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Archives of Business Research – Vol. 10, No. 12

Publication Date: December 25, 2022

DOI:10.14738/abr.1012.13649. Kurniawanto, H., & Rispantyo (2022). Enterprise Risk Management and Firm Value: Evidence from State-Owned Enterprise in

Indonesia. Archives of Business Research, 10(12). 228-237.

Services for Science and Education – United Kingdom

Enterprise Risk Management and Firm Value: Evidence From

State-Owned Enterprise in Indonesia

Hudi Kurniawanto

Doctor in Accounting, Faculty of Economics,

Universitas Slamet Riyadi, Surakarta, Indonesia

Rispantyo

Faculty of Economics,

Universitas Slamet Riyadi, Surakarta, Indonesia

ABSTRACT

This study aims to provide empirical evidence of the influence of enterprise risk

management on firm value. This study also uses leverage and profitability as

control variables. The research population is State-Owned Enterprises listed on the

Indonesia Stock Exchange in 2020-2021. The sampling method used is the

purposive sampling method, the number of samples according to the criteria of 40

annual reports. The data analysis tool used in this research is multiple linear

regression analysis. The results of this study prove that enterprise risk

management has a significant positive effect on firm value while leverage and

profitability do not affect firm value.

Keywords: Enterprise Risk Management, Leverage, Profitability, Firm Value, Indonesia

Stock Exchange

INTRODUCTION

The phenomenon of the stock index performance of State-Owned Enterprises recorded a

decline to double digits, namely 13.78% year to date. The weakening of the State-Owned

Enterprises index was depressed by sluggish shares in the infrastructure sector, such as Adhi

Karya Ltd, PP Ltd, and Wijaya Karya Ltd. This is because the company has not implemented

optimal risk management and the prolonged pandemic has resulted in delayed development

expectations. Economic growth occurred because government consumption for handling

COVID-19 and household consumption increased dramatically, not yet towards the

infrastructure sector (Kontan.co.id dated August 9, 2021).

The increasingly fierce business competition encourages every company to be more

transparent in disclosing information. The information disclosed must be understandable,

relevant, reliable, and comparable. The more quality and comprehensive the information

presented in the company's annual report, the more important the report is for investors

(Miihkinen, 2012) and reduces information asymmetry between investors and management

(Lajili & Zeghal, 2005). The need for the disclosure of information is increasing, especially the

disclosure of non-financial information (Cole & Jones, 2005).

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Kurniawanto, H., & Rispantyo (2022). Enterprise Risk Management and Firm Value: Evidence from State-Owned Enterprise in Indonesia. Archives of

Business Research, 10(12). 228-237.

URL: http://dx.doi.org/10.14738/abr.1012.13649

This is necessary because investment activities are activities that contain risks and

uncertainties. Disclosure of risk will help investors determine the level of risk they will face and

improve the quality of their investment decisions (Solomon, Solomon, Norton, & Joseph, 2000).

Empirically, the influence of enterprise risk management on the value of the company has

various results. Dinoyu & Septiani (2020), Iswajuni, Soetedjo, & Manasikana (2018), Anggreni,

Suprasto, Ariyanto, & Suaryana (2021), Ismail & Wijaya (2021), Devi, Budiasih, & Badera

(2017), Pamungkas (2019) concluded that enterprise risk management had a positive effect on

firm value, while Pamungkas & Maryati (2017), Rivandi (2018), Aditya & Naomi (2017), Fadilah

& Afriyenti (2020) concluded that enterprise risk management did not affect firm value.

This research can contribute to the government as a reference in determining policies

regarding risk management disclosure of state-owned companies listed on the Indonesia Stock

Exchange to increase investor confidence.

For corporate management, this research can provide information and understanding of

corporate risk management disclosures to help improve risk management disclosure practices

in companies and realize good corporate governance.

Based on the description of the background above, the purpose of this study is to determine

and analyze the effect of Enterprise Risk Management on Firm Value with several control

variables. The results of this study are expected to increase the wealth of knowledge related to

Risk Management. Especially for public institutions, so that the results can be used in the

preparation of public policies.

