Does Financial Performance Mediate the Relationship between Corporate Governance and Corporate Value? Evidence from Indonesian Banking Companies

Abstract

The banking sector has the potential to progress and grow sustainably. This is reflected in the increase in the value of distributed funds and the value of commercial bank assets. However, this increase was not in line with the increase in company value. Therefore, companies must be able to optimize their resources to increase corporate value. This study aims to analyze and explain the factors that can affect corporate value. The variables used in this research are corporate governance as an independent variable, financial performance as a mediating variable, and corporate value as a dependent variable. The type of research used is explanatory research with a quantitative approach. The samples for this research were Bank Rakyat Indonesia (BBRI), Bank Mandiri (BMRI), Bank Negara Indonesia (BBNI), and Bank Tabungan Negara (BBTN). The data analysis was done using descriptive statistical analysis and partial least squares (PLS) analysis which is processed using SmartPLS software. The results of this research indicate that corporate governance has a negative and insignificant effect on corporate value. Furthermore, corporate governance variables also had a negative and insignificant effect on financial performance. Apart from that the results also show that the financial performance variable is not able to mediate the relationship between corporate governance and corporate value significantly. The practical implication of this research was to encourage banking management in Indonesia to implement good corporate governance as it can boost financial performance.


Keywords: banking, corporate governance, corporate value, financial performance

References
[1] Weill P, Ross J. A matrixed approach to designing IT governance. Sloan Manag Rev. 2005;46:26–34.

[2] De Haes S, Van Grembergen W. An exploratory study into IT Governance implementations and its impact on business/IT alignment. 2009; 26:123–37.

[3] Chan YE, Reich BH. IT alignment: What have we learned? J Inf Technol. 2007;22:297–315.

[4] Gerow JE, Thatcher JB, Grover V. Six types of IT-business strategic alignment: an investigation of the constructs and their measurement. Eur J Inf Syst. 2014;1–27.

[5] Long S. Socioanalytic methods: Discovering the hidden in organisations and social systems. Karnac Books Ltd; 2013.

[6] Luftman J, Lyytinen K, Zvi T ben. Enhancing the measurement of information technology (IT) business alignment and its influence on company performance. J Inf Technol. 2017;32.

[7] Henderson JC, Venkatraman N. Strategic alignment: Leveraging information technology for transforming organizations. IBM Syst J. 1993;Vol. 32.

[8] Van Grembergen W, De Haes S. A research Journey into Enterprise Governance of IT, Business/IT alignment and Value Creation. Int J ITBusiness Alignment Gov. 2010;1(1):1–13.

[9] Liang T-P, Chiu Y-C, Wu SP-J. The impact of IT Governance on organizational performance. AMCIS 2011 Proc - Submiss 268 [Internet]. 2011; Available from: http://aisel.aisnet.org/amcis2011_submissions/268

[10] Harguem S, Karuranga E, Mellouli S. Impact of IT Governance on organizational performance: Proposing an explanatory model. Eur Conf Manag Leadersh Gov. 2014.

[11] Chan YE, Sabherwal R, Thatcher JB. Antecedents and outcomes of strategic IS alignment: An empirical investigation. IEEE Trans Eng Manag. 2006;Vol. 53.

[12] Wu SP-J, Straub DW, Liang T-P. How information technology governance mechanisms and strategic alignment influence organizational performance: Insight from a matched Survey of Business and IT Managers. MIS Q. 2015;Vol. 39:497–518.

[13] Vejseli S, Rossmann A. The impact of IT governance on firm performance a literature review. PACIS 2017 Proc Assoc Inf Syst. 2017;41.

[14] ITGI. Board Briefing on IT Governance 2nd Edition. IT Governance Institute; 2003.

[15] Aladwani AM. Change management strategies for successful ERP implementation. Bus Process Manag J. 2001;7:266–75.

[16] Sikdar A, Payyazhi J. A process model of managing organizational change during business process redesign. Bus Process Manag J. 2014;20:971–98.

[17] Bradford DL, Burke WW. Reinventing organization development: New approaches to change in organizations. Pfeiffer. 2005.

