Determinant of state-owned enterprises financial health: Indonesia empirical evidence

Sayidah, Nur; Assagaf, Aminullah; Bayu Taufiq Possumah Article Determinant of state-owned enterprises financial health: Indonesia empirical evidence Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Sayidah, Nur; Assagaf, Aminullah; Bayu Taufiq Possumah (2019) : Determinant of state-owned enterprises financial health: Indonesia empirical evidence, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 6, pp. 1-15, https://doi.org/10.1080/23311975.2019.1600207 This Version is available at: https://hdl.handle.net/10419/206168 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ BANKING & FINANCE | RESEARCH ARTICLE Determinant of state-owned enterprises financial health: Indonesia empirical evidence Nur Sayidah 1 , Aminullah Assagaf 1 and Bayu Taufiq Possumah 2 * Abstract: This research is motivated to study the phenomenon of the financial health of state-owned enterprises (SOEs) who are healthy but still dependent on government subsidies. Based on these phenomena, the aim of this study is to determine the factors that affect the company’s financial health. In order to achieve this aim, the present research will employ the purposive sampling method of seven SOEs with observations during the last 11 years. The data analysis employed involves the use of linear regression model and its management through software SPSS-Amos 23. As a result, the study found that subsidy is significant and negatively affects financial health, which means that the financial health of the SOEs is getting down when funding is still maintaining subsidy every year. Instead, financial health would be enhanced if the government limits the subsidies gradually and gives broad authority to decide on the pricing structure and control of resources to support the cost of efficiency. The study also found that firm size strengthens the link between subsidies to financial health with a positive coefficient and is exhibited significantly, which means that the larger the firm size, the stronger the effect of subsidies on the financial health SOEs. This means that the SOEs that have a good asset capability tend to have a better financial health, especially because efficient opportunities are supported by the control of resources and a more economical business scale. Nur Sayidah ABOUT THE AUTHORS Nur Sayidah is senior lecturer at Faculty of Economics and Business, DR. Soetomo University in Surabaya, Indonesia. She holds a doctorate degree on financial accounting from Brawijaya University, Indonesia. Her research areas are corporate and financial accounting. Now she is a dean of faculty of economic and business at DR. Soetomo University in Surabaya, Indonesia. Aminullah Assagaf is professor and senior lecturer at DR. Soetomo University in Surabaya, Indonesia. His research areas are financial economics, corporate finance and managerial economics. Bayu Taufiq Possumah as corresponding author is a lecturer, at School of Economics, Universiti Malaysia Terengganu. He holds PhD in economic and finance at University Kebangsaan Malaysia. He is also a member of the Institute of Islamic Economic Research and Thought Centre. His research interests are in the areas of Islamic economic and finance, SMEs, Islamic Social Finance and corporate governance PUBLIC INTEREST STATEMENT The phenomenon of state-owned enterprises which are still obtaining funding assistance from the government in the form of subsidies or additional capital sounds rationale, since the firm with such a large-scale state-owned enterprise needs to operate efficiently and is able to obtain greater market share. This research provides a methodology which enables to investigate the influence of the independent variable profitability, earnings management and subsidy practices to the financial health of state-owned enterprises. The methodology also analyzed the moderating variable of firm size in strengthening the influence of the independent variables on financial health of state-owned enterprises. Sayidah et al., Cogent Business & Management (2019), 6: 1600207 https://doi.org/10.1080/23311975.2019.1600207 © 2019 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. Received: 09 October 2018 Accepted: 14 March 2019 First Published: 31 March 2019 *Corresponding author: Bayu Taufiq Possumah, Universiti Malaysia Terengganu, Kuala terengganu, Malaysia E-mail: [email protected] Reviewing editor: David McMillan, University of Stirling, Stirling, United Kingdom Additional information is available at the end of the article Page 1 of 15 Subjects: Business, Management and Accounting; Strategic Management; Critical Management Studies Keywords: financial health; earnings management; subsidy 1. Introduction This research is motivated to learn from the analysis of the phenomenon of state-owned enterprises (SOEs) that are still obtaining funding assistance from the government in the form of subsidies or additional capital. Rationally, it should be that, firm with such a large-scale SOEs can operate efficiently and is able to obtain greater market share, so as to meet the funding needs independently. When the cost structure of the firm is managed optimally, the firm will be more efficient. That is because the firm will have qualified human resources and technological capability to produce a product or service that is more in line with consumer expectations. The firm can also apply rate or price at a reasonable level for return on investment, and even capable of doing the business development on a larger scale efficiently. The practices such as performance management and strategic planning have conquered the