level of debt to minimize the risk of bankruptcy
(Froot & Stein, 1993).

The analysis results indicate that business risk has a significant negative
effect on the value of textile/garment companies listed on the Indonesia Stock
Exchange. This means that the higher the business risk faced by textile/garment
companies, the lower their value. This can be caused by many factors, such as
market risk, operational risk, financial risk, reputation risk, and environmental risk.
All of these risks can reduce the value of a company if not properly addressed.

Other studies that support these results have been conducted by Yulianto &
Suharli (2015), who concluded that business risk has a significant effect on the
value of manufacturing companies in the Indonesia Stock Exchange. The study
used data from the period of 2008-2012 and found that companies with high
business risk had lower company values compared to those with low business risk.

Kusumawati & Wijayanti (2019) found that business risk has a negative
effect on the value of manufacturing companies listed on the Indonesia Stock
Exchange, including textile and garment companies. The study used data from the
period of 2012-2017 and found that business risk had a significant negative impact
on company value. Handayani & Sari (2020) researched the effect of business risk
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on the value of textile and garment companies listed on the Indonesia Stock
Exchange using data from the period of 2014-2018. The results showed that
business risk has a significant negative effect on the value of textile and garment
companies.

CONCLUSION, LIMITATION, AND RECOMMENDATION

Conclusion

Based on the analysis and research conducted, it can be concluded that

business risk has a negative and significant effect on the value of Textile/garment
industry companies listed on the Indonesia Stock Exchange. The higher the
business risk faced by the company, the lower its value. Therefore, companies need
to consider business risk when determining the appropriate level of debt to
minimize the risk of bankruptcy and maximize the value of the company.
Companies also need to manage business risks well to maintain the credibility and
reputation of the company, as well as influence stock prices and the value of the
company.

Limitation

The limitations faced by the researchers during data collection and

processing are as follows:
1. Limitations in data collection: The researchers faced difficulties in obtaining
complete data from textile/garment companies listed on the Indonesia Stock
Exchange. Some companies did not provide complete data.
2. Limitations in interpreting results: This study only focused on the relationship
between business risk and firm value in the textile/garment industry in the
Indonesia Stock Exchange. Therefore, the conclusions drawn from this study
may not be applicable to other industries or countries. In addition, other
factors that were not considered in this study may also affect the relationship
between business risk and firm value.
3. Limitations in generalizing results: This study only involved companies listed
on the Indonesia Stock Exchange and did not consider non-listed companies.

Recommendation

Companies need to pay attention to business risk, which has been proven to
have a significant negative impact on company value. High business risk can have
a detrimental effect on the business, as the expected return rate is lower than the
debt used in the business. Investors who consider investing in the garment industry
companies listed on the Indonesia Stock Exchange should consider the variable of

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business risk. However, it should be noted that this research only used a sample
from the garment industry.

There are several recommendations for future research, including:

a) Testing the effect of other variables on the relationship between business

risk and firm value in the textile/garment industry in the Indonesian Stock
Exchange, such as firm size, sales growth, and leverage.
b) Expanding the scope of the study to other industries in the Indonesian Stock
Exchange to see if the findings regarding the impact of business risk on firm
value can be applied to different industries.
c) Examining the impact of external factors such as economic conditions and
government regulations on the relationship between business risk and firm
value in the textile/garment industry in the Indonesian Stock Exchange.
d) Analyzing the impact of business risk on firm financial performance, such
as profitability and efficiency.
e) Using different research methods such as qualitative methods or case studies
to gain a deeper understanding of how business risk affects firm value in the
textile/garment industry in the Indonesian Stock Exchange.
f) Conducting longitudinal research by extending the observation period to see
changes in the impact of business risk on firm value over time.

By conducting further research and expanding understanding about the relationship

between business risk and company value, it can provide greater benefits for
investors and decision-makers in the textile/garment industry and other industries
on the Indonesia Stock Exchange.

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