IMPLEMENTATION OF ENTERPRISE RISK MANAGEMENT AND FIRM
VALUE IN THE CONSTRUCTION AND PROPERTY
1.0 Introduction:
The huge financial scandals of Enron and WorldCom once shocked the public. On
paper, the financial statements were good but at some point the companies suddenly
collapsed. What was even more shocking was that this bankruptcy was caused by a fatal
error in their accounting system. For the last seven years before the case was exposed,
Enron over-recorded its net income and covered up its debts. The second scandal was
Worldcom, after acquiring MCI, UUNet, Compuserve, and the AOL (American Online)
data network in 1998. This led to too much telecommunications capacity and the
subsequent dot-com bubble in 2000. This resulted in Worldcom's revenue dropping
dramatically. This motivated Bernard Ebbers as CEO and Scott Sullivan as CFO and
David Myers as senior auditor to decide to manipulate the financial statements. The case
that befell the two companies involving the famous public accounting firm Arthur
Anderson shocked users of financial statements around the world. Bachtiar (2012) noted
several Indonesian companies that have been involved in financial scandals. The two
Indonesian companies were Global Bank in 2004 and PT KAI in 2006.
The experience of the accounting scandal above, provides a lesson that even
though financial reports have been routinely published does not mean that a company is
free from lurking risks. This is because in the global era, businesses are faced with an
environment of very high uncertainty and complexity. Based on a survey conducted by one
of the auditor companies, KPMG, to 1500 Audit Committee members in 34 countries, it
was found that 43 percent of the correspondents recognized how increasingly difficult it
was to oversee a number of major risks faced by the company. Some of the key risks
include legal/regulatory compliance, corruption/anti-bribery, financial risk, and/or IT and
cyber risk. This is inseparable from the increasingly complex regulatory, business and
operational environments faced by companies around the world (Saputra, 2014).
At the beginning of its development, the risk management perspective was silo-
based (partial), also known as Traditional Risk Management (TRM). The traditional
approach is still thick with ego-sectoral, where each division or department does not want
to share information or other things that are actually needed for mutual progress. In recent
years, there has been a paradigm shift in the way risk management is viewed, using a
holistic approach. A risk management approach that makes risk management cover all
aspects and is carried out in an integrated manner, which is commonly called enterprise
risk management (ERM). ERM is the opposite of TRM. ERM is often referred to as
Integrated Risk Management (IRM) and Strategic Risk Management (SRM) which offers a
concept of considering the entire company's risk portfolio in an integrated and holistic
manner, so that risk mitigation can be early and comprehensive. Furthermore, risk
management is part of the overall business strategy and is intended to contribute to
protecting and enhancing shareholder value (Hoyt & Liebenberg, 2011). Risk management
is usually carried out by a team called the Risk Management Committee.
In Indonesia, the issue of the importance of risk management has become a
serious concern, especially in the banking industry. This can be seen with the issuance of
BI Regulation No. 8/4/PBI/2006 which was updated by BI Regulation No. 8/14/2006 on
the Implementation of Good Corporate Governance (BI, 2006). This regulation requires
Commercial Banks to establish a Risk Monitoring Committee, further strengthened by the
Financial Services Authority (OJK) through Regulation number 18/POJK.03/2016 requires
Commercial Banks to establish a Risk Management Committee (OJK, 2016), so that it can
be ascertained that all Commercial Banks in Indonesia have a Risk Management
Committee. The regulation only applies to the banking sector and has not touched other
industrial sectors, even though risks are faced in all businesses in any industrial sector.
In Indonesia, infrastructure development is currently being intensified by the
Government under the leadership of President Joko Widodo. This has made the
construction sector one of the sectors that support growth Indonesia's economy. The
construction industry grew by 7-7.3 percent (Bappenas, 2016). The construction market is
projected to grow by 14.26% to reach IDR 446 trillion in 2015 and will be one of the most
promising sectors thanks to the acceleration of the government's infrastructure
development plan (Willantdavis, 2015). The construction sector is projected to be the
driving force of economic growth and the composite stock price index in 2016. With the
boost to the construction sector, the banking sector is automatically boosted by lending to
infrastructure projects.
The large role and business risks of the construction and property sector must be
accompanied by adequate risk management. But until now, there is no regulation that
requires companies in the construction and property sector to carry out risk management as
regulations in the banking sector. The only cross-sectoral regulation on this matter is the
regulation on the establishment of risk monitoring committees in SOEs. In accordance
with the regulation of the Minister of State-Owned Enterprises Number: PER-
10/MBU/2012 on the Supporting Organ of the Board of Commissioners/Supervisory
Board of SOEs, all State-Owned Enterprises (SOEs) have established a Risk Management
Monitoring Committee. So, the regulation also applies to SOEs engaged in construction
and property.
Despite the increasing attention to risk management, academic research in this
field is still relatively minimal. One of the reasons is due to the difficulty to determine the
right measure of ERM construction. Some researchers (Beasley, et al, 2008; Hoyt,
Liebenberg, 2011) use the presence of a chief risk officer (CRO) as a proxy of ERM
implementation. Other researchers, such as Gordon, Loeb, and Tseng developed their own
ERM index (Gordon, et al., 2009).
The implementation of the ERM system will improve company performance
(Hoyt & Liebenberg, 2011). There are at least three studies that link ERM with company
performance, the first conducted by Hoyt, Moore, and Liepenberg (2008), the second
conducted by Gordon, et al (2009), then the third conducted by Bertinetti, et al (2013).
Hoyt, et al (2008) through their research believes that there is a positive relationship
between firm value and ERM implementation in the company. His research on insurance
companies in the United States statistically and economically found that company value
increased by 17% with the implementation of ERM.
The results of ERM implementation for firms are reduced volatility of earnings
and stock prices, improved capital efficiency, and creating synergies between different risk
management activities (Miccolis & Shah, 2000; Cumming & Hirtle, 2001; Lam, 2001;
Meulbroek, 2002; Beasley, et al., 2008). ERM implementation appears to promote risk
awareness, which supports better operations and strategic decision-making.
