Cash Holding, Type of Ownership and Firm Performance

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Cash Holding, Type of Ownership and Firm Performance: An Empirical Study Indonesia

Dian Rizandi^*, Ismawati, Rizki Haryanto

Master of Business Administration, Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia

*Corresponding Author: [email protected] Accepted: 15 February 2023 | Published: 1 March 2023

DOI:https://doi.org/10.55057/ajafin.2023.5.1.2

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Abstract: This study aims to examine the effect of foreign institutional ownership on cash holding rates and test the impact of foreign institutional ownership on firm performance. The data in this study used a sample of 165 non-financial companies listed on the IDX and had a proportion of foreign institutional ownership of more than 1% during the period 2016 - 2021.

This research uses quantitative methods. Sources and types of data, this study uses secondary data on financial statements obtained from the Bvd Osiris database and KSEI. The data is processed into panel data by choosing the best model of common effect, fixed effect, and random effect. The best model in this study is the fixed effect model. This research conducted a robustness test using the lag factor on the independent variable. The results of this study show that foreign institutional ownership significantly negatively affects the company's cash holding rate. The results of subsequent studies showed that foreign institutional ownership positively affects firm performance.

Keywords: cash holding, firm performance, foreign institutional ownership

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1. Introduction

Globalization has resulted in changes in various sectors, ranging from scientific technology and politics to the economy. Globalization has encouraged global economic relations in the financial industry, as seen by international companies' flow of funds, information, trade, and investment. The capital market has changed due to the ease of interacting and transacting with various countries, including the Indonesian capital market. Indonesia has become an attraction for some overseas investors to invest in companies in Indonesia. According to a report by the rating agency (FitchRatings, 2022), Indonesia has received the title BBB Long-term. This makes investors think that companies in Indonesia have a high growth potential to provide higher profits. There are several ways foreign investors invest in Indonesia, one of which is with FDI (foreign direct investment), namely direct investment or funding through the capital market.

Data collected from KSEI shows that Indonesia's number of foreign owners from 2017 to 2021 has consistently been above 40%. This indicates that the role of foreign investors in Indonesia is significant. The presence of foreign investors is essential for the company's funding sources and managing the company. The presence of foreign investors is considered to be able to reduce agency conflicts that commonly occur in companies. Agency conflicts arising between principals and agents will impact the company's decision to use the company's cash holding.

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The presence of foreign investors is considered to reduce agency costs by improving monitoring and corporate governance to reduce the tendency for insider takeovers (Bena et al., 2017).

Efficiency in asset management affects the company's performance and the level of company profitability, thus influencing the decisions of local and foreign investors in investing in the company. The presence of foreign investors tends to bring a strict governance and monitoring system, which makes managers disciplined and improves the performance of managers to improve the company's overall performance.

2. Literature Review

This research was developed through agency theory. Agency theory explains an interconnected behavior between the principal and the agent. The top company involves the agent as a delegate to several decision-making authorities to meet their needs (Jensen & Meckling, 2019). In the relationship between the principal and agent, it is possible to have agency problems. Agency problems that occur have incurred agency costs. Agency fees are costs incurred by companies to monitor the relationship between principals and agents. According to (Jensen & Meckling, 2019), agency costs are divided into three types: the principal's monitoring expenditures, the agent's bonding expenditures, and the residual loss. Bodie et al., (2018) explain some of the mechanisms used to reduce agency problems, one of which is the presence of large institutional investors such as pension funds etc., through strict supervision. And make managers who have poor performance feel uncomfortable.

Agency conflicts that occur between shareholders and managers have an impact on cash management and firm performance. Most of the company's transactions use cash in the company's operational activities. Gill & Shah (2011) argue that cash holding is cash held or held by a company that is available for investment and can be used as a source of funds.

According to Schumpeter & Keynes (1936), there are three motives for decisions against the management/use of cash, the first for transactions, just in case, and for speculation. The presence of institutional investors can minimize agency conflict. Foreign institutional ownership is the portion or percentage of shares owned by foreign institutions that invest in a company by investing in a domestic company. According to Tandelilin (2010), institutional investors comprise insurance companies, fund depositors (banks and savings and loan institutions), pension fund institutions, and investment companies. According to Law No. 25 of 2007 in article 1 number 6, foreign investors are individuals of foreign nationals, foreign business entities, and or foreign governments who invest in the territory of the Republic of Indonesia. According to Ferreira & Matos (2008), the existence of foreign institutional ownership in the company can increase the company's work. The company's performance can be assessed through the company's financial performance, namely by looking at the level of company profitability. According to Brigham & Ehrhardt (2017), profitability is the net income from several policies and decisions that a company has taken.

