Scientific Research Journal (SCIRJ), Volume V, Issue I, January 2017 ISSN 2201-2796
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INFLUENCE OF RETURN ON INVESTMENT, MANAGERIAL OWNERSHIP ON STOCK RETURN, WITH FREE CASH FLOW AS MODERATING VARIABLE (Study in Manufacture Companies at Indonesia Stock Exchange Period 2006-2015) Kadek Listyawati University of Mahasaraswati Denpasar, Indonesia
[email protected]
Anik Yuesti University of Mahasaraswati Denpasar, Indonesia
Putu Kepramareni University of Mahasaraswati Denpasar, Indonesia
Abstract - The Purpose of this research is mean 1) to find out the influence of Return On Invesment to the Stock Return2) to find out the influence of Managerial Ownership to the Stock Return 3) to find out the influence of Return On Invesment to the Stock Return with Free Cash Flow as a moderating variable 4) to find out the influence of Managerial Ownership to the Stock Return with Free Cash Flow as a moderating variable 5) to find out the influence of Free cash Flow to the Stock Return. This research motivation is previous research obtained inconsistent result about Return On Investment and Managerial Ownership. This research use analysis technique multiple linear regression and moderated regression analysis (MRA) with independent variable Return On Investment and Managerial Ownership, dependent variable Stock Return, and moderate variable Free Cash Flow. The method sample selection use purposive sampling, obtained 11 company that have complete data required in this research period 2006-2015. The result of the test shows that Return On Investment partially has significant influence to the Stock Return, Managerial Ownership and Free Cash Flow partially does not have any influence to the Stock Return. While the result moderated regression analysis shows that Free Cash Flow has not been able to moderate the relationship between Return On Investment with Stock Return, and has not been able to moderate the relationship between Managerial Ownership with Stock Return. Key words: Return On Investment, Managerial Ownership, Free Cash Flow, Stock Return
I. INTRODUCTION Indonesian economic situation that is unstable causing investors to be cautious in investing, especially in the capital
market. According Riyanto (2013) Return On Investment is variable the ability of a company to generate net income from the asset that were used to compare between earning after tax withtotal assets. Profit increase has the effect of a positive reply to the company’s financial performance in achieving the goal of maximizing the valueof the company which would be responded positively by investors and request the company’s stock could rise and may raise the company’s stock price (Syamsudin, 2002). Several previous studies which conducted research on the influence of the stock return Return On Investmentget result that are not consistent. Puspitawati (2008) who examines the influence Return On Investment and economic value added on stock return rose partially and jointly positive and significant impact on Stock Return. Otherwise, Sunardi (2010) found that Return On Investment no effect on Stock Return. Meanwhile Suratini and Nikmah (2011) found that Return On Investmenthas no significant effect on stock return . Stock Return can be influenced by managerial stock ownership. Return of eminence are usually filled a company that has a good financial performance. By Wahidahwati (2002) appropriate agency is the theory of so called principal shareholder and who is an agent is the management company that manages. Managerial Ownership reduce the likelihood that earnings manipulastion by management because corporate insider has the urge to use the financial report for the consideration of investment and financial decisions that are in their favor. Some research ago is doing research on the effect of stock ownership is done by Warfield et al. (1995) found a negative relationship between managerial ownership with profit management. Contrary to Gabrielsen et al. (1997) find result that are positive between Managerial Ownership with profit management. While Maiyusti (2014) find that Managerial Ownership significant effect on earnings management. Inconsistencies in previous studies on the effect of the Return On Investment with Stock Return as well as the influence
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Scientific Research Journal (SCIRJ), Volume V, Issue I, January 2017 ISSN 2201-2796
of Managerial Ownership with profit management encourage researchers to include variables Free Cash Flow as a moderating variable. Investors are now starting to be more careful with the Return On Investment the value reported by the company. There is a possibility that the company did report earnings management in. Free Cash Flowcan be used as an amplifier that profit the company reported an actual profit, because Free Cash Flowis the excess cash held company that can be distributed as dividends or reinvestment. Based on the background above, the problem in this study can be described as follows: 1. Is the Return On Investement (ROI) positive effect on Stock Return? 2. Is the Managerial Ownership positive effect on Stock Return? 3. Does Free Cash Flow is able to moderate the relationship between Return On Investment with Stock Return? 4. Does Free Cash Flow is able to moderate the relationship between managerial ownership with Stock Return? 5. Is the Free Cash Flow positive effect on Stock Return? Purpose of this study is to determine the ability of Free Cash Flow in moderating the relationship between Return On Investment, Managerial Ownership with Stock Return