The purpose of this study is to find empirical evidence on the following matters:
First, analyze the effect of ERM implementation on the value of construction and property
companies in Indonesia; Second, analyze the effect of control factors consisting of size,
leverage, profitability, stock price volatility, sales growth, and dividend policy on the value
of construction and property companies in Indonesia; Third, analyze the correlation of
Enterprise Risk Management (ERM) with control variables consisting of size, leverage,
profitability, stock price volatility, sales growth, and dividend policy.
2.0 METHODS:
The object of research is construction and property companies listed on the IDX.
The sampling method used is purposive sample. The criteria used in sampling this study
are as follows: (1) Construction and property sector companies listed on the IDX;
(2) The construction and property sector companies have complete financial reports in the
2012, 2013, and 2014 periods; (3) The construction and property sector companies have
financial reports whose variables are needed in this study.
Firm value Q is the dependent variable, ERM implementation is the independent
variable, and six other variables: size, leverage, profitability, stock price volatility, sales
growth, and dividend policy, are control variables. This study will use multiple linear
regression analysis techniques.
3.0 RESULTS AND DISCUSSION:
In accordance with the sampling criteria, the number of samples selected from 60
construction and property sector companies listed on the IDX was only 46 that passed the
selection criteria. The data used is data from 2012 to 2014, so a total of 138 data were
collected and 1 outlier data so that 137 data were used.
The implementation of enterprise risk management (ERM) does not appear to
have a significant effect on firm value. This is in line with research conducted by Sanjaya
& Linawati (2015) where the application of ERM in the banking sector has no significant
impact on firm value. Likewise, research conducted by Saptiti (2013) with a sample of
construction and property companies listed on the IDX but the dependent variable is
earnings quality, also did not find a significant effect of the existence of ERM. This is in
contrast to research conducted abroad by Hoyt, et al (2008) and Bertinetti, et al (2013)
which found that ERM implementation has a significant impact on firm value. This may be
due to the implementation of ERM in Indonesia is still new and is still limited to the
formality of following existing regulations. Sanjaya & Linawati (2015) who examined the
banking sector in Indonesia also did not show significant results on the application of
ERM to firm value.
According to (Salvatore, 2005) a high stock price makes the company's value also
high where the main objective of the company according to the theory of the firm is to
maximize wealth or company value.
It is different in the results of research conducted by Manasikana (2015), with
research subjects on manufacturing companies listed on the IDX in the period 2010-2013
found a significant positive relationship with ERM implementation. It turns out that the
manufacturing sector provides different feedback from the service sector, both
construction-property and banking. The necessity of maintaining the supply chain and
quality standards in every mass product seems to be the reason that the implementation of
ERM becomes more important and has an impact on firm value.
In this construction-property service sector, leverage is a variable that has a
significant positive effect on firm value. In contrast to the results of research by Sanjaya &
Linawati (2015) in the banking sector where leverage has a significant negative effect,
which means that the higher the leverage will reduce the company's value. This is in
contrast to the construction and property sectors where high leverage actually increases
firm value. The amount of interest expense obligations that must be paid by construction
and property companies actually increases investor enthusiasm in putting their funds in
this sector. The public's belief that the value of property is bound to rise beyond the
interest expense seems to be a factor related to this. Revenue growth is the second variable
that has a positive and significant relationship with firm value. As mentioned above, public
confidence in the growing property services business is evident here. The revenue growth
variable is the king of investor perception of firm value. The rapid growth in the property
sector was feared to cause a property bubble and it seems that this is not the case, this
sector is still growing rapidly.
According to Sambora, et al (2014), the greater leverage reflects the smaller
potential profits and dividends that will be distributed to shareholders, so that it can reduce
the company's share price. A decrease in dividends and share prices results in reduced
investor confidence in the company. From the above case, it appears that leverage and
dividends are the opposite. Interestingly, in this study ERM is in a significant correlation
with both. Thus it can be stated that in construction and property sector companies the
existence of ERM supports the amount of leverage, in contrast to food industry companies
and drinks as studied by Sambora, et al (2014).
Leverage is a measure that indicates the extent to which fixed income securities
(debt and preferred stock) are used in a firm's capital structure. In relation to firm value,
the sign of this variable is ambiguous. On the one hand, financial leverage increases firm
value to the extent that it reduces free cash flow, or perhaps even vice versa, has been
invested by management in projects that are not optimal (Jensen, 1976). Pagach and Warr
(2007) in their study also found that a 10% increase in leverage increases by 7.8% the
likelihood of a firm to hire a CRO. On the other hand, Liebenberg and Hoyt (2008, 2011)
found a negative relationship between leverage and firm value, where the greater the
leverage, the lower the firm value.
ERM can be interpreted as a comprehensive, detailed, and integrated risk
management implementation in the company. ERM is expected to support the achievement
of company goals through the management of company risks (Charvin, 2014). ERM is a
process that involves the board of directors, management and company members, which is
implemented in strategic settings throughout the company. ERM is designed to identify
potential events that can affect the company, and manage risks to be at a level of risk that
can be controlled by the company, to provide confidence in the achievement of company
goals.
ERM controls the risks faced by the company in an integrated and holistic
manner. Failure to identify, assess, and manage risks can result in losses for stakeholders
and shareholders. In addition, ERM can help a company achieve its key objectives and
create value through the implementation of ERM that is directly linked to corporate
strategizing. High quality ERM can influence resource allocation through market
participants' perception of the reliability of accounting earnings (Baxter, et al., 2012).
Nocco & Stulz (2006) state that ERM can increase firm value at the micro and macro
levels. ERM creates value by enabling senior management to measure and manage risk.
ERM helps companies maintain access to capital markets and other resources needed to
implement strategies and business plans.
In general, the role of ERM is expected to be greater than it is today, as
companies in Indonesia continue to grow and possibly target a wider global market. This
will certainly bring new and greater challenges. The trend in ERM implementation is
positive, though not yet encouraging. However, from annual reports and news releases by
companies make the implementation of ERM a new selling point (branding) of the
company to investors.
4.0 CONCLUSION:
Based on the results of this study, it shows that the enterprise risk management
(ERM) variable has no significant effect on firm value in the construction and property
sectors. This shows that the application of ERM is still limited to following existing
regulations and does not appear to have a direct impact on firm value. Moreover, it can be
seen that the application of ERM is still new in Indonesia while ERM is a continuous
strategic process. Looking at various cases of existing global companies, it is certain that
the application of ERM is appropriate and should be a positive trend.