Foreign Institutional Ownership of Cash Holding

Agency conflicts tend to increase agency costs. The existence of foreign ownership in the company is considered to be able to minimize agency conflicts and reduce agency costs.

According to Bena et al., (2017), foreign institutions can reduce agency costs by improving monitoring and corporate governance to reduce the tendency for takeovers by insiders.

Enhancing monitoring and corporate governance will impact the company's cash management.

The high amount of the company's cash is also due to the increasing cost of external funding.

Companies with high external funding costs optimally have high cash levels (Riddick &

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Whited, 2009). Foreign institutional existence is considered to reduce agency costs and external funding costs to reduce the tendency for high cash accumulation. Previous research by Loncan (2020) shows that foreign institutional ownership negatively affects the company's cash holding rate. Therefore, Hypothesis 1: Foreign institutional ownership negatively affects the company's cash holding rate.

Foreign Institutional Ownership of Firm Performance

Foreign institutional investors are considered to be parties who have experience and are effective in monitoring the company. Ferreira & Matos (2008) said that foreign institutional investors are more active in managing companies and are more likely to demand changes in corporate governance than domestic institutional investors. Improvement of management and monitoring of managers makes managers disciplined so that manager performance increases and makes the company's performance better. Research by Lin & Fu(2017) shows a positive influence of institutional ownership on firm performance. Based on this description, hypothesis 2: Foreign institutional ownership positively affects the company's performance.

Foreign institutional ownership positively affects the company's performance.

Figure 1: Research Framework Model Source: Data Processed by Researchers (2022)

3. Methods

This research is a quantitative study that aims to test hypotheses based on the literature review empirically. Hypotheses are tested using secondary data. The variables studied include foreign institutional ownership, cash holding, and firm performance. The research population is non- financial companies in Indonesia listed on the stock exchange and active in 2016 – 2021. The data of this study was obtained from the databases of BvD Osiris and KSEI. This study used a purposive sampling technique. The criteria for a company with a proportion of foreign institutional ownership has a shareholding of more than 1% of the total outstanding shares.

Based on the criteria, a company is obtained that is the study's sample. There were 669 non- financial companies listed and active on the IDX in 2016 – 2021. Furthermore, 241 companies with a foreign national ownership rate of more than 1% were obtained; after that, 165 companies were obtained with complete data and according to the required sample criteria.

This is a panel data research with descriptive analysis and classical assumption testing.

Descriptive statistics are presented in tables, graphs, and diagrams consisting of maximum and minimum values, mean, and standard deviation. The classical assumption test in this study consists of a normality test using Uji Shapiro-Wilk. Test multicollinearity by looking at the value of the VIF. The heteroskedasticity test uses Breusch-Pagan/Cook-Weisberg test to detect heteroskedasticity problems. Furthermore, to obtain the best hypothesis test results, first determine the appropriate regression model estimate. This study used the Chow Test and the Husmann Test LM Test To test the estimation of the corresponding regression model.

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Table 1: Operational of Definition Variables

Operational of Definition Variables

Dependent variables Operational Definition

Cash holding cash and equivalent cash/ Total Asset firm performance ROA = net income/total asset

ROE = net income/Total sheres holders equity Independent variables

Foreign Institutional Ownership Foreign institutional shares of the Company/Total outstanding shares of the Company

Control variables

Leverage Total debt/Total asset

Cash Flow Operating cashflows/ Total asset

Net Working Capital Current Asset-Current liabilities/Total asset Growth total revenue t -total revenue t-1/ total revenue t-1

Size Logarithm Natural Total Asset

Age Year of establishment of the Company to the year of research liquidity Current Asset/ Current liabilities

4. Results

Hypothesis testing in this study used regression analysis of panel data based on research. The first model is a model for analyzing the influence of foreign institutional ownership on cash holdings. The second model analyzes the effect of foreign institutional ownership on the company's performance. The following is the regression model used in this study.

