British Journal of Economics, Finance and Management Sciences 195

July 2015, Vol. 10 (2)

The Effect of Ownership Structure, Corporate Governance, Investment Decision, Financial

Decision and Dividend Policy on the Value of the Firm Manufacturing Companies Listed on
Indonesian Stock Exchange

Dr. Muhammad Nasrum1),

School of Management YAPIM Maros, Indonesia
jomanajerial@gmail.com

Dahlan2),
School of Management YAPIM Maros, Indonesia
habbadahlan@gmail.com

Abdul Hafid Burhami3)

School of Management YAPIM Maros, Indonesia
ahburhamix@gmail.com

ABSTRACT
The study aims to determine significance effect of ownership structure, corporate governance, investment
decisions, financial decisions and dividend policy on the value of the firm. The data used in this
study are secondary and primary data. The population are all listed manufacturing companies in
Indonesian stock exchange and forty samples were selected by means of simple random sampling
technique for the period of 9 years (2000-2009). The analysis procedure was path analysis consisting of
four sub-structure.
The study indicates that the ownership structure and corporate governance have a positive influence on
investment decisions. On the contrary, both have a negative effect on the financial decisions. Meanwhile,
the investment decision have a positive influence on financial decisions. Both ownership structure and
corporate governance have a positive influence on dividend policy, while making investment and
financial decisions would negatively affect the dividend policy. Ownership structure, corporate
governance, investment decision, financing decision, and dividend policy have a positive influence on the
value of the firm.

Keywords: Ownership Structure, Corporate Governance, Investment Decision, Financial Decisions,

Dividend Policy and Value of the Firm

INTRODUCTION
Basically, the main objective of financial statements is to provide relevant information to users of
financial statements to inform the value of the company. Shareholder is a party that plays an important
role in the survival and development of enterprises. Shares of a company may be owned by many,
namely: management, foreign investors, domestic investors, employees, and all stakeholders in the
company. Shareholders' invested capital to the company in order to get a high return, both dividends and
capital gains.
Agency theory explains, that the agency relationship arises when one or more persons (the principal)
employs another person (agent) to provide a service and then delegate decision-making authority to the
agent (Jensen and Meckling, 1976). As a corporate manager, the manager will be more aware of internal
information and corporate prospects than the owners (shareholders)

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Fama (1980) argues that the separation of ownership and control can be described as an efficient form of
economic organization in the perspective of "a set of contracs". While Fama and Jensen (1983) analyzed
the separation of ownership (risk bearing function) and control (decision function) which is not only for
big companies but also to small companies as well as other services. This separation is meant to address
the agency problem in the firm's growing conditions. Jensen and Meckling (1976) argue that agency
conflicts occur because of the separation of ownership and control of the company, which in turn will
affect the value of the company. Shareholding structure of a company consists of shares owned by
institutional and managerial shareholdings. Managerial ownership by the relatively small number, but it
encourages management to improve company performance.
Ownership structure will have different motivations in monitoring and management companies and
boards of directors. Ownership structure is believed to have the ability to influence the future course of
the company that could affect the company's performance. Ownership structure is a mechanism to reduce
the conflict between management and shareholders.
Several empirical studies show that the ownership structure will affect the value of the company.
Research Tam et al. (2007) which focuses on the ownership structure affects the running of the company,
which in turn affect the performance of the company in an effort to achieve corporate objectives, namely
maximizing the value of the company. The company's shares can be owned by different parties, such
parties are responsible for the operational management of the company. The management company
should have better information about the company as a whole, because the management is directly
responsible for the survival and development of enterprises. The management is also obliged to inform
the company's accountability to stakeholders in the form of financial statements. Thus indirectly, the
management has a very important role in survival (going concern) company
Garay and Gonzalez (2008) conducted a study to examine the relationship between corporate governance,
as measured by the Corporate Governance Index (CGI), and the value of the firm, as measured by the
Price to Book Value (P / BV) and Tobin'Q, the companies went public in Venezuela. Garay and Gonzalez
The results showed that an increase of 1% in CGI result in an average increase of 11.3% in dividend
payouts, 9.9% in the Price to Book Value, and 2.7% in Tobin's q. Findings Garay and Gonzalez are
consistent with theoretical models of La Porta, et al. (2002) which states that good corporate governance
is associated with a high confidence of investors.
Silveira and Barros (2007) conducted a study to determine the effect of the quality of corporate
governance on the market value of the 154 companies went public in Brazil in 2002. Proxy of the quality
of corporate governance derived from a governance index that has been built. Investigations involving
different econometric approaches to address the complexity of the problem, namely multiple regressions
using Ordinary Least Squares (OLS), instrumental variables approach, and systems of simultaneous
equations. Results of analysis multiple regressions (OLS), which uses variable Tobin's q and P / BV as a
variable market value suggests that, ceteris paribus, a change from the worst to the best in quality of
governance will result in an increase in market capitalization in a row from approximately 85% and
100%. While the results of the use of simultaneous equation approach indicates a reverse causality
relationship between the quality of corporate governance and firm value.
Some research contrary to the above studies, Tang (2007) conducted a study to test the significance of the
effect of corporate governance mechanisms on firm performance as measured by stock returns. The study
used a sample of 117 Japanese non-financial companies listed on the Tokyo Stock Exchange covering the
period covering 1989 to 2001. Using an econometric approach that is different from previous studies, the
relationship between board composition and firm performance is tested by least squares regression
analysis of the pooled estimates. Tang study results show that: (1) there is a negative and significant
relationship between the rotation of the members of the board of directors and firm performance, (2)