ERM correlation to significant control variables are size, leverage, and dividend
policy. Large companies have greater risks so that the implementation of ERM becomes
urgent, also large companies are more likely to complete their organizational structure
including risk committees. All of these things are reflected in this research. What is
interesting is that the existence of ERM has a significant positive correlation with leverage,
it can be seen that the existence of ERM convinces creditors to provide loans to companies
in this sector. Finally, companies that implement ERM seem to be more diligent in
distributing dividends to their investors, which is a positive sign for investors.
The suggestions that can be given for further research are: (1) Using a larger
sample of companies listed on the Indonesia Stock Exchange so that the test results are
more comprehensive or generalized; (2) Adding the number of years of research in order
to see the effect better. (3) Examining the effect of the existence of ERM on other
industrial sectors with the same method.
The large role and business risks of the construction and property sector must be
accompanied by adequate risk management. But until now, there is no regulation that
requires companies in the construction and property sector to carry out risk management as
regulations in the banking sector. The only cross-sectoral regulation on this matter is the
regulation on the establishment of risk monitoring committees in SOEs. In accordance
with the regulation of the Minister of State-Owned Enterprises Number: PER-
10/MBU/2012 on the Supporting Organ of the Board of Commissioners/Supervisory
Board of SOEs, all State-Owned Enterprises (SOEs) have established a Risk Management
Monitoring Committee. So, the regulation also applies to SOEs engaged in construction
and property.
Despite the increasing attention to risk management, academic research in this
field is still relatively minimal. One of the reasons is due to the difficulty to determine the
right measure of ERM construction. Some researchers (Beasley, et al, 2008; Hoyt,
Liebenberg, 2011) use the presence of a chief risk officer (CRO) as a proxy of ERM
implementation. Other researchers, such as Gordon, Loeb, and Tseng developed their own
ERM index (Gordon, et al., 2009).
The implementation of the ERM system will improve company performance
(Hoyt & Liebenberg, 2011). There are at least three studies that link ERM with company
performance, the first conducted by Hoyt, Moore, and Liepenberg (2008), the second
conducted by Gordon, et al (2009), then the third conducted by Bertinetti, et al (2013).
Hoyt, et al (2008) through their research believes that there is a positive relationship
between firm value and ERM implementation in the company. His research on insurance
companies in the United States statistically and economically found that company value
increased by 17% with the implementation of ERM.
The results of ERM implementation for firms are reduced volatility of earnings
and stock prices, improved capital efficiency, and creating synergies between different risk
management activities (Miccolis & Shah, 2000; Cumming & Hirtle, 2001; Lam, 2001;
Meulbroek, 2002; Beasley, et al., 2008). ERM implementation appears to promote risk
awareness, which supports better operations and strategic decision-making.
The purpose of this study is to find empirical evidence on the following matters:
First, analyze the effect of ERM implementation on the value of construction and property
companies in Indonesia; Second, analyze the effect of control factors consisting of size,
leverage, profitability, stock price volatility, sales growth, and dividend policy on the value
of construction and property companies in Indonesia; Third, analyze the correlation of
Enterprise Risk Management (ERM) with control variables consisting of size, leverage,
profitability, stock price volatility, sales growth, and dividend policy.
2.0 METHODS:
The object of research is construction and property companies listed on the IDX.
The sampling method used is purposive sample. The criteria used in sampling this study
are as follows: (1) Construction and property sector companies listed on the IDX;
(2) The construction and property sector companies have complete financial reports in the
2012, 2013, and 2014 periods; (3) The construction and property sector companies have
financial reports whose variables are needed in this study.
Firm value Q is the dependent variable, ERM implementation is the independent
variable, and six other variables: size, leverage, profitability, stock price volatility, sales
growth, and dividend policy, are control variables. This study will use multiple linear
regression analysis techniques.
3.0 RESULTS AND DISCUSSION:
In accordance with the sampling criteria, the number of samples selected from 60
construction and property sector companies listed on the IDX was only 46 that passed the
selection criteria. The data used is data from 2012 to 2014, so a total of 138 data were
collected and 1 outlier data so that 137 data were used.
The implementation of enterprise risk management (ERM) does not appear to
have a significant effect on firm value. This is in line with research conducted by Sanjaya
& Linawati (2015) where the application of ERM in the banking sector has no significant
impact on firm value. Likewise, research conducted by Saptiti (2013) with a sample of
construction and property companies listed on the IDX but the dependent variable is
earnings quality, also did not find a significant effect of the existence of ERM. This is in
contrast to research conducted abroad by Hoyt, et al (2008) and Bertinetti, et al (2013)
which found that ERM implementation has a significant impact on firm value. This may be
due to the implementation of ERM in Indonesia is still new and is still limited to the
formality of following existing regulations. Sanjaya & Linawati (2015) who examined the
banking sector in Indonesia also did not show significant results on the application of
ERM to firm value.
According to (Salvatore, 2005) a high stock price makes the company's value also
high where the main objective of the company according to the theory of the firm is to
maximize wealth or company value.
It is different in the results of research conducted by Manasikana (2015), with
research subjects on manufacturing companies listed on the IDX in the period 2010-2013
found a significant positive relationship with ERM implementation. It turns out that the
manufacturing sector provides different feedback from the service sector, both
construction-property and banking. The necessity of maintaining the supply chain and
quality standards in every mass product seems to be the reason that the implementation of
ERM becomes more important and has an impact on firm value.
In this construction-property service sector, leverage is a variable that has a
significant positive effect on firm value. In contrast to the results of research by Sanjaya &
Linawati (2015) in the banking sector where leverage has a significant negative effect,
which means that the higher the leverage will reduce the company's value. This is in
contrast to the construction and property sectors where high leverage actually increases
firm value. The amount of interest expense obligations that must be paid by construction
and property companies actually increases investor enthusiasm in putting their funds in
this sector. The public's belief that the value of property is bound to rise beyond the
interest expense seems to be a factor related to this. Revenue growth is the second variable
that has a positive and significant relationship with firm value. As mentioned above, public
confidence in the growing property services business is evident here. The revenue growth
variable is the king of investor perception of firm value. The rapid growth in the property
sector was feared to cause a property bubble and it seems that this is not the case, this
sector is still growing rapidly.