public sector in many countries (Goeminne and George 2018). Contrarily, due to a poor financial health, the SOEs can even be liquidated if it is not supported by government funding. In view of this, the current study examines some of the major factors that affect the financial health of SOEs and provide information about the role of these factors so that it can become a reference in the decision to improve the financial health of the company. The factors that may affect the financial health of SOEs occur due to negative profitability gap (NPG) that is smaller than the income of the burden of operational costs incurred by the company. Funding assistance from the government in the form of subsidies or additional capital is also another factor. This is why the present research categorized it as a subsidy which is positioned as an independent variable that affects the financial health and its effect is reinforced by the moderator variables of firm size. Other independent variables that are practical and rational are financial health which affects the achievement levels of profitability and earnings management practices. While the variables are selected as a moderator variable for rational reasons, firm size is capable of delivering the influence of independent variables on financial health. Therefore, this research is motivated to give an overview of the factors affecting the financial health of SOEs, so as to be useful and provide input to management and shareholders in the decision-making process related to the determination of the tariff structure and efficiency which may affect profitability. In this study, the practice of earnings management-based accruals, to the transaction costs and income, subsidy wisdom and firm size are selected as a moderator variable. Previous researches carried out by the financial health scholars, such as Haron, Hartadi., Ansari. and Ismail (2009), and another conducted by Hadlock and Sonti (2010), use current measurement methods of Althman (1984) with the consideration that the use of five financial ratios that produced three assessment criteria are able to describe the financial health of the company. Based on these reasons, this study also used financial measurement of Althman health approach in 1984, and Althman 1983 for a sensitivity analysis, in order to test the consistency of the calculation and assess the level of its relevancy to the empirical fact of the SOEs. The result of the forgoing is that this research would provide inspiration as an alternative in the management decision-making process, so that the SOEs would be able to minimize the dependency on funding from the subsidy. Through improving the financial health in the management of finance, it is expected to provide a balance between the financial interests, environmental interests and the interests of society, so that the company is able to obtain the support of government and society in a viable tariff adjustment. Again, previous researches into the phenomenon of SOE have focused on the financial health with the fundamental problems which are as follows: (a) How is the profitability of the financial Sayidah et al., Cogent Business & Management (2019), 6: 1600207 https://doi.org/10.1080/23311975.2019.1600207 Page 2 of 15 health of SOEs? (b) How is the practice of earnings management to the financial health of SOEs? (c) How is the subsidy to the financial health of SOEs? (d) What is the effect of firm size on the financial health of SOEs? (e) Does the firm size strengthen the link between the profitability with the financial health of SOEs? (e) Does firm size relationship between earnings management strengthen the financial health of SOEs? (f) Is the strengthening relationship between firm size subsidies to the financial health of SOEs? As a result, this research aims to study the influence of the independent variable profitability, earnings management and subsidy practices of the financial health of the SOEs. This study also analyzed the moderating variable of firm size in strengthening the influence of the independent variables on financial health of the SOEs. Therefore, the benefits of this research are expected to contribute to the development of science and provide input to the management of the company, becoming a reference for practitioners, analysts and subsequent research, especially related to the financial health of the SOEs. 1.1. Literature review and hypotheses development 1.1.1. Agency theory Agency theory was propounded by Jensen and Meckling (1976), and it suggested that there is a contract in the agency relationship between the principal owner of the company or by the manager who commissioned the agent to do a job in running the company. Principal party gives full authority to the agent to run the company and make decisions according to their expectations. In this experiment, we use the agency theory as the basis of the analysis relating to the management efforts of the SOEs in improving financial health. The analysis of the financial health using several variables affects the financial health integration, assesses its management policy steps in running the company and enhances the company’s financial health in accordance with the wishes of the principal. On this basis, the principal party sets specific targets to support the improvement of services at the same time fostering the company’s profits. 