Dynamic performance of Indonesian public companies: An analysis of financial decision behavior

Abstract

The purpose of this research is to investigate the effects of financial decision behavior on firm performance of Indonesian public companies using panel data. The dynamic generalized method of moment is utilized in this study. The results show that firm performance is dynamic in nature, which indicates that last year performance affects current performance significantly. Empirical result of financial decision behavior shows that investment, leverage, and dividend per share (DPS) have significant impact on firm performance. Specifically, investment has negative impact on firm performance. Meanwhile leverage has negative effects on return on assets (ROA), but positively affects Tobin’s Q. Moreover, DPS positively affects ROA and Tobin’s Q. This finding suggests that investment decision of Indonesian firms is overinvestment, indicated with higher investment affects firm performance negatively. Similarly with leverage, the finding reveals that Indonesian public companies borrowed external fund more than they required (overleverage). The positive effect of DPS on firm performance implies that dividends payout to shareholders create good signal to the market, in which managers uses dividend to deliver private information to the market. However, based on the coefficient of financial decision variables, the impact is more on the market performance and less on the accounting performance.

Keywords:

• Financial decision
• dynamic performance
• GMM-difference

Public Interest Statement

Firm management has an important role to increase firm profitability and maximize shareholders’ wealth. Hence, managers should act on behalf of shareholders’ interest to enhance firm performance. Generally, the financial performance measures are categorized into the accounting-based and the market-based measures. Firm performance is determined by various factors, of which that the internal and external factors play an important role in determining firm performance. Thus, financial decision behavior; such as investment, financing decision, and dividend policy becomes important role for managers in allocating fund resources. Firms with higher internal fund tend to overinvest in unprofitable investment instead of paying dividend to shareholders. The results of this research show that firm performance is dynamic in nature, indicates that last year performance has impact on current performance. Investment, leverage, and dividend policy become important factors that determine firm performance. However, the impacts are more on the market performance and less on the accounting performance.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Darmawati Muchtar

Darmawati Muchtar is a lecturer in Finance at Faculty of Economic and Business, Universitas Malikussaleh (UNIMAL), Aceh-Indonesia. She received her D.B.A (Finance) from the Graduate School of Business, Universiti Kebangsaan Malaysia in 2017.

Fauzias Mat Nor

Fauzias Mat Nor is a professor of finance at Universiti Sains Islam Malaysia. Her research interest is on Islamic Finance with special focus on Corporate Finance and Banking. Prior to joining USIM, in 2015, she has served UKM for more than 29 years as a lecturer, an Associate Professor and Professor in Finance.

Wahyuddin Albra

Wachyuddin Albra is a lecturer in Department of Management at Faculty of Economic and Business, Universitas Malikussaleh (FEB-UNIMAL), Aceh-Indonesia. Now he is a Dean at FEB-UNIMAL, Aceh, Indonesia.

Muhammad Arifai

Muhammad Arifai is a lecturer at Department of Accounting, Lhokseumawe State of Polytechnic, Aceh, Indonesia.

Ansari Saleh Ahmar

Ansari Saleh Ahmar is a lecturer at Department of Statistics, Universitas Negeri Makassar, Makassar, Indonesia.