According to Sambora, et al (2014), the greater leverage reflects the smaller
potential profits and dividends that will be distributed to shareholders, so that it can reduce
the company's share price. A decrease in dividends and share prices results in reduced
investor confidence in the company. From the above case, it appears that leverage and
dividends are the opposite. Interestingly, in this study ERM is in a significant correlation
with both. Thus it can be stated that in construction and property sector companies the
existence of ERM supports the amount of leverage, in contrast to food industry companies
and drinks as studied by Sambora, et al (2014).
Leverage is a measure that indicates the extent to which fixed income securities
(debt and preferred stock) are used in a firm's capital structure. In relation to firm value,
the sign of this variable is ambiguous. On the one hand, financial leverage increases firm
value to the extent that it reduces free cash flow, or perhaps even vice versa, has been
invested by management in projects that are not optimal (Jensen, 1976). Pagach and Warr
(2007) in their study also found that a 10% increase in leverage increases by 7.8% the
likelihood of a firm to hire a CRO. On the other hand, Liebenberg and Hoyt (2008, 2011)
found a negative relationship between leverage and firm value, where the greater the
leverage, the lower the firm value.
ERM can be interpreted as a comprehensive, detailed, and integrated risk
management implementation in the company. ERM is expected to support the achievement
of company goals through the management of company risks (Charvin, 2014). ERM is a
process that involves the board of directors, management and company members, which is
implemented in strategic settings throughout the company. ERM is designed to identify
potential events that can affect the company, and manage risks to be at a level of risk that
can be controlled by the company, to provide confidence in the achievement of company
goals.
ERM controls the risks faced by the company in an integrated and holistic
manner. Failure to identify, assess, and manage risks can result in losses for stakeholders
and shareholders. In addition, ERM can help a company achieve its key objectives and
create value through the implementation of ERM that is directly linked to corporate
strategizing. High quality ERM can influence resource allocation through market
participants' perception of the reliability of accounting earnings (Baxter, et al., 2012).
Nocco & Stulz (2006) state that ERM can increase firm value at the micro and macro
levels. ERM creates value by enabling senior management to measure and manage risk.
ERM helps companies maintain access to capital markets and other resources needed to
implement strategies and business plans.
In general, the role of ERM is expected to be greater than it is today, as
companies in Indonesia continue to grow and possibly target a wider global market. This
will certainly bring new and greater challenges. The trend in ERM implementation is
positive, though not yet encouraging. However, from annual reports and news releases by
companies make the implementation of ERM a new selling point (branding) of the
company to investors.
4.0 CONCLUSION:
Based on the results of this study, it shows that the enterprise risk management
(ERM) variable has no significant effect on firm value in the construction and property
sectors. This shows that the application of ERM is still limited to following existing
regulations and does not appear to have a direct impact on firm value. Moreover, it can be
seen that the application of ERM is still new in Indonesia while ERM is a continuous
strategic process. Looking at various cases of existing global companies, it is certain that
the application of ERM is appropriate and should be a positive trend.
ERM correlation to significant control variables are size, leverage, and dividend
policy. Large companies have greater risks so that the implementation of ERM becomes
urgent, also large companies are more likely to complete their organizational structure
including risk committees. All of these things are reflected in this research. What is
interesting is that the existence of ERM has a significant positive correlation with leverage,
it can be seen that the existence of ERM convinces creditors to provide loans to companies
in this sector. Finally, companies that implement ERM seem to be more diligent in
distributing dividends to their investors, which is a positive sign for investors.
The suggestions that can be given for further research are: (1) Using a larger
sample of companies listed on the Indonesia Stock Exchange so that the test results are
more comprehensive or generalized; (2) Adding the number of years of research in order
to see the effect better. (3) Examining the effect of the existence of ERM on other
industrial sectors with the same method.
The large role and business risks of the construction and property sector must be
accompanied by adequate risk management. But until now, there is no regulation that
requires companies in the construction and property sector to carry out risk management as
regulations in the banking sector. The only cross-sectoral regulation on this matter is the
regulation on the establishment of risk monitoring committees in SOEs. In accordance
with the regulation of the Minister of State-Owned Enterprises Number: PER-
10/MBU/2012 on the Supporting Organ of the Board of Commissioners/Supervisory
Board of SOEs, all State-Owned Enterprises (SOEs) have established a Risk Management
Monitoring Committee. So, the regulation also applies to SOEs engaged in construction
and property.
Despite the increasing attention to risk management, academic research in this
field is still relatively minimal. One of the reasons is due to the difficulty to determine the
right measure of ERM construction. Some researchers (Beasley, et al, 2008; Hoyt,
Liebenberg, 2011) use the presence of a chief risk officer (CRO) as a proxy of ERM
implementation. Other researchers, such as Gordon, Loeb, and Tseng developed their own
ERM index (Gordon, et al., 2009).
The implementation of the ERM system will improve company performance
(Hoyt & Liebenberg, 2011). There are at least three studies that link ERM with company
performance, the first conducted by Hoyt, Moore, and Liepenberg (2008), the second
conducted by Gordon, et al (2009), then the third conducted by Bertinetti, et al (2013).
Hoyt, et al (2008) through their research believes that there is a positive relationship
between firm value and ERM implementation in the company. His research on insurance
companies in the United States statistically and economically found that company value
increased by 17% with the implementation of ERM.
The results of ERM implementation for firms are reduced volatility of earnings
and stock prices, improved capital efficiency, and creating synergies between different risk
management activities (Miccolis & Shah, 2000; Cumming & Hirtle, 2001; Lam, 2001;
Meulbroek, 2002; Beasley, et al., 2008). ERM implementation appears to promote risk
awareness, which supports better operations and strategic decision-making.
The purpose of this study is to find empirical evidence on the following matters:
First, analyze the effect of ERM implementation on the value of construction and property
companies in Indonesia; Second, analyze the effect of control factors consisting of size,
leverage, profitability, stock price volatility, sales growth, and dividend policy on the value
of construction and property companies in Indonesia; Third, analyze the correlation of
Enterprise Risk Management (ERM) with control variables consisting of size, leverage,
profitability, stock price volatility, sales growth, and dividend policy.
2.0 METHODS:
The object of research is construction and property companies listed on the IDX.
