The Effects of Accounting and Market Indicators Towards Company’s Performance: A Conceptual Framework

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The Effects of Accounting and Market Indicators Towards Company’s Performance: A Conceptual Framework

Ahmad Abdallah Ahmed Alswalmeh^1*, Nuradli Ridzwan Shah Mohd Dali¹

1 Faculty of Economics and Muamalat, University Sains Islam Malaysia, Nilai, Negeri Sembilan

*Corresponding Author: [email protected] m

Accepted: 8 August 2020 | Published: 15 August 2020

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Abstract: The accounting and market indicators have been identified as the key elements to examine company’s performance. The purpose of this study is to initially construct a conceptual framework of accounting and market indicators such as the profitability analysis, credit (risk), valuation and market capitalization affecting company’s performance. Data were collected from secondary sources. The study expects that profitability analysis, credit (risk), valuation and market capitalization could directly affect the company’s performance.

Keywords: Islamic Finance, Company’s Performance, Accounting Indicators, Market Indicators

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1. Introduction

Company’s performance assessment and measurement are two of the key elements of the management control system in organizations. A company’s performance assessment provides feedback to help members identify deficiencies in the company’s various activities and opportunities to improve future performance. Dalvi & Baghi (2014) argued that the effective performance measurement system must include the basic performance indicators that measure the operation activities of the company from the point of view of clients, management, analysts, users and interested parties in the performance of those organizations.

The objectives of corporate management include increasing shareholder wealth and evaluating its economic performance in the market. The accounting performance measures which are based on financial accounting information and the capital