Academic journal article European Research Studies

Financial Performance towards Value of Firms in Basic and Chemicals Industry

Academic journal article European Research Studies

Financial Performance towards Value of Firms in Basic and Chemicals Industry

Article excerpt

1. Introduction

Capital market is one of the major contributors of economic growth in Indonesia. Rise and fall of the stock index is a reflection of the economic dynamism of the country (Widoatmodjo, 2009). Capital market is a platform between parties who have excess fund (investors) to those who need additional fund by trading the securities issued by the related companies (Tandelilin, 2010). The performance of capital market could be used as a benchmark to determine the economy growth of a country (Fetai, 2015; Glavina, 2015; Thalassinos, 2008; Thalassinos et al., 2012).

Investment activity is an activity of placing funds in to one or more than one assets in a certain period with expectation of generating income or increasing value of the investment. Increasing trading value will be followed by increasing stock price (Husnan, 2005). Investment climate in Indonesia tends to hike in accordance with the new regulation of Decree No. KEP-00071/BEI/11-2013 concerning Changes to Round Lots and Tick Price. Effectively implemented since January 6, 2014, the new regulation stipulated the round lot value of equity security now consists of 100 shares as compared to 500 shares set out in the previous Decree of 2012. Decreasing round lots is expected to attract investors to trade actively at stock exchange, because the funds needed to purchase a stock became less. Since more investors are entering the stock market, there will be more trading transactions so it will enhance market capitalization and the liquidity of stock will go up. Liquid stocks will have high trading value, which indicates the investors are attracted to this stock. Stock price is formed on the power supply and demand in the stock market which is influenced by investors' considerations both from firm's internal and external factors (Jogiyanto, 2010; Thalassinos et al., 2015; Rupeika-Apoga and Nedovis, 2015).

An investor, before making any decision regarding an investment, should always analyze and have in depth knowledge about the performance of related firm. The firm's performance could be discovered through the firm's internal information sourced from the firm's financial statements (Hanafi and Halim, 1996). The information presented in the financial statements has been sufficiently described the development of the firm and its achievements. If the financial performance of a firm shows good prospects, the stockholders and potential investors will be interested in buying the stocks, which will affect stock price (Tcvetkov et al., 2015).

Generally, the main purpose of a firm is to maximize the wealth of its stockholders through the firm's value as reflected in the stock price (Brigham and Houston, 2001). The stock price is the price that would be paid by investors as an evidence of ownership. The higher the value of the firm, the more an investor is willing to pay for a stock. The stockholders always observe stock price movements, as the value of their prosperity is determined by the stock price. The stock price will directly affect value of the firm, which is an important indicator for investors. Value of a firm is very essential because it reflects firm's performance that could affect investors' perception towards the firm. In general terms, there are three approaches to value a firm which are discounted cash flow valuation, relative valuation, and contingent claim valuation (Damodaran, 2012). In reality, the most approach used is the relative valuation which will become the focus in this study. Relative valuation estimates the value of an asset by analyzing its pricing of comparable assets relative to a common variable. Price earnings ratio (PER), price to book value ratio (PBV), Tobin's Q, and price sales ratio are some of the widely used ratios to determine the value of a firm.

A publicly traded firm provides information regarding its financial performance and financial ratios as consideration for investors in making an investment decision. …

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