The sampling method used is purposive sample. The criteria used in sampling this study
are as follows: (1) Construction and property sector companies listed on the IDX;
(2) The construction and property sector companies have complete financial reports in the
2012, 2013, and 2014 periods; (3) The construction and property sector companies have
financial reports whose variables are needed in this study.
Firm value Q is the dependent variable, ERM implementation is the independent
variable, and six other variables: size, leverage, profitability, stock price volatility, sales
growth, and dividend policy, are control variables. This study will use multiple linear
regression analysis techniques.
3.0 RESULTS AND DISCUSSION:
In accordance with the sampling criteria, the number of samples selected from 60
construction and property sector companies listed on the IDX was only 46 that passed the
selection criteria. The data used is data from 2012 to 2014, so a total of 138 data were
collected and 1 outlier data so that 137 data were used.
The implementation of enterprise risk management (ERM) does not appear to
have a significant effect on firm value. This is in line with research conducted by Sanjaya
& Linawati (2015) where the application of ERM in the banking sector has no significant
impact on firm value. Likewise, research conducted by Saptiti (2013) with a sample of
construction and property companies listed on the IDX but the dependent variable is
earnings quality, also did not find a significant effect of the existence of ERM. This is in
contrast to research conducted abroad by Hoyt, et al (2008) and Bertinetti, et al (2013)
which found that ERM implementation has a significant impact on firm value. This may be
due to the implementation of ERM in Indonesia is still new and is still limited to the
formality of following existing regulations. Sanjaya & Linawati (2015) who examined the
banking sector in Indonesia also did not show significant results on the application of
ERM to firm value.
According to (Salvatore, 2005) a high stock price makes the company's value also
high where the main objective of the company according to the theory of the firm is to
maximize wealth or company value.
It is different in the results of research conducted by Manasikana (2015), with
research subjects on manufacturing companies listed on the IDX in the period 2010-2013
found a significant positive relationship with ERM implementation. It turns out that the
manufacturing sector provides different feedback from the service sector, both
construction-property and banking. The necessity of maintaining the supply chain and
quality standards in every mass product seems to be the reason that the implementation of
ERM becomes more important and has an impact on firm value.
In this construction-property service sector, leverage is a variable that has a
significant positive effect on firm value. In contrast to the results of research by Sanjaya &
Linawati (2015) in the banking sector where leverage has a significant negative effect,
which means that the higher the leverage will reduce the company's value. This is in
contrast to the construction and property sectors where high leverage actually increases
firm value. The amount of interest expense obligations that must be paid by construction
and property companies actually increases investor enthusiasm in putting their funds in
this sector. The public's belief that the value of property is bound to rise beyond the
interest expense seems to be a factor related to this. Revenue growth is the second variable
that has a positive and significant relationship with firm value. As mentioned above, public
confidence in the growing property services business is evident here. The revenue growth
variable is the king of investor perception of firm value. The rapid growth in the property
sector was feared to cause a property bubble and it seems that this is not the case, this
sector is still growing rapidly.
According to Sambora, et al (2014), the greater leverage reflects the smaller
potential profits and dividends that will be distributed to shareholders, so that it can reduce
the company's share price. A decrease in dividends and share prices results in reduced
investor confidence in the company. From the above case, it appears that leverage and
dividends are the opposite. Interestingly, in this study ERM is in a significant correlation
with both. Thus it can be stated that in construction and property sector companies the
existence of ERM supports the amount of leverage, in contrast to food industry companies
and drinks as studied by Sambora, et al (2014).
Leverage is a measure that indicates the extent to which fixed income securities
(debt and preferred stock) are used in a firm's capital structure. In relation to firm value,
the sign of this variable is ambiguous. On the one hand, financial leverage increases firm
value to the extent that it reduces free cash flow, or perhaps even vice versa, has been
invested by management in projects that are not optimal (Jensen, 1976). Pagach and Warr
(2007) in their study also found that a 10% increase in leverage increases by 7.8% the
likelihood of a firm to hire a CRO. On the other hand, Liebenberg and Hoyt (2008, 2011)
found a negative relationship between leverage and firm value, where the greater the
leverage, the lower the firm value.
ERM can be interpreted as a comprehensive, detailed, and integrated risk
management implementation in the company. ERM is expected to support the achievement
of company goals through the management of company risks (Charvin, 2014). ERM is a
process that involves the board of directors, management and company members, which is
implemented in strategic settings throughout the company. ERM is designed to identify
potential events that can affect the company, and manage risks to be at a level of risk that
can be controlled by the company, to provide confidence in the achievement of company
goals.
ERM controls the risks faced by the company in an integrated and holistic
manner. Failure to identify, assess, and manage risks can result in losses for stakeholders
and shareholders. In addition, ERM can help a company achieve its key objectives and
create value through the implementation of ERM that is directly linked to corporate
strategizing. High quality ERM can influence resource allocation through market
participants' perception of the reliability of accounting earnings (Baxter, et al., 2012).
Nocco & Stulz (2006) state that ERM can increase firm value at the micro and macro
levels. ERM creates value by enabling senior management to measure and manage risk.
ERM helps companies maintain access to capital markets and other resources needed to
implement strategies and business plans.
In general, the role of ERM is expected to be greater than it is today, as
companies in Indonesia continue to grow and possibly target a wider global market. This
will certainly bring new and greater challenges. The trend in ERM implementation is
positive, though not yet encouraging. However, from annual reports and news releases by
companies make the implementation of ERM a new selling point (branding) of the
company to investors.
4.0 CONCLUSION:
Based on the results of this study, it shows that the enterprise risk management
(ERM) variable has no significant effect on firm value in the construction and property
sectors. This shows that the application of ERM is still limited to following existing
regulations and does not appear to have a direct impact on firm value. Moreover, it can be
seen that the application of ERM is still new in Indonesia while ERM is a continuous
strategic process. Looking at various cases of existing global companies, it is certain that
the application of ERM is appropriate and should be a positive trend.
ERM correlation to significant control variables are size, leverage, and dividend
policy. Large companies have greater risks so that the implementation of ERM becomes
urgent, also large companies are more likely to complete their organizational structure
including risk committees. All of these things are reflected in this research. What is
interesting is that the existence of ERM has a significant positive correlation with leverage,
it can be seen that the existence of ERM convinces creditors to provide loans to companies
in this sector. Finally, companies that implement ERM seem to be more diligent in
distributing dividends to their investors, which is a positive sign for investors.