II. Grounding Theory and Hypothesis development Agency theory Jensen dan Meckling (1976) dalam Astika (2003) discusses the company’s ownership structure by intergrating elements of agency theory, property fightand financial theory. According to thetheory of the company previously developed a theory of the market where the company is the culprit so the result is a theory which assumes profit maximization as the goal of the company. Jensen dan Meckling uses the assumption of utility maximization behavior to explain the process of balancing the interests of various stakeholders. How to surf the agency theory incentive contracts can be written to motivate individuals obtain a harmonious target. He tried to outline the main factors that should be considered in designing incentive contracts. There is an agency relationship if one party or agency to carry out some services and in doing so delegates decision making authority for agents. In the company shareholder is the principal and CEO was their agent. Shareholders employ them and expect them to act for the benefit of the principal. Agency theory also discussed issues regarding the limitation of bounded rationalitydando not risk avarse. In general desire the greatest possible advantage for him self at the cost of others. Besides humans also have a tendency to shy away from risk by his actions and tried to blame others. The limitations of human nature have led to principal and another agent seeking to to avoid it then takes an independent third party to assess the performance of each, especially the last. Agent periodically prepares financial statements as a signal of accountability for all the effort that he did. The report submitted to the principal and economic community who need the information from the report, assuming that they have attemptedto well. Third party task is to
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check the level of the signal reasonableness of the criteria and it is the duty of the public accountant. Return On Investmentis a measure commonly used to measure he level of corporate profits, or in other word the ratio used to measure a company’s ability to produce all (Sunardi:2010). ROI is generally use by investors as a guide in making an investment desicion. Only investment that can give ROI as expected by investors who accepted. Previous studies that examined the relationship Return On Investment with Stock Return done by Veda Janita (2015) studies show a positive effect Return On Investment to Stock Return. Powered by Puspitawati (2008) and Pinangkaan (2012). Basis of the description can be made hypotheses : H1 :Return On Investment positive influence to Stock Return. Jensen dan Meckling (1976) in Murwaningsari (2012) argued that the agency conflict occurs because of the separation of ownership and control. Agency conflict causes a decrease in value of the company. Conflict of interest between managers and shareholders can be minimized with the monitoring mechanism to align interests related. The monitoring mechanism will cause the cost of the socalled agency cost. Agency cost can be reduced either by increasing the company’s shares by managerial. The ownership of shares by management is an incentive for managers to improve the performance of the company. H2 :Managerial Ownership positive influence to Stock Return By Mande (1994); Voghtand Vu (2000) in Widanaputra (2003) stated that FCF paid as dividend will be responded to market positively by the market. Investors prefer the return obtained by the company in the form of dividends distributed in the form of capital gains rather than because it provides smaller risk. It is supported by other reasearchers, according to Jensen (1996) in Widanaputra (2003) dividend from Free Cash Flow of the company indicates the high attention of management on shareholder interests. Several previous studies undertaken research on the effect of Return on Investment on the Stock Return obtained inconsistent result. From the description above can be made the hypothesis: H3 : Free Cash Flow is able to moderate the relationship between Return On Investment and the Stock Return Fuerst and Kang (2000) is a test of a public company in 1.638 in NYSE explain that to the ownership of the CEO and the corporate insider has a positive effect on company performance. Managerial Ownership reduces the possibility of earnings manipulation conducted by the management for corporate insider has the urge to use the financial report for the consideration of investment. Additional research regarding the ownership of shares carried out by Warfield et al. (1995) found a negative relationship between managerial ownership with profit management. Contrary to Gabrielsen et al. (1997) find a positive result between Managerial Ownership with profit management. Inconsistency of the result of previous studies indicates other factors that affect it. The higher free cash flow contained in the
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Scientific Research Journal (SCIRJ), Volume V, Issue I, January 2017 ISSN 2201-2796
company then the company’s performance will be better (Lady:2014). Based on these descriptions can be made hypotheses : H4: Free Cash Flow is able to moderate the relationship between Managerial Ownership with Stock Return. Wardani and Siregar (2009) in Ismiwatis Naini (2014) state that the presence of free cash flow in the enterprise is a positive signal that can be delivered to investors will be the company’s prospects in the future which describe the ability of the creation of future cash. The performance of the company will increase the company’s value is realized in the form of high return, through dividends and share price or retained earnings to invest in the future. Besides, the internal surplus funds will improve the ability of the company in term of pay or repay short term liabilities and long term. High ability to repay this obligation demonstrate the company’s ability to face financial difficulties in the future so that it will get a positive response from investors in the market (Tommy, 2010). Wardani dan Siregar (2009) and Tommy (2010) has proven that free cash flow positive and significant effect on firm value. According to Sutrisno (2009) in Kurnia Fidhayantin (2012) market to book value ratio is the ratio of assessment used to determine how much the price of the existing shares in the market compared to the book value of stock. The higher this ratio the show that companies are increasingly believed that the higher the value of the company. Based on these descriptions can be made hypotheses: H5: Free Cash Flow positive influence to Stock Return
III. RESEARCH METHODS Population research is all manufacturing companies listed in Indonesia Stock Exchanges with the observation period of the year 2006 until the year 2015. Selection of samples bypurposive sampling with criteria : a.