1.1.2. Financial health Financial health shows a combination of several financial indicators such as profitability indicators, liquidity indicators, leverage indicators and activity indicators that produce category rankings, namely (a) healthy category, (b) unhealthy category, and (c) unhealthy category, while financial performance only uses profitability indicators, liquidity indicators, leverage indicators and active indicators to assess the success of the company’s financial performance. Financial performance weaknesses due to the success of one indicator are not necessarily other indicators that are successful, making it difficult to assess the company’s financial performance as a whole, while financial health provides a comprehensive assessment of the combined indicators, then to provide an overview of the company’s success from time to time can be compared with other companies. In this study, financial health is the dependent variable and it is measured using the method of Althman 1984 and 1983 as suggested by Haron et al. (2009). The study suggests that there are five financial ratios for such an approach which might be a strong element that is formed with the categories of financial health, but if the financial condition is healthy or not bankrupt, it means the financial condition or the gray area and the financial condition is not healthy. The annual financial report presented by the company described the condition of financial health of the company, this is done in order to find in the report the company’s financial condition category, weather it is strong, medium or weak. 1.1.3. Profitability Strategic corporations target certain profitabilitas every year, because there is the need for them to achieve these goals, so that managers can take action that is more focused on supporting these targets through the utilization of company resources under their control or authority. Financial health requires the support of the achievement of profitability, while supporting the achievement Sayidah et al., Cogent Business & Management (2019), 6: 1600207 https://doi.org/10.1080/23311975.2019.1600207 Page 3 of 15 of targets is done by shareholders in order to obtain the optimal dividend and increasing the value of the company. Bercovitz and Mitchell (2007), Assagaf (2014,2015) and Assagaf, Lestari and Hamzah (2016) suggested that profitability can be measured by a comparison between profitability from year to year, as a basis for assessing the success of the company’s management of improving the company’s financial health, as well as by total debt to capital ratio (Abor, 2005). Based on the importance of the profitability in improving financial health, this study proposed the following hypothesis (H1): H1. Profitability positively and significantly has impact on the health of financial position of the SOEs. 1.1.4. Earnings management A research conducted Aulia and Ikhwana (2012) in Assagaf (2017) suggests that earnings management is a management action that leads to the achievement of financial health of the company. Earning management is used for specific purposes, and its implementation is still within the limits of appropriate standards applicable for financial reporting. It is often used in a variety of patterns, such as income smoothing and set up finance report to support an initial public offering, for the benefit of the acquisition of bonus greater for management and employees, to meet targets or requirements of the covenant bank lending, improving image management in the face of the election of new management and others. The strategy used to achieve the target of financial health is if the company uses accruals earnings management approach. Research done by Scott (2012) and the physical defect report (2016) argued that earning management is a corporate strategy undertaken with the aim of maximizing the company’s market value. Based on the accrual-based earnings management practices, this study proposed the following hypothesis (H2): H2. Accrual-based earnings management positively and significantly has impact on the financial health of the SOEs. 1.1.5. Subsidy Results of research conducted by Schreiner and Yaron (1999) in Assagaf (2017) showed that the subsidies are intended to assist the development of the company through research and development that is able to generate new innovations that can support increased revenue or sales. Based on that study, it also showed that the subsidies provided by the government through SOEs are a driving force in the growth of industry, development of business and social sectors and other economic benefits to the society in general, such as the development of education, provision of health services and government efforts to improve the welfare of the society at large. In order to overcome these losses, the government has to set up a fund to help the SOEs in the form of subsidies or additional capital. The research result of González (2005) also suggested that the NPG basis for determining the subsidy is if the subsidy granted to the company will encourage the development innovation and progress. Given the role of subsidies in the financial health of SOEs, this study proposed the following hypothesis (H3): H3. Subsidy given by government significantly and negatively has effect on the financial health of the SOEs. 1.1.6. Firm size Firm size is the most important variable which affects the financial health of the company, depending on the success of the asset management company to mobilize, so as to be more productive and contribute to the improvement of the financial health of the company. Research conducted by Capon et al. (1990) in Assagaf (2014,2015,2016,2017) uses this variable as a factor affecting the company’s financial health, and when viewed in the company’s operations, the firm size variables can influence the relationship between independent variables and financial health, Sayidah et al., Cogent Business & Management (2019), 6: 1600207 https://doi.org/10.1080/23311975.2019.1600207 Page 4 of 15 so that these variables can serve as the independent variable and also as a moderating variable. Given this importance to the firm size variables, this study proposes the following hypothesis (H4): H4. Firm size is the independent variable and it positively and significantly impacts on the financial health of SOEs. 1.1.7. Moderating variables (interaction) Research by Baron and Kenny (1986) argued that the moderating variables can be selected according to the role that is based on the reality of rational and theoretical considerations. Moderating variables may affect the relationship between the independent variables, because the dependent variable result is the direction of the relationship strengthening the interaction of variables and positively and significantly weakens the direction coefficient and has significant negative relationship. Based on firm size variable role is a moderating variable. Based on this, the present research proposes the following hypothesis (H5): H5. Firm size is a variable moderator strengthening the influence of the independent variable profitability, earnings management and financial subsidy of the SOEs. 1.2. Conceptual framework predicting SOEs financial health Based on the problems and hypothesis of this study, the below conceptual framework is put forward as Figure1. This conceptual framework uses several variables, which consist of three independent variables: two control variables and one moderating variable to analyze the changes in the dependent variable. 2. Methods 2.1. Sample selection To prove the hypothesis of this study, the data collection used purposive sampling method in determining the sample and it is considered to have in accordance with the objectives and Figure 1. Framework of SOEs financial health variable Moderating Variable Independen Variable Dependent Variable Control Variable Profitability (X1) Firm Size (X4) Financial Health (Y) Acceuals Earning Management (X2) Subsidy (X3) Investment (X5) Leverage (X6) Sayidah et al., Cogent Business & Management (2019), 6: 1600207 https://doi.org/10.1080/23311975.2019.1600207 Page 5 of 15 problem solving methods related to the financial health of the SOEs. The samples were selected and included seven SOEs that have a scale big business and have a wide range in various aspects of social life of the local economy and are able to influence national economic growth and can represent the SOEs more to the study and analysis of financial health. This study was conducted within a period of 12 years (2005–2016), but the data used in this study are only for firms that are of 77 years. However, in terms of the period, it uses some of the data that is measured based on a change between the times, therefore, it is used for 11 years. 2.2. Variable and measurement In order to perform a more precise data analysis, this study used the variable data to measure the financial health in relation to the independent variable, the moderating variable and control variables as stated below: 2.3. Financial health This variable is in a proxy using the Altman Z-score approach of 1984 in the publications of Altman (2000) below: Zi ¼0:717ðnumber of assets smoothly the amount of current liabilitiesÞ þ0:847ðThe amount of retained earnings=total assetsÞ þ3:107ðamount of earnings before interest and taxes=total assetsÞ þ0:420ðmarket price of ordinary shares and preference shares=amount debtÞ þ0:998ðsales=total assetsÞ (1) where Zi is a Z-score. 2.4. Profitability Profitability variables can affect the health of financial condition in getting better through the company’s profitability to improve its operating cash flow and facilitating the acquisition of funding bank loans, bonds and shares in the capital market. Also, measurement variable profitability is based on growth over time that is calculated based on the difference between the net incomes of the period (t) by reducing net income in the period (t−1), then divided by net income of the period (t−1). The research conducted by Bercovitz and Mitchell (2007) in Assagaf (2014,2015,2017) and Assagaf et al. (2016) has the following formula: Profitability ¼Net Income tðÞNet Income t 1ðÞ Net Income t 1ðÞ (2) Earnings management variable is used by the accruals earnings management, which is named as one strategy to increase profits through transactions related to the accrual of costs and revenues, but still within the limits of appropriate accounting standards. This variable measurement approach of Dechow Model (1995) has a formula that is used to calculate accrual earnings management of residual or known abnormal accruals obtained from the calculation of the equation or the total accruals or accruals (ACC), using the following equation: ACCit=TAt1¼α0þα1ΔREVtΔRECit ðÞ=TAt1þα2PPEit=TAt1 þα3CFOit=TAt1þeit (3) where ACC is the total accruals or accruals, TA is the number of assets, REV is the amount of revenue, REC is the amount receivable, PPE is the amount of property, plant and equipment and eis the error. 