The suggestions that can be given for further research are: (1) Using a larger
sample of companies listed on the Indonesia Stock Exchange so that the test results are
more comprehensive or generalized; (2) Adding the number of years of research in order
to see the effect better. (3) Examining the effect of the existence of ERM on other
industrial sectors with the same method.
The large role and business risks of the construction and property sector must be
accompanied by adequate risk management. But until now, there is no regulation that
requires companies in the construction and property sector to carry out risk management as
regulations in the banking sector. The only cross-sectoral regulation on this matter is the
regulation on the establishment of risk monitoring committees in SOEs. In accordance
with the regulation of the Minister of State-Owned Enterprises Number: PER-
10/MBU/2012 on the Supporting Organ of the Board of Commissioners/Supervisory
Board of SOEs, all State-Owned Enterprises (SOEs) have established a Risk Management
Monitoring Committee. So, the regulation also applies to SOEs engaged in construction
and property.
Despite the increasing attention to risk management, academic research in this
field is still relatively minimal. One of the reasons is due to the difficulty to determine the
right measure of ERM construction. Some researchers (Beasley, et al, 2008; Hoyt,
Liebenberg, 2011) use the presence of a chief risk officer (CRO) as a proxy of ERM
implementation. Other researchers, such as Gordon, Loeb, and Tseng developed their own
ERM index (Gordon, et al., 2009).
The implementation of the ERM system will improve company performance
(Hoyt & Liebenberg, 2011). There are at least three studies that link ERM with company
performance, the first conducted by Hoyt, Moore, and Liepenberg (2008), the second
conducted by Gordon, et al (2009), then the third conducted by Bertinetti, et al (2013).
Hoyt, et al (2008) through their research believes that there is a positive relationship
between firm value and ERM implementation in the company. His research on insurance
companies in the United States statistically and economically found that company value
increased by 17% with the implementation of ERM.
The results of ERM implementation for firms are reduced volatility of earnings
and stock prices, improved capital efficiency, and creating synergies between different risk
management activities (Miccolis & Shah, 2000; Cumming & Hirtle, 2001; Lam, 2001;
Meulbroek, 2002; Beasley, et al., 2008). ERM implementation appears to promote risk
awareness, which supports better operations and strategic decision-making.
The purpose of this study is to find empirical evidence on the following matters:
First, analyze the effect of ERM implementation on the value of construction and property
companies in Indonesia; Second, analyze the effect of control factors consisting of size,
leverage, profitability, stock price volatility, sales growth, and dividend policy on the value
of construction and property companies in Indonesia; Third, analyze the correlation of
Enterprise Risk Management (ERM) with control variables consisting of size, leverage,
profitability, stock price volatility, sales growth, and dividend policy.
2.0 METHODS:
The object of research is construction and property companies listed on the IDX.
The sampling method used is purposive sample. The criteria used in sampling this study
are as follows: (1) Construction and property sector companies listed on the IDX;
(2) The construction and property sector companies have complete financial reports in the
2012, 2013, and 2014 periods; (3) The construction and property sector companies have
financial reports whose variables are needed in this study.
Firm value Q is the dependent variable, ERM implementation is the independent
variable, and six other variables: size, leverage, profitability, stock price volatility, sales
growth, and dividend policy, are control variables. This study will use multiple linear
regression analysis techniques.
3.0 RESULTS AND DISCUSSION:
In accordance with the sampling criteria, the number of samples selected from 60
construction and property sector companies listed on the IDX was only 46 that passed the
selection criteria. The data used is data from 2012 to 2014, so a total of 138 data were
collected and 1 outlier data so that 137 data were used.
The implementation of enterprise risk management (ERM) does not appear to
have a significant effect on firm value. This is in line with research conducted by Sanjaya
& Linawati (2015) where the application of ERM in the banking sector has no significant
impact on firm value. Likewise, research conducted by Saptiti (2013) with a sample of
construction and property companies listed on the IDX but the dependent variable is
earnings quality, also did not find a significant effect of the existence of ERM. This is in
contrast to research conducted abroad by Hoyt, et al (2008) and Bertinetti, et al (2013)
which found that ERM implementation has a significant impact on firm value. This may be
due to the implementation of ERM in Indonesia is still new and is still limited to the
formality of following existing regulations. Sanjaya & Linawati (2015) who examined the
banking sector in Indonesia also did not show significant results on the application of
ERM to firm value.
According to (Salvatore, 2005) a high stock price makes the company's value also
high where the main objective of the company according to the theory of the firm is to
maximize wealth or company value.
It is different in the results of research conducted by Manasikana (2015), with
research subjects on manufacturing companies listed on the IDX in the period 2010-2013
found a significant positive relationship with ERM implementation. It turns out that the
manufacturing sector provides different feedback from the service sector, both
construction-property and banking. The necessity of maintaining the supply chain and
quality standards in every mass product seems to be the reason that the implementation of
ERM becomes more important and has an impact on firm value.
In this construction-property service sector, leverage is a variable that has a
significant positive effect on firm value. In contrast to the results of research by Sanjaya &
Linawati (2015) in the banking sector where leverage has a significant negative effect,
which means that the higher the leverage will reduce the company's value. This is in
contrast to the construction and property sectors where high leverage actually increases
firm value. The amount of interest expense obligations that must be paid by construction
and property companies actually increases investor enthusiasm in putting their funds in
this sector. The public's belief that the value of property is bound to rise beyond the
interest expense seems to be a factor related to this. Revenue growth is the second variable
that has a positive and significant relationship with firm value. As mentioned above, public
confidence in the growing property services business is evident here. The revenue growth
variable is the king of investor perception of firm value. The rapid growth in the property
sector was feared to cause a property bubble and it seems that this is not the case, this
sector is still growing rapidly.
According to Sambora, et al (2014), the greater leverage reflects the smaller
potential profits and dividends that will be distributed to shareholders, so that it can reduce
the company's share price. A decrease in dividends and share prices results in reduced
investor confidence in the company. From the above case, it appears that leverage and
dividends are the opposite. Interestingly, in this study ERM is in a significant correlation
with both. Thus it can be stated that in construction and property sector companies the
existence of ERM supports the amount of leverage, in contrast to food industry companies
and drinks as studied by Sambora, et al (2014).