Manufacturing companies listed in Indonesia Stock Exchange period 2006-2015. b. The company detailing the complete data required in research during the period 2006-2015. c. The company has a number of positif Free Cash Flow. The number of samples that can be used in this study were 11 companies or 110 data companies year. In this study, analyzed the variables are defined as follow : 1. Return On Investment Is a measurement of the ability of a manufacturing company in Indonesia Stock Exchangein generating profits for a total amount of assets available in the company, measured by the ratio between EAT with total assets acquired in the financial statements period 2006-2015 expressed as a percentage units. ROI = 2.
EAT tot .aktiva
x 100%
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Is the percentage of ownership by the manager, directorsand commissioners of the overall stock ownership throughout the company listed in Indonesia Stock Exchange period 2006-2015. 3. Stock Return According Riyanto (2013) Stock Return is right on the stock of the equity ownership in the company, Stock Return is calculated by the formula:
R1
( Pt Pt 1 ) Pt 1
R1 = Stock Return individual Pt = Stock Price in the period t Pt-1 = Stock Price in the periodt-1 4. Free Cash Flow A typical advantages owned company which is calculated by subtackting the amount of net income from the company with dividends paid after coupled with depreciation in the same period (Lehn & Pulsen 1989, in Widanaputra). Free Cash Flowis calculated by the formula :
FCF
( net .income depreciati on deviden ) market .value.of .equity
Market Value of Equity calculate based on the share price multiplied by number of shares outstanding. Hypothetical form 1, 2, and 5 multiple regression model as follows : Y =α + β1X1+ β2X2 + β3X3 + e Y = Stock Return α = constants β1…. Β3 = coefficient regression X1 = Return On Investment X2 = Managerial Ownership X3 = Free Cash Flow e = error Hypothetical form 3, and 4 regression model as follows : Y =α + β1ZX1+ β2ZX3 + β3|ZX1 - ZX3| + e Y =α + β1ZX2+ β2ZX3 + β3|ZX2 - ZX3| + e Y = Stock Return X1 = Return On Investment X2 = Managerial Ownership X3 = Free Cash Flow α = constants β1… β3 =coefficient regression ZX1 = Return On Investment standardized, ZX2 = Managerial Ownership standardized, ZX3 = Free Cash Flow standardized, |ZX1 - ZX3| = interaction that is measured by the absolutvalue of the difference ZX1 and ZX3 |ZX2 - ZX3| = interaction that is measured by the absolutvalue of the difference ZX2 and ZX3 e = error
Managerial Ownership
IV RESULT AND DISCUSSION www.scirj.org © 2016, Scientific Research Journal
Scientific Research Journal (SCIRJ), Volume V, Issue I, January 2017 ISSN 2201-2796
Classical Assumption Test Result Normality test The test result do not meet the classical assumption of normality assumption can be found. To overcome the problem of abnormalities is one of them with a data transformation forms of transformation used is logarithm after transformation with the natural logarithm of normality. Multicollinearity test The test result can be found in appendix 1 that the absence of multicollinearity in the third regression model, it is apparent from the tolerance value of not less than 10% (percentage) and VIF value of not more than 10. Autocorrelation test Autocorrelation test is done by testing a two sided confidence level = 0,05. ifdwlocated between du and (4-du) then there is no autocorrelation. Heteroskedastisitas test Heterokedastisitas test result by using glejser testin this study can be found in appendix 4. Value of each sig. for independent variable has a value > 0,05. So it can be said that the regression model free heterokedastisitas. The result of multiple regression analysis Model 1
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is not used or invested to maximize revenue or the balance of shareholders in the form profitable investment, it will increase agency problem. The agency problem that is not addressed in the right way would give a bad signal to the market that may make investors do not use free cash flow as a moderating listen relationship between return on investment with stock return. Model 3 Y = 0,153 + 0,122 ZKM + 0,030 ZFCF – 0,121 |ZKM - ZFCF| + e These result are not in accordance with the fourth hypothesis (H4) which states that free cash flow is able to moderate the relationship between managerial ownership with stock return. Thus meaning the fourth hypothesis (H4) in study is rejected. In ability of the free cash flow is not as moderating the relationship between managerial ownership with stock return in period these observations suggest that the possible components free cash flow is not yet fully used as a basis for decision making. Besides their differences in the interests between managerial and shareholder in managing free cash flow can give a bad signal for the company. Extention of the interests that takes place where the manager wants to use free cash flow to invest in projects that benefit because in the future will increase the incentives for managers, while shareholders want distributed free cash flow in the form of dividends.