2.4.1. Subsidy Variable subsidy is the funding received from the government through the budget revenue and expenditure as a consequence because the revenue amount is lower than the operating costs. It is measured by the number of admissions subsidy funding provided by the government to the Sayidah et al., Cogent Business & Management (2019), 6: 1600207 https://doi.org/10.1080/23311975.2019.1600207 Page 6 of 15 SOEs in the form of subsidies or as an additional category of government investment capital. This study uses a measurement variable subsidy based on Price-Gap as stated by Doug Koplow (2009) in Assagaf et al. (2016,2017) as stated below: Subsidy ¼Cost of Product Sales Cost of Product (4) In comparison to previous research, where variable subsidy is used by Dinar and Yaron (1992), Schreiner (1997) in Assagaf (2017), their measurements are based on a standard subsidy dependence index with the following formula: Standar SDI ¼Subsidy Revenue (5) Other research measurement subsidy was proposed by González (2005) in Assagaf (2017), and it is based on the NPG having the following formula: NPG ¼Revenue Cost (6) Calculation subsidies granted to SOEs are based on the number of NPG plus a certain number or exceed the amount of damages to provide financing opportunities of investment, mortgage payments and long-term debt maturities and provide margin, in order to describe the financial health better. 2.4.2. Firm size Firm size variable in its function as a moderator variable indicates the capacity or the number of the company’s assets in accordance to the year-end financial statements. The measurement of this variable is based on the logarithm of total assets according to research conducted by Capon et al. (1990) in Assagaf et al. (2016,2017) having the following formula: Firm size ¼Log Total AssetsðÞ (7) 2.4.3. Investation Investment variables as control variables are based on investment expenditure which can be seen in the growth of fixed assets that are reported in a year-end financial statement. Measurement variable on the other hand is based on the asset value fixed period (t) minus the fixed assets period (t−1), then divided by the number of assets fixed period (t−1) based on the study of Asquith et al. (1994) as stated by Assagaf (2016,2017) with the following formula: Investasi ¼Fix Asset tðÞFixed Assets t 1ðÞ Fixed Assets t 1ðÞ (8) 2.4.4. Leverage Variable leverage in its function as a control variable describes the ratio of debt to capital in financing the company’s operations. Funding through debt can provide a higher benefit to shareholders, because without increasing the amount of equity, greater profitability can be delivered in order to increase the dividend per share. The measurement of these variables using a formula of total assets to total equity was proposed by Pratheepkanth (2011)asshown below: Leverage ¼Total Debt Equity (9) 2.5. Research models The model is used to test the hypothesis that is put forward as a model in the following linear regression equation: Sayidah et al., Cogent Business & Management (2019), 6: 1600207 https://doi.org/10.1080/23311975.2019.1600207 Page 7 of 15 2.5.1. Model for H1, H2 and H3 The influence of profitability, earnings management and financial subsidy on health: Model 1 : Yit ¼β0þβ1Profitabilityit þβ2Accrual Earning Managementit þβ3Subsidyit þβ4Firm Sizeit þβ5Investmentit þβ6Leverageit þeit (10) 2.5.2. Model for H4 and H5 The effect of firm size as a moderator variable on the relationship between profitability, earnings management and subsidy with financial health: Model 2 :Yit¼β0þβ1Profitabilityitþβ2Accrual Earning Managementit þβ3Subsidyit þβ4Firm Sizeit þβ5Investmentit þβ6Leverageit þβ7Profitability:Firm Sizeit ðÞ þβ8ðAccrual Earning ManagementitÞþβ9ðSubsidy:Firm SizeitÞþeit (11) 2.5.3. Sensitivity analysis for H4 and H5 models Sensitivity analysis using the Altman approach in 1983 for the measurement of financial health variables is as follow: Model 3:Yait ¼β0þβ1Profitabilit yit þβ2Accrual Managementit þβ3Subsid yit þβ4Firm Sizeit þβ5Investmentit þβ6Leverageit þβ7Profitability:Accrual Earning Managementit ðÞ _þβ8ðaccrual searning management:Firm SizeitÞþβ9ðSubsidy:Firm SizeitÞþeit (12) where Y it is the financial health (Althman 1984), β 0 is the constant, β 1 is the coefficient and e it is the error. 3. Result and discussion 3.1. Descriptive statistics According to the research results in the Table 1below, descriptive statistics indicate that the dependent variable of financial health or Yvaries from a minimum of 0.399 to a maximum of 2.764, and a mean value of 1.527 or close to the maximum number, means that the distribution of research data is concentrated on a value closer to the maximum than the minimum and fluctuated in the range of 0.722 from the mean. This happens because the degree of financial health business entities controlled by the government through the supervision or control of pricing is relatively at low level of corporate profitability. The independent variable profitability with a standard deviation of 6.263 and a mean value of 0.909 indicates a high fluctuation within the limits of a minimum value and a maximum 32.214–5.011. This shows that the profitability of variable data is concentrated on minimum than the maximum number. The independent variable earnings management with a standard deviation of 0.175 and a mean value of −0.177 indicates a relatively low fluctuation in these Table 1. Descriptive statistics NMinimum Maximum Mean Std. deviation Financial health 28 0.399 2.764 1.527 0.722 Profitability 28 −5.011 32.214 0.909 6.263 Accrual earn management 28 −0.689 0.108 −0.117 0.175 Subsidy 28 0.000 0.509 0.108 0.158 Firm size 28 3.532 6.089 4.445 0.656 Investment 28 −0.878 1.528 0.293 0.414 Leverage 28 0.403 41.258 2.648 7.599 Valid N(listwise) 28 Sayidah et al., Cogent Business & Management (2019), 6: 1600207 https://doi.org/10.1080/23311975.2019.1600207 Page 8 of 15 © 2019 The Author(s). This open access article is distributed under a Creative Commons Attribution(CC-BY) 4.0 license. You are free to: Share —copy and redistribute the material in any medium or format. Adapt —remix, transform, and build upon the material for any purpose, even commercially. 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