Leverage is a measure that indicates the extent to which fixed income securities
(debt and preferred stock) are used in a firm's capital structure. In relation to firm value,
the sign of this variable is ambiguous. On the one hand, financial leverage increases firm
value to the extent that it reduces free cash flow, or perhaps even vice versa, has been
invested by management in projects that are not optimal (Jensen, 1976). Pagach and Warr
(2007) in their study also found that a 10% increase in leverage increases by 7.8% the
likelihood of a firm to hire a CRO. On the other hand, Liebenberg and Hoyt (2008, 2011)
found a negative relationship between leverage and firm value, where the greater the
leverage, the lower the firm value.
ERM can be interpreted as a comprehensive, detailed, and integrated risk
management implementation in the company. ERM is expected to support the achievement
of company goals through the management of company risks (Charvin, 2014). ERM is a
process that involves the board of directors, management and company members, which is
implemented in strategic settings throughout the company. ERM is designed to identify
potential events that can affect the company, and manage risks to be at a level of risk that
can be controlled by the company, to provide confidence in the achievement of company
goals.
ERM controls the risks faced by the company in an integrated and holistic
manner. Failure to identify, assess, and manage risks can result in losses for stakeholders
and shareholders. In addition, ERM can help a company achieve its key objectives and
create value through the implementation of ERM that is directly linked to corporate
strategizing. High quality ERM can influence resource allocation through market
participants' perception of the reliability of accounting earnings (Baxter, et al., 2012).
Nocco & Stulz (2006) state that ERM can increase firm value at the micro and macro
levels. ERM creates value by enabling senior management to measure and manage risk.
ERM helps companies maintain access to capital markets and other resources needed to
implement strategies and business plans.
In general, the role of ERM is expected to be greater than it is today, as
companies in Indonesia continue to grow and possibly target a wider global market. This
will certainly bring new and greater challenges. The trend in ERM implementation is
positive, though not yet encouraging. However, from annual reports and news releases by
companies make the implementation of ERM a new selling point (branding) of the
company to investors.
4.0 CONCLUSION:
Based on the results of this study, it shows that the enterprise risk management
(ERM) variable has no significant effect on firm value in the construction and property
sectors. This shows that the application of ERM is still limited to following existing
regulations and does not appear to have a direct impact on firm value. Moreover, it can be
seen that the application of ERM is still new in Indonesia while ERM is a continuous
strategic process. Looking at various cases of existing global companies, it is certain that
the application of ERM is appropriate and should be a positive trend.
ERM correlation to significant control variables are size, leverage, and dividend
policy. Large companies have greater risks so that the implementation of ERM becomes
urgent, also large companies are more likely to complete their organizational structure
including risk committees. All of these things are reflected in this research. What is
interesting is that the existence of ERM has a significant positive correlation with leverage,
it can be seen that the existence of ERM convinces creditors to provide loans to companies
in this sector. Finally, companies that implement ERM seem to be more diligent in
distributing dividends to their investors, which is a positive sign for investors.
The suggestions that can be given for further research are: (1) Using a larger
sample of companies listed on the Indonesia Stock Exchange so that the test results are
more comprehensive or generalized; (2) Adding the number of years of research in order
to see the effect better. (3) Examining the effect of the existence of ERM on other
industrial sectors with the same method.
The large role and business risks of the construction and property sector must be
accompanied by adequate risk management. But until now, there is no regulation that
requires companies in the construction and property sector to carry out risk management as
regulations in the banking sector. The only cross-sectoral regulation on this matter is the
regulation on the establishment of risk monitoring committees in SOEs. In accordance
with the regulation of the Minister of State-Owned Enterprises Number: PER-
10/MBU/2012 on the Supporting Organ of the Board of Commissioners/Supervisory
Board of SOEs, all State-Owned Enterprises (SOEs) have established a Risk Management
Monitoring Committee. So, the regulation also applies to SOEs engaged in construction
and property.
Despite the increasing attention to risk management, academic research in this
field is still relatively minimal. One of the reasons is due to the difficulty to determine the
right measure of ERM construction. Some researchers (Beasley, et al, 2008; Hoyt,
Liebenberg, 2011) use the presence of a chief risk officer (CRO) as a proxy of ERM
implementation. Other researchers, such as Gordon, Loeb, and Tseng developed their own
ERM index (Gordon, et al., 2009).
The implementation of the ERM system will improve company performance
(Hoyt & Liebenberg, 2011). There are at least three studies that link ERM with company
performance, the first conducted by Hoyt, Moore, and Liepenberg (2008), the second
conducted by Gordon, et al (2009), then the third conducted by Bertinetti, et al (2013).
Hoyt, et al (2008) through their research believes that there is a positive relationship
between firm value and ERM implementation in the company. His research on insurance
companies in the United States statistically and economically found that company value
increased by 17% with the implementation of ERM.
The results of ERM implementation for firms are reduced volatility of earnings
and stock prices, improved capital efficiency, and creating synergies between different risk
management activities (Miccolis & Shah, 2000; Cumming & Hirtle, 2001; Lam, 2001;
Meulbroek, 2002; Beasley, et al., 2008). ERM implementation appears to promote risk
awareness, which supports better operations and strategic decision-making.
The purpose of this study is to find empirical evidence on the following matters:
First, analyze the effect of ERM implementation on the value of construction and property
companies in Indonesia; Second, analyze the effect of control factors consisting of size,
leverage, profitability, stock price volatility, sales growth, and dividend policy on the value
of construction and property companies in Indonesia; Third, analyze the correlation of
Enterprise Risk Management (ERM) with control variables consisting of size, leverage,
profitability, stock price volatility, sales growth, and dividend policy.
2.0 METHODS:
The object of research is construction and property companies listed on the IDX.
The sampling method used is purposive sample. The criteria used in sampling this study
are as follows: (1) Construction and property sector companies listed on the IDX;
(2) The construction and property sector companies have complete financial reports in the
2012, 2013, and 2014 periods; (3) The construction and property sector companies have
financial reports whose variables are needed in this study.
Firm value Q is the dependent variable, ERM implementation is the independent
variable, and six other variables: size, leverage, profitability, stock price volatility, sales
growth, and dividend policy, are control variables. This study will use multiple linear
regression analysis techniques.