[18] Fruhlinger J, Wailgum T, Sayer P. 16 famous ERP disasters, dustups and disappointments [Internet]. cio.com. 2020 [cited 2022 Jan 22]. Available from: https://www.cio.com/article/278677/enterprise-resource-planning-10-famous-erpdisasters- dustups-and-disappointments.html

[19] Kitani K. The $900 billion reason GE, Ford and P&G failed at digital transformation. cnbc.com; 2019.

[20] Kappelman L, McLean E, Johnson V, Torres R, Maurer C, Snyder M, et al. The 2018 SIM IT Trends study the 2019 comprehensive report: Issues, investments, concerns and practices of organizations and their it executives. SIM IT Trends Study. 2018.

[21] Nfuka EN, Rusu L. The effect of critical success factors on IT governance performance. Ind Manag Data Syst. 2011;Vol. 111:1418–48.

[22] Al-Ali AA, Singh SK, Al-Nahyan M, Sohal AS. Change management through leadership: the mediating role of organizational culture. Int J Organ Anal. 2017;25:723–39.

[23] Onyango WP. Effects of organization culture on change management: A case of the vocational training centre for the blind and deaf Sikri. Eur J Bus Manag. 2014;Vol. 6, 2014:204–14.

[24] Karahanna E, Watson RT. Information systems leadership. IEEE Trans Eng Manag. 2006;VOL. 53, NO. 2, MAY 2006:171–6.

[25] El-Mekawy M, Rusu L, Perjons E. The impact of business-IT alignment on organizational culture. PACIS 2014 Proc. 2014;Paper 310.

[26] Weiss JW, Anderson D. Aligning technology and business strategy: issues & frameworks, a field study of 15 companies. 37th Annu Hawaii Int Conf Syst Sci 2004 Proc Of [Internet]. Big Island, HI, USA: IEEE; 2004 [cited 2023 Jun 19]. p. 10 pp. Available from: http://ieeexplore.ieee.org/document/1265511/

[27] Dahlberg T, Lahdelma P. IT Governance maturity and IT outsourcing degree: An exploratory study. 2007 40th Annu Hawaii Int Conf Syst Sci HICSS07 [Internet]. Waikoloa, HI, USA: IEEE; 2007 [cited 2023 Jun 19]. p. 236a–236a. Available from: http://ieeexplore.ieee.org/document/4076859/

[28] Peterson R. Crafting Information Technology Governance. Inf Syst Manag. 2004.

[29] Raghupathi W “Rp.” Corporate governance of IT: A framework for development. Commun ACM. 2007;50:94–9.

[30] Robbins SP, Judge TA. Essentials of organizational behavior. 14th Edition. Pearson Education Limited; 2018.

[31] Spremic M. IT Governance mechanisms in managing IT business value. Inf Sci Appl. 2009;Vol. 6:906–15.

[32] Bradley RV, Byrd TA, Pridmore JL, Thrasher E, Pratt RM, Mbarika VW. An empirical examination of antecedents and consequences of IT Governance in US Hospitals. J Inf Technol. 2012;27:156–77.

[33] Cameron KS, Quinn RE. Diagnosing and changing organizational culture. 3rd Edition. Jossey-Bass; 2011.

[34] Mian Z, Li H, Wei J. Examining the relationship between organizational culture and performance: The perspectives of consistency and balance. Front Bus Res China. 2008;2:256.

[35] De Haes S, Haest R, Van Grembergen W. IT Governance and Business-IT Alignment in SMEs. ISACA J. 2010;VOLUME 6.

[36] De Haes S, Van Grembergen W, Joshi A, Huygh T. Enterprise governance of information technology achieving alignment and value in digital organizations Steven De Haes Wim Van Grembergen Anant Joshi Tim Huygh. Third Edition. Springer; 2020.

[37] Neely A. Business performance measurement: Unifying theories and integrating practice. 2nd Edition. Cambridge University Press; 2007.

[38] Santos JB, Brito LAL. Toward a subjective measurement model for firm performance. BAR Rio Jan. 2012;Vol. 9:95–117.