Regression-1 Equation Model

CASHi.t=α 0+β1FIOi.t+ β3LEVERAGEi.t + β4CASHFLOWi.t +β5NWCi.t Regression-2 Equation Model

Performai.t=α0+β1FIOi.t+β2Growthi.t+β3Agei.t+β4Sizei.t+β5Liquidityi.t+β6Leveragei.t

Analysis and Discussion

Table 2: Statistic Descriptive

Variables Obs Mean Std. Dev. Min Max

CASH 990 0.098 0084 0,000 0,646

ROA 990 0.040 0.064 -0.171 0.471

ROE 990 0.067 0.148 -1.450 1.100

FIO 990 0.268 0.243 0.011 0.997

LEVERAGE 990 0.270 0.170 0.000 0.800

NWC 990 0.148 0.185 -0.548 0.722

CASHFLOW 990 0.074 0.085 -0.200 0.545

GROWTH 990 0.079 0.252 -0.485 2.288

AGE 990 37.264 18.788 6 120

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SIZE 990 29.628 1.558 24.948 33.537

LIQUIDITY 990 1.930 1.445 0.147 9.284

Source: Data Processed by Researchers (2022)

Table 2 shows that the cash holding variable has a minimum value of 0.000. a maximum value of 0.646, and an average value of 0.098 with a standard deviation value of 0.084. Based on the data obtained, it can be seen that the company's cash holding with the lowest level was PT Toba Pulp Lestari Tbk (INRU) in 2020 of 0.000, and the highest cash holding owned by PT Prodia Widyahusada Tbk (PRDA) in 2016, which was 0.646. ROA has an average value of 0.040, with the highest value of 0.471 owned by PT Baramulti Suksessarana Tbk (BSSR) in 2021 and the lowest value of -0.171 in 2020 in the company PT Lippo Karawaci Tbk (LPKR).

Furthermore, ROE has an average value of 0.067, with the highest value of 1.100 owned in the company PT Golden Energy Mines TBK (GEMS) in 2021 and the lowest value of -1.450 located in the company PT Krakatau Steel (Persero) TBK ( KRAS) in 2019.

Table 3: Selection of Panel Data Regression Models Test panel data

regression

Model 1 CASH HOLDING

Model 2 ROA

ROE

P-value Type P-value Type P-value Type

Chow Test 0.000 FEM 0.000 FEM 0.000 FEM

Hausmann Test 0.005 FEM 0.000 FEM 0.000 FEM

Conclusion FEM FEM FEM

Based on the chow test, the Hausmann test, and the LM test in the selected regression model for each model are fixed effect models

Normality Test

Table 4: Normality Test

Model 1 Variables Obs W V Z Prob>z

Cash holding 990 0.968 20.109 7.429 0.000

Model 2

Variables Obs W V Z Prob>z

ROA 990 0.935 40.689 9.174 0.000

Variables Obs W V Z Prob>z

ROE 990 0.820 112.574 11.693 0.000

Based on the Shapiro-Wilk test that has been carried out by looking at the probability values in both models < 005, it can be concluded that the data in this study are not normal.

Multicollinearity Test

Table 5: Multicollinearity Test Model 1

Variables VIFs Information FIO 1.02 Not multicollinearity Leverage 1.40 Not multicollinearity NWC 1.31 Not multicollinearity Cash Flow 1.09 Not multicollinearity

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Model 2

Variables VIFs Information FIO 1.02 Not multicollinearity Leverage 1.24 Not multicollinearity Liquidity 1.18 Not multicollinearity Size 1.08 Not multicollinearity Age 1.01 Not multicollinearity Growth 1.00 Not multicollinearity

Based on Table 5, it can be explained that each of the variables has a VIF value of < 10 Thus, it can be concluded that there is no multicollinearity in this research model.

Heteroskedasticity Test

Table 6: Heteroskedasticity Test

Heteroskedasticity Test: Breusch-Pagan/Cook-Weisberg Type Proxy Variabel Dependent Prob > chi2 Information

Model 1 Cash holding 0.0000 Heteroscedasticity occurs

Model 2 ROA 0.0000 Heteroscedasticity occurs

ROE 0.0000 Heteroscedasticity occurs

Source: Results of Data Processing by the Author

Hypothesis Test

Table 7: Hypothesis Test Dependent

variables

Model 1 Model 2

Cash holding ROA ROE

FIO -2.90*** 2.26** 2.53**

(-0.04) 0.04 0.12

Leverage -1.33 -6.31*** -4.37***

(-0.05) (-0.00) (-0.41)

NWC 5.55*** - -

0.26 - -

Cash flow 3.45*** - -

0.14 - -

Growth - 6.94*** 6.30***

- 0.05 0.12

Age - -3.09 -3.36***

- (-0.00) (-0.01)