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reduction of the board size is significantly negative effect on firm performance, (3) there is no consistent
evidence of the influence of outside Directorship, as one proxy of corporate governance mechanisms, the
performance of the company.
Javed and Iqbal (2007) conduct an investigation to answer the question of whether differences in the level
of quality of the company's corporate governance can explain the level of performance achieved by the
company. Investigations carried out on a sample of 50 companies listed on the Karachi Stock Exchange.
Javed and Iqbal conducted an analysis of the relationship between the level of firm value as measured by
Tobin's Q and the Corporate Governance Index (CGI) were measured using three sub-indications of the
council (board), shareholdings and ownership, and disclosures (disclosures) and transparency
(transparency ). Results of the investigation indicate that corporate governance is a means in Pakistan.
However, not all components of corporate governance is important. Board composition and ownership
and shareholdings enhance firm performance, whereas disclosure and transparency has no significant
effect on firm performance. The results of this investigation indicate that the adequacy of the level of
corporate governance can not replace the real condition of the company. The low level of production and
management practices that can not be covered with poor disclosure and clear standards for transparency.
Some of the above studies about the relationship between agency problems on firm value. This study aims
to connect the theory of agency problems with a particular firm about financial decision that will
ultimately affect the value of the company, especially in the manufacturing industry in Indonesia.
This study focused on the manufacturing industry as the manufacturing industry contributed nearly 30
percent of Gross Domestic Product (GDP), manufacturing industries are the main sectors driving growth.
Addition to the large share of exports in manufacturing industries, employment in the non-oil
manufacturing industry also ranks above that whether improved performance of the manufacturing
industry have a significant impact both on exports, employment and the overall economy. Importance of
the manufacturing industry should be coupled with better performance. However, based on data from the
last few years the manufacturing industry experienced a downturn, even below the rate of economic
growth in Indonesia. In 2005 Indonesia's economic growth reached 5.5 percent while growth in the
manufacturing industry only grew by 4.6 percent. While economic growth in 2006 reached 6.3 percent,
but the manufacturing industry grew by only 4.7 percent. Even in 2009, the manufacturing industry is
considered very poor compared with other industry sectors.
Manufacturing sector continued to slow until it reaches the lowest point in the third quarter of 2009 with
growth of only 3.1 percent (Reuters, January 12, 2010). Manufacturing firms serve as the object of study
is based on several considerations that: 1) Manufacturing Industry is the largest contributor of the GDP of
Indonesia where the post-economic crisis of 1997 continued to decline in 2005 grew only 5.5 percent in
2006 down to 4.6 percent while the lowest growth was 2009 grew by only 3.1 percent; 2) based on some
of the results of the study said that one of the causes of the economic crisis in Asia, especially in
Indonesia is that companies in Indonesia do not implement corporate governance. Generally it is said that
the practice of collusion, corruption and nepotism are rampant both at the government-owned companies
and the private companies; 3) From the perspective of agency theory obtained indications that the
ownership structure of companies in Indonesia, particularly manufacturing firms are more concentrated
(owned concentrate) on families and businesses group; 4) The number of companies listed on the
Indonesia Stock Exchange (IDX) more than the industrial sector to another; 5) The regulations requiring
companies to perform disclousure on all information needed by both by the principal, government,
creditors and stakeholders; 6) manufacturing company has disclousure which is simpler than the banking
company; 7) The fall in the competitiveness of manufactured products are compounded by the number of
illegal products that compete in the market which in conjunction with law enforcement very weak.
Decline in competitiveness is one caused by the rising cost of overhead; 8) The debt burden growing

