Academic journal article European Research Studies

Commodity Prices, Exchange Rates and Investment on Firm's Value Mediated by Business Risk: A Case from Indonesian Stock Exchange

Academic journal article European Research Studies

Commodity Prices, Exchange Rates and Investment on Firm's Value Mediated by Business Risk: A Case from Indonesian Stock Exchange

Article excerpt

Introduction

Economic globalization encourages the integration of the economic system and the integration of markets, where market integration has made interdependence between markets (stock markets, commodities and foreign exchange). This condition is not only an opportunity for the company but also expand business risk. The enterprise value reflected in stock market prices (Fama, 1978) more sensitive to the dynamics of global economic conditions, particularly multinationals and local companies that have international activity (exporters and importers), such as mining and plantation commodity company listed on the Stock Exchange Indonesia (IDX). The value of the company and the risk of non-financial companies, not only depend on internal factors such as a financial decision, but also in commodity prices and exchange rates (Bartram, 2005).

Indonesia is the world's largest producer and exporter of many commodities, however, commodity reference prices still refer to market prices and commodity exchang in other countries, as well as the sales price is denominated in US Dollars. Table 1 shows the commodities produced by companies engaged in commodity business that listed on the Indonesia stock exchange (IDX) and the price reference.

Risk is one of the factors that affect the firm's value, the risk affecting the firm's value through cash flow (Damodaran, 2006; Lusht, 1977), and also through company costs such as agency costs, compensation to managers, financial distress, bankruptcy and lack of investment management (Beatty, Petacchi et al., 2012; Naito and Laux 2011; Stulz, 2002; Allayannis et al., 2012). Meanwhile, based on the viewpoint of financial management, efforts to increase the value of the company can be pursued by investing (Fama, 1978). So that four variables (business risks, commodity prices, exchange rates and investment) are an important variables that affect the firm"s value in commodity business fields (mining and plantation).

2. Literature Review and Hypothesis Development

2.1. Business Risk and Firm's Value

The business risk is defined in various contexts (Doff, 2008), sometimes business risk is defined as the aggregate of all risks (Marshall and Marshall 2001), also sometimes referred to as the residual risk type after all other risk types are identified (James, 1996 ; Van Lelyveld, 2006; Kuritzkes and Schuermann, 2006). The business risk is also defined as the equivalent of non-systematic risk (idiosyncratic or diversifiable) in the context of the capital asset pricing model (Amit and Wernerfelt, 1990; Conine, 1982). There are also defining business risks associated with revenue and sales value, such as Matten (2000), Schroeck (2002) and Crouhy et al. (2006) and Van Lelyveld (2006).

Risk is one of the factors that affect the firm's value, the risk of affecting the firm's value through cash flow (Damodaran, 2006; Lusht, 1977), and also throughcompany costs such as agency cost (Petacchi et al., 2012; Naito and Laux 2011; Stulz, 2002), the compensation of the managers, a decrease in the cost of financial distress and bankruptcy and lack of investment management (Bartram, 2006; Carter, Rogers et al., 2006; Bartram and Bodnar, 2007; Bartram et al., 2009; Aretz and Bartram, 2010; Allayannis et al., 2012; El-Charami, 2014; Thalassinos and Politis, 2011; Thalassinos et al., 2012; 2013; Setyawati et al., 2017; Glavina, 2015). The previous studies on the effect of risk on the firm's value, carried out in a variety of topics. Several studies have shown significant results that the risk affects the value of the company, or a reduction in the risk can increase the value of the company and reverse the increase in risk would decrease the firm's value, including research results Hamma, Jarboui et al. (2014), Basher and Sadorsky (2004), Jin and Jorion (2006), Bartram (2009), Allayannis and Ihrig (2001), Gjerde and Saettem (1999), Ferderer (1996), Huang et al. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.