[39] Kaplan RS, Norton DP. The balanced scorecard – measures that drive performance. Harv Bus Rev. 1992;70-79.

[40] Mollah S, Al Farooque O, Karim W. Ownership structure, corporate governance and firm performance: Evidence from an African emerging market. Stud Econ Finance. 2012;Vol. 92:301–19.

[41] Kaplan RS, Norton DP. The execution premium: Linking strategy to operations for competitive advantage. 1st Sed. HBS Press; 2008.

[42] Melville, Kraemer, Gurbaxani. Review: Information technology and organizational performance: An integrative model of IT Business Value. MIS Q. 2004;28:283.

[43] Rai, Patnayakuni, Seth. Firm performance impacts of digitally enabled supply chain integration capabilities. MIS Q. 2006;30:225.

[44] Wade, Hulland. Review: The resource-based view and information systems research: Review, extension, and suggestions for future research. MIS Q. 2004;28:107.

[45] Tallon PP. Does IT pay to focus? An analysis of IT business value under single and multi-focused business strategies. J Strateg Inf Syst. 2007;16:278–300.

[46] Tallon PP, Kraemer KL, Gurbaxani V. Executives’ perceptions of the business value of information technology: A process-oriented approach. J Manag Inf Syst. 2001;16:145– 73.

[47] BPS J. Direktori Perusahaan Industri Besar dan Sedang Provinsi Jawa Timur 2022. ©Badan Pusat Statistik Provinsi Jawa Timur. ©Badan Pusat Statistik Provinsi Jawa Timur.; 2022.

[48] Amar NCB, Fimel E. Examining the impact of organizational culture on IS strategic alignment under a qualitative analysis. AIMS-XXVème Conférence Int Manag Strat. 2016.

[49] Joseph OO, Kibera F. Organizational culture and performance: Evidence from microfinance institutions in Kenya. SAGE Open. 2019;1–11.

[50] Eom MT, Kahai S, Yayla A. Investigation of how IT leadership impacts IT-business alignment through shared domain knowledge and knowledge integration. Bus Fac Publ Present 21 [Internet]. 2015; Available from: http://pilotscholars.up.edu/bus_facpubs/21

[51] Miyamoto M. IT-business alignment and resource-based view of competitive advantage: Intangible assets of Korean SMEs. Univers J Manag. 2017;5:101–9.

[52] Yayla AA, Hu Q. The impact of IT-business strategic alignment on firm performance in a developing country setting: Exploring moderating roles of environmental uncertainty and strategic orientation. Eur J Inf Syst. 2012;21:373–87.

[53] Sirisomboonsuk P, Gu VC, Cao RQ, Burns JR. Relationships between project governance and information technology governance and their impact on project performance. Int J Proj Manag. 2017.

[54] Cohen BA. Point of view: How should novelty be valued in science? eLife- Sciences.org. 2017.

[55] Solimun, Fernandes AAR. Metodologi Penelitian Kuantitatif Perspektif Sistem. Cetakan kedua. UB Press; 2019.

[56] Chin WW. Partial least squares for researchers: An overview and presentation of recent advances using the PLS approach. Proc Twenty First Int Conf Inf Syst. 2002.

[57] Daikeler J, Bošnjak M, Lozar Manfreda K. Web versus other survey modes: An updated and extended meta-analysis comparing response rates. J Surv Stat Methodol. 2020;8:513–39.

[58] Shih T-H, Xitao Fan. Comparing response rates from web and mail surveys: A metaanalysis. Field Methods. 2008;20:249–71.

[59] Garson D. Garson_2016_Partial Least Squares. Regression and Structural Equation Models.pdf. Statistical Publishing Associates; 2016.

[60] Kock N. WarpPLS User Manual: Version 6.0. ScriptWarp Syst. 2019.

[61] Hair JF, Ringle CM, Sarstedt M. PLS-SEM: Indeed a Silver Bullet. J Mark Theory Pract. 2011;19:139–52.

[62] Chin WW. The Partial Least Squares Approach to SEM. Lawrence Erlbaum Assoc. 1998.