Y = -0,061 + 1,756 ROI - 0,101 KM + 0,053 FCF + e V CONCLUSION The test result are consistent with the first hypothesis (H1) which states that the Return On Investment positive influence to Stock Return. These result are consistent with previous studies conducted by Veda Janita (2015), Puspitawati (2008) and Pinangkaan (2012). These result are not in accordance with the second hypothesis (H2) which states that Managerial Ownership positively affect Stock Return. Therefore means that the second hypothesis (H2) rejected. These result are consistent with research Warfield et al. (1995) and Dwi Hastuti (2005) which state there is a negative relationship between Managerial Ownership with profit management. These result are not in accordance with the fifth hypothesis (H5) which states that Free Cash Flow influence to Stock Return. Model 2 Y = 0,135 + 0,148 ZROI + 0,105 ZFCF – 0,102 |ZROI - ZFCF| + e These result are not in accordance with the third hypothesis (H3) which states that Free Cash Flowas a moderating influence the relationship between Return On Investment to Stock Return. By Wardani dan Siregar(2009) in Ismiwatis Naini (2014) free cash flow in the enterprise is a positive signal that can be delivered to investors about the prospects of companies in the future which describes the ability of the creation of future cash. This will be used as a material consideration and a positive signal for investors in making investment desicions, so the impact on the increasing value of stock and stock returns of investors. Jensen (1986) inZuhri (2011stated that if the company’s free cash flow
Based on data analysis of research on the “influence return on investment, managerial ownership on stock return, with free cash flow as a moderating variable”, then the conclusions that can be drawn in this study is : 1. Return On Investment partially influence to Stock Return in manufacturing companies in BEI period 2006-2015. This is indicated by multiple regression analysis using SPSS version 21.0 a value sig. t arithmetic 0,026 smaller than 5%. Managerial Ownership no effect on Stock Return on manufacturing companies in BEI period 2006-2015. This is indicated by multiple regression analysis sig. t count value 0,760 is greater than 5%. The same result are shown in partially free cash flow does not affect the stock return. This is indicated by multiple regression analysis value sig. t count 0,417 is greater than 5%. 2. Free Cash Flow not able to moderate the relationship between Return On Investment with Stock Return in manufacturing companies in BEI period 2006-2015. This is indicated by the result Moderate Regression Analysis (MRA) when sig. t value count 0,154 is greater than 5%. This indicates that Free Cash Flow is not able to provide any additional information that effect the attitude of investors in assessing the relationship between Return On Investment with Stock Return. With the information free cash flow gives a negative response because of the possible indications of agency problems in the company that are not resolved properly. 3. Free Cash Flow not able to moderate the relationship between managerial ownership with Stock Return in manufacturing companies in BEI period 2006-2015. This is
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Scientific Research Journal (SCIRJ), Volume V, Issue I, January 2017 ISSN 2201-2796
indicated by the result Moderate Regression Analysis (MRA) when sig. t value count 0,181 154 is greater than 5%. This indicates that investors in the Indonesia stock exchange managerial ownership have not been viewed as an influential factor in investment desicion. Possibility that this could have also been statistically average number of managerial ownership in manufacturing companies is relatively small so there has been no alignment of interests between owners and managers.
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