LITERATUR REVIEW

Signaling Theory

Brigham & Houston (2009) explain Signaling Theory from a corporate perspective, as an action

taken by management to provide instructions for investors regarding how management views

the company's future opportunities.

Signaling Theory explains the importance of information from the company for the investment

decisions of shareholders and other stakeholders. Signaling theory also aims to minimize

information asymmetry between stakeholders and the company so that the signals given by the

company can be responded to positively by stakeholders.

Verrecchia (1983) states that companies will disclose the information if the information is

expected to increase the value of the company. This shows that Signaling Theory is in line with

the importance of ERM information for stakeholders, where ERM can be categorized as

information that will increase the value of the company.

Firm Value

According to Gitman (2009) firm value is the value reflected by the stock price of a company.

This is based on the main goal of management which is to create value by maximizing wealth

for company owners by increasing the company's share price. The act of maximizing wealth

must also be followed by considering the wishes of other stakeholders.

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Archives of Business Research (ABR) Vol. 10, Issue 12, December-2022

Services for Science and Education – United Kingdom

Several measurements can be used to measure company value including price earning ratio,

price to book value, Tobin's Q, and company size which theoretically shows value in the form

of company stability information and other measurements. To assess the market response and

investors' expectations of the company, Tobin's Q is used as a measurement that represents the

value of the company.

Enterprise Risk Management.

Risk is an uncertain outcome because the probability of uncertainty cannot be determined.

There are six risk categories, namely: financial risk, operating risk, empowerment risk,

information processing, and technology risk, integrity risk, and strategic risk (Linsley & Shrives,

2006). Miihkinen (2012) defines risk disclosure as all information about the risk presented by

the company in the annual report. The lack of information about corporate risk in the annual

report can threaten the relevance of the report (Cabedo & Tirado, 2004). ISO 31000 (2018)

defines ERM as coordinated activities carried out to manage and control the company related

to the risks faced by the company. Initially, ERM was developed to manage risks that occur in

financial institutions and insurance companies (Schiller & Prpich, 2014). However, over time,

the scope of risk has expanded beyond just financial risk. Operational risk, technology risk, and

various other risks make the company aware to develop its goal not only to maximize the

company's performance but also the foundation for sustainable development.

Effect of ERM Disclosure on Firm Value

Based on signaling theory were the actions taken by management to guide investors are related

to how management views the company's opportunities in the future (Brigham & Houston,

2009). ERM implementation information disclosed will be a signal by the company that

investors and stakeholders will respond to through fluctuations in the company's stock price in

the market as measured by Tobin's Q.

The implementation of ERM disclosed by the company in the annual report is the company's

way of providing information to stakeholders regarding the risk profile and how the company

manages these risks. ERM also plays an important role in maintaining company stability (Devi

et al., 2017). In addition to improving the company's performance through ROA, the

implementation of ERM can also increase the value of the company in the capital market. Baxter,

Bedard, Hoitash, & Yezegel (2013) in their research results found that companies with better

ERM quality showed higher market valuation results as well. There is a time lag between the

realization of the benefits of ERM to the company, making Tobin's Q an appropriate

measurement to reflect future expectations of investors by looking at the market response

(Hoyt & Liebenberg, 2011).

ERM in this case benefits the company by reducing the volatility of earnings and stock prices

(Beasley, Pagach, & Warr, 2008). ERM reduces volatility by preventing the accumulation of

inherent risk in various sources. Furthermore, the ERM program emerged because of increased

information about the company's risk profile. For outsiders who tend to experience difficulties

when making assessments, it is easier to assess the financial strength and risk profile of the

company financially and operationally with the ERM information in the annual report.

Disclosure of ERM implementation is also a signal of the company's commitment to managing

its risks. With increased disclosure of risk management, ERM tends to lower the anticipated

costs that will arise from regulatory oversight and external capital (Meulbroek, 2002).