3.0 RESULTS AND DISCUSSION:
In accordance with the sampling criteria, the number of samples selected from 60
construction and property sector companies listed on the IDX was only 46 that passed the
selection criteria. The data used is data from 2012 to 2014, so a total of 138 data were
collected and 1 outlier data so that 137 data were used.
The implementation of enterprise risk management (ERM) does not appear to
have a significant effect on firm value. This is in line with research conducted by Sanjaya
& Linawati (2015) where the application of ERM in the banking sector has no significant
impact on firm value. Likewise, research conducted by Saptiti (2013) with a sample of
construction and property companies listed on the IDX but the dependent variable is
earnings quality, also did not find a significant effect of the existence of ERM. This is in
contrast to research conducted abroad by Hoyt, et al (2008) and Bertinetti, et al (2013)
which found that ERM implementation has a significant impact on firm value. This may be
due to the implementation of ERM in Indonesia is still new and is still limited to the
formality of following existing regulations. Sanjaya & Linawati (2015) who examined the
banking sector in Indonesia also did not show significant results on the application of
ERM to firm value.
According to (Salvatore, 2005) a high stock price makes the company's value also
high where the main objective of the company according to the theory of the firm is to
maximize wealth or company value.
It is different in the results of research conducted by Manasikana (2015), with
research subjects on manufacturing companies listed on the IDX in the period 2010-2013
found a significant positive relationship with ERM implementation. It turns out that the
manufacturing sector provides different feedback from the service sector, both
construction-property and banking. The necessity of maintaining the supply chain and
quality standards in every mass product seems to be the reason that the implementation of
ERM becomes more important and has an impact on firm value.
In this construction-property service sector, leverage is a variable that has a
significant positive effect on firm value. In contrast to the results of research by Sanjaya &
Linawati (2015) in the banking sector where leverage has a significant negative effect,
which means that the higher the leverage will reduce the company's value. This is in
contrast to the construction and property sectors where high leverage actually increases
firm value. The amount of interest expense obligations that must be paid by construction
and property companies actually increases investor enthusiasm in putting their funds in
this sector. The public's belief that the value of property is bound to rise beyond the
interest expense seems to be a factor related to this. Revenue growth is the second variable
that has a positive and significant relationship with firm value. As mentioned above, public
confidence in the growing property services business is evident here. The revenue growth
variable is the king of investor perception of firm value. The rapid growth in the property
sector was feared to cause a property bubble and it seems that this is not the case, this
sector is still growing rapidly.
According to Sambora, et al (2014), the greater leverage reflects the smaller
potential profits and dividends that will be distributed to shareholders, so that it can reduce
the company's share price. A decrease in dividends and share prices results in reduced
investor confidence in the company. From the above case, it appears that leverage and
dividends are the opposite. Interestingly, in this study ERM is in a significant correlation
with both. Thus it can be stated that in construction and property sector companies the
existence of ERM supports the amount of leverage, in contrast to food industry companies
and drinks as studied by Sambora, et al (2014).
Leverage is a measure that indicates the extent to which fixed income securities
(debt and preferred stock) are used in a firm's capital structure. In relation to firm value,
the sign of this variable is ambiguous. On the one hand, financial leverage increases firm
value to the extent that it reduces free cash flow, or perhaps even vice versa, has been
invested by management in projects that are not optimal (Jensen, 1976). Pagach and Warr
(2007) in their study also found that a 10% increase in leverage increases by 7.8% the
likelihood of a firm to hire a CRO. On the other hand, Liebenberg and Hoyt (2008, 2011)
found a negative relationship between leverage and firm value, where the greater the
leverage, the lower the firm value.
ERM can be interpreted as a comprehensive, detailed, and integrated risk
management implementation in the company. ERM is expected to support the achievement
of company goals through the management of company risks (Charvin, 2014). ERM is a
process that involves the board of directors, management and company members, which is
implemented in strategic settings throughout the company. ERM is designed to identify
potential events that can affect the company, and manage risks to be at a level of risk that
can be controlled by the company, to provide confidence in the achievement of company
goals.
ERM controls the risks faced by the company in an integrated and holistic
manner. Failure to identify, assess, and manage risks can result in losses for stakeholders
and shareholders. In addition, ERM can help a company achieve its key objectives and
create value through the implementation of ERM that is directly linked to corporate
strategizing. High quality ERM can influence resource allocation through market
participants' perception of the reliability of accounting earnings (Baxter, et al., 2012).
Nocco & Stulz (2006) state that ERM can increase firm value at the micro and macro
levels. ERM creates value by enabling senior management to measure and manage risk.
ERM helps companies maintain access to capital markets and other resources needed to
implement strategies and business plans.
In general, the role of ERM is expected to be greater than it is today, as
companies in Indonesia continue to grow and possibly target a wider global market. This
will certainly bring new and greater challenges. The trend in ERM implementation is
positive, though not yet encouraging. However, from annual reports and news releases by
companies make the implementation of ERM a new selling point (branding) of the
company to investors.
4.0 CONCLUSION:
Based on the results of this study, it shows that the enterprise risk management
(ERM) variable has no significant effect on firm value in the construction and property
sectors. This shows that the application of ERM is still limited to following existing
regulations and does not appear to have a direct impact on firm value. Moreover, it can be
seen that the application of ERM is still new in Indonesia while ERM is a continuous
strategic process. Looking at various cases of existing global companies, it is certain that
the application of ERM is appropriate and should be a positive trend.
ERM correlation to significant control variables are size, leverage, and dividend
policy. Large companies have greater risks so that the implementation of ERM becomes
urgent, also large companies are more likely to complete their organizational structure
including risk committees. All of these things are reflected in this research. What is
interesting is that the existence of ERM has a significant positive correlation with leverage,
it can be seen that the existence of ERM convinces creditors to provide loans to companies
in this sector. Finally, companies that implement ERM seem to be more diligent in
distributing dividends to their investors, which is a positive sign for investors.
The suggestions that can be given for further research are: (1) Using a larger
sample of companies listed on the Indonesia Stock Exchange so that the test results are
more comprehensive or generalized; (2) Adding the number of years of research in order
to see the effect better. (3) Examining the effect of the existence of ERM on other
industrial sectors with the same method.