[63] Sadeghi D. Alignment of organizational change strategies and its relationship with increasing organizations’ performance. Procedia Soc Behav Sci. 2011;Vol.

[64] Sukirno S. Teori Pengantar Makroekonomi, Edisi Kedua. Jakarta: Raja Grafindo Persada. 2015.

[65] Ba Pusat Statistik. Berita Resmi Statistik: Pertumbuhan Ekonomi Indonesia Triwulan IV-2022. Jakarta: BPS RI. 2023.

[66] Kusmayadi D, Rudiana D, Badruzaman J. Good corporate governance. Tasikmalaya: LPPM Universitas Siliwangi. 2015.

[67] Suhadak K, Handayani SR, Rahayu SM. Stock return and financial performance as moderation variable in influence of good corporate governance towards corporate value. Asian Journal of Accounting Research. 2018; 4 (1): 18-34.

[68] Nazir MS, Afza T. 2018. Does managerial behavior of managing earnings mitigate the relationship between corporate governance and firm value? Evidence from an emerging market. Future Business Journal. 4 (1): 139-156.

[69] Ana SR, Sulistiyo AB, Prasetyo W. The effect of intellectual capital and good corporate governance on company value mediated by competitive advantage. Journal of Accounting and Investment. 2021; 22(2), 276-29.

[70] Bath KU, Chen Y, Jebran K, Bhutto NA. Corporate governance and firm value: a comparative analysis of state and non-state owned companies in the context of Pakistan. Corporate Governance. 2018;18 (6): 1196-1206.

[71] Suhadak, Rahayu SM, Handayani SR. GCG, financial architecture on stock return, financial performance and corporate value. International Journal of Productivity and Performance Management. 2019; 69 (9): 1812-1831.

[72] Mahrani M, Soewarno N. The effect of good corporate governance mechanism and corporate social responsibility on financial performance with earnings management as mediating variable. Asia Journal of Accounting Research. 2018; 3 (1): 41-60.

[73] Iqbal S, Nawaz A, Ehsan S. Financial performance and corporate governance in microfinance: Evidence from Asia. Journal of Asian Economics. 2018;60: 1-13.

[74] Deswanto RB, Siregar SV. The associations between environmental disclosures with financial performance, environmental performance, and firm value. Social Responsibility Journal. 2018;14 (1): 180-193.

[75] Spence M. Job market signaling. The Quarterly Journal of Economics. 1973;87(3): 355-374. (Aug., 1973).

[76] Ulum I. 2009. Intellectual Capital: Konsep dan Kajian Empiris. Yogyakarta: Graha Ilmu.

[77] Sartono A. Manajemen Keuangan Teori dan Aplikasi. Yogyakarta: BPFE. 2010.

[78] Brigham EF, Houston JF. Dasar-Dasar Manajemen Keuangan. Jakarta: Salemba Empat. 2014.

[79] Fahmi I. Manajemen Investasi: Teori dan Soal Jawab. Edisi 2. Jakarta: Salemba Empat.

[80] Connelly BL, Certo ST, Ireland RD, Reutzel CR. Signaling theory: A review and assessment. Journal of Management. 2011; 37(1): 39-67.

[81] Sugiyono. Metode Penelitian Pendidikan (Pendekatan Kuantitatif, Kualitatif dan R&D). Bandung: Alfabeta ; 2016.

[82] Adrian S. Good corporate governance. Jakarta: Sinar Grafika; 2012.

[83] Fahmi I. Analisis Kinerja Keuangan. Bandung: Alfabeta; 2017.

[84] Ajili H, Bouri A. Corporate governance quality of Islamic banks: Measurement and effect on financial performance. International Journal of Islamic and Middle Eastern Finance and Management. 2018;11 (3): 470-487.

[85] Al-ahdal WM, Alsamhi MH, Tabash MI, Farhan NHS. The impact of corporate governance on financial performance of Indian and GCC listed firms: An empirical investigation. Research in International Business and Finance. 2019.

[86] Manurung E, Effrida E, Gondowonto AJ. Effect of financial performance, good corporate governance and corporate size on corporate value in food and beverages.