Size - 2.59** 3.06

- 0.03 0.11

Liquidity - 0.52 0.47

0.00 0.00

R-squared 0.21 0.25 0.19

F-test 18.264 14.73 12.24

Prob > F 0.00 0.00 0.00

p<.01. ** p<.05. * p<.1

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The hypothesis test results in Table 7 show that foreign institutional ownership (FIO) has a negative effect with a p-value significance level of <0.01. Institutional investors are crucial in monitoring activities to ensure that the company's cash holding is not wasted (Ward et al., 2018). In addition, through good governance, foreign institutions can prevent cash expropriation and waste of company-owned resources (Loncan, 2020). The existence of foreign institutional investors can minimize agency conflicts. Decreasing agency conflicts can mitigate agency costs to reduce the company's tendency to accumulate cash, which can cause excess company cash. Based on the results of hypothesis testing, hypothesis 1 in this study, foreign institutional ownership negatively affects the company's cash holding rate, has been supported.

The results of this study reinforce the findings of Loncan (2020), which found that institutional ownership decreases the company's cash holding.

The hypothesis test results in Table 7 show that foreign institutional ownership (FIO) positively affects both ROA and ROE firm performance proxies. Investors from foreign institutions apply managerial experience, professional knowledge, and voting rights that influence managers to improve the company's efficiency and corporate governance and influence managers in making business decisions. Based on the test results, then hypothesis 2 in this study, foreign institutional ownership positively affects the company's performance, has been supported g.

This follows the findings of Lin & Fu (2017), which state that foreign institutional investors positively affect the performance of companies

Robustness Test

Table 8: Robustness Test Dependent

Variables

Model-1 Model-2

Cash holding ROA ROE

FIO_lag -1.92* 2.19** 1.86*

-0.04 0.05 0.11

Leverage_lag -0.91 -0.09 -0.61

-0.03 -0.00 -0.06

NWC_lag 1.77* - -

0.07 - -

Cash flow_lag 3.06*** - -

0.14 - -

Growth_lag - 0.13 0.57

- 0.00 0.01

Age_lag - 1.96* 0.68

- 0.00 0.00

Size_lag - -4.48*** -2.87***

- -0.06 -0.10

Liquidity_lag - -2.06** -2.71***

-0.00 -0.01

R-squared 0.057 0.058 0.036

F-test 5.518 6.169 4.847

Prob > F 0.001 0.00 0.00

Description: *** p<0.01. ** p<0.05. * p<0.1 Source: Data Processed by Researchers (2022)

Based on the table above, it can be seen that in the equation-1 model, the variable of foreign institutional ownership has a negative coefficient with a significance level of < 0.1. In the equation-2 model, foreign institutional ownership variables showed significant positive results on firm performance in each ROA proxy with a significance level of < 0.05 and ROE with a signification rate of <0.1. The test results showed results consistent with the research regression

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model. It can be concluded that the tests taking into account the lag factor gave consistent results so that foreign institutional ownership variables also influenced the dependent variables of cash holding and firm performance in year t in year t-1.

5. Conclusion And Recommendation

This study examines the relationship of foreign institutional ownership to the level of corporate cash holding and the relationship of foreign institutional ownership to firm performance. This research was conducted in Indonesia with a sample of non-financial companies registered and active on the IDX in 2016 - 2021. The results of the hypothesis tests show that there is a negative influence between foreign institutional ownership and the company's cash holding rate in Indonesia. Foreign institutional investors can reduce cash accumulation by mitigating agency costs used for management monitoring—there is a positive influence between foreign institutional ownership and the company's performance. The governance and monitoring system owned by foreign investors has been able to discipline management in carrying out their duties, which improves their performance and impacts the company's performance. It can be concluded that each of the hypotheses in this study has been supported.

The limitation of this study is that the data obtained and processed are not distributed normally.

This study did not measure the effect of foreign institutional ownership on cash holdings and firm performance in companies with a more specific character. This study did not consider the industrial variable as a control variable. Researchers are expected to conduct more homogeneous corporate research and testing with groupings by the industrial sector and other categories. Researchers are further likely to shed light on the influence of foreign institutional ownership on the company's market performance. Researchers can then add samples between ASEAN emerging markets.

The study results can be an additional consideration for policyholders in viewing the presence of foreign investors in Indonesia. Foreign institutional investors have impacted firm performance through a governance and monitoring system that allows management to manage cash efficiently and rationally to encourage firm performance towards a better direction.

Through effective governance and monitoring of foreign institutional investors preventing insider takeovers that could harm the company, findings can be helpful as a consideration for investors in selecting companies to invest in.

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