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manufacturing company is characterized by a high rate Debt to Equity Ratio (DER) and Debt to Assets
Ratio (DAR) which indicates the use of high debt on operations company.

MATERIAL AND METHOD

In general, the objectives of this research is to develop new theoretical approaches, in an effort to resolve
the conceptual debate on the impact of agency theory to the value of the firm by bringing in financial
decision which consists of investment decisions, financing decisions and dividend policy. Data used in
this study is a combination of time series data with cross section called pooling the data. Populations and
samples used in this study is a manufacturing company listed on the Indonesia Stock Exchange in 2004-
2013 period. Data sampling technique using simple random sampling.

RESULTS

Based on the results obtained from statistical testing using ANOVA table obtained F value of 452 771
with probability (sig) = 0.000. Because the sig <0.05, then the decision is rejected H0 and accept Ha. this
means that the ownership structure and corporate governance jointly influence investment decisions. R-
square coefficient of determination or R2 = 0.717 or 71.70%, while the influence of other variables not
included in the model, namely, = 1-.717 = 0.283 or 28.3%
Based on the results obtained from statistical testing using ANOVA table obtained F value of 129 452
with probability (sig) = 0.000. Because the sig <0.05, then the decision is rejected H0 and accept Ha. this
means that the ownership structure, corporate governance and investment decisions jointly influence the
funding decisions. R-square coefficient of determination or R2 = 0.522 or 52.20%, while the influence of
other variables not included in the model, namely, = 1-.522 = 0.478 or 47.8%
Based on the results obtained from statistical testing using ANOVA table obtained F value of 256 417
with probability (sig) = 0.00. Because the sig <0.05, then the decision is to reject H0 and accept Ha. this
means that the ownership structure, corporate governance, investment decisions and financing decisions
jointly affect dividend policy. R-square coefficient of determination or R2 = 0.743 or 74.30%, while the
influence of other variables not included in the model, namely, = 1-.743 = 0.257 or 25.70%
Based on the results obtained from statistical testing using ANOVA table obtained F value of 59 644 with
probability (sig) = 0.000. Because the sig <0.05, then the decision is to reject H0 and accept Ha. this
means that the ownership structure, corporate governance, investment decisions, financing decisions and
dividend policy jointly affect firm value. R-square coefficient of determination or R2 = 0.457 or 45.70%,
while the influence of other variables not included in the model, namely, = 1-.457 = 0.542 or 54.20%.

DISCUSSION

Based on the results of the calculation are known, that the influence of the ownership structure (X1) for
investment decisions (Y1) is equal to 0.140 with a probability level of 0.000. This means that the
ownership structure (X1) and a significant positive effect on investment decisions (Y1). From the results
of this study indicate that ownership structure where there is managerial ownership and institutional
ownership affect corporate investment decisions.
Ownership structure has positive influence on investment decisions. Positive effect is caused by the
shareholding that is still dominated by insider holding in which there is ownership by the owner of the
company and ownership by managers.
With the amount of insider ownership holding, then it will continue to add and develop an investment
company because that would be a signal that the company is growing.

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The results are consistent with Jensen and Meckling (1976) which states that one of the requirements to
reduce agency cost is to increase the stock ownership by management in addition to institutional
ownership. This suggests that greater ownership by management, then management will tend to work
harder because they also are part of the company's shareholders.
The findings of this study support some research done by Moh'd et al. (1998), Roseff (1982), Porter
(1992) and Wahyudi & Pawestri (2006).
Based on the results of the calculation are known, that the influence of the ownership structure (X1) for
funding decisions (Y2) is equal to -0.653 with a probability level of 0.000. This means that, ownership
structure (X1) and a significant negative effect on funding decisions (Y2). It can be interpreted that the
increase in ownership structure would reduce corporate financing decisions particularly from external
funding. The findings of this study indicate that the concentrated ownership on management (insider
holdings), where they are part of a family through the use of debt to fund investment. It is evident from
the book's debt to equity (BDE) manufacturing companies during the period 2001-2009 continue to
increase. This contrasts with the results of the research study conducted by Kim and Sorensen (1986),
Agrawal and Mendelker (1987), and Mehran (1992). They examined the effect of managerial ownership
on corporate debt ratios, the results are positive relationship between manager ownership with debt ratios.
Based on the results of the calculation are known, that the influence of the ownership structure (X1) to
dividend policy (Y3) is equal to 0.121 with a probability level of 0.001. This means that, ownership
structure (X1) and a significant positive effect on dividend policy (Y3). This suggests that the ownership
structure affects corporate policy to distribute devidend
Results of this study support the results of research conducted by Jensen and Meckling (1976) which
states that, the greater the proportion of managerial ownership in a company, then the management will
strive even harder to meet the interests of shareholders as well as the management are also shareholders.
Similarly, a study conducted by Leland Pyle (1977) which states that the debt to equity ratio affect the
dividend payout ratio with the positive direction of the relationship.
Results of this study also supports research Frank and Goyal (2000), Hensen (1989) and Ross (1977).
However, contrary to the results of this research study conducted by Crutchly (1999) which states, that
the effect of institutional ownership on the dividend is negative. The higher institutional ownership, the
stronger external control of the company and will reduce agency costs, so companies will tend to use a
low dividend.
Based on the results of the calculation are known, that the influence of the ownership structure (X1) on
firm value (Y4) is equal to 0.447 with a probability level of 0.000. This means, that the ownership
structure (X1) and a significant positive effect on firm value (Y4).
Positive influence between the value of the company ownership structure shows that, when investment
decisions are proxied through the investment opportunity set (IOS) increases, then the value of the
company will also increase. Based on data from the manufacturing industry, the data obtained investment
opportunity set (IOS) are increasingly accompanied by an increase in the value of the firm proxied by
price-book value (PBV). This is contrary to some research results, that the performance of the
manufacturing industry continued to decline.
The findings of this study support the research conducted by Itturiaga and Sanz (1998) which states, that
the relationship of managerial ownership structure with an enterprise value of non-monotonic
relationship. This relationship explains, that as a result of incentives and their managers have attempted to
perform an alignment of interests with ownwership outsider by increasing their shareholding if the value
of the company increases.

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CONCLUSION

Ownership structure and corporate governance have a significant effect on investment decisions.
Ownership structure and corporate governance negatively affect funding decisions, while a positive effect
on investment decisions financing decisions. Ownership structure and corporate governance has a positive
effect on dividend policy, while making investment and financing decisions negatively affect dividend
policy. Ownership structure, corporate governance, investment decisions, financing decisions and
dividend policy and a significant positive effect on value of the firm. Positive relationship between
ownership structure and corporate governance on value of the firm shows the improvement in agency
problems. With improved conditions, will further increase the confidence of the shareholders on the
return that will be earned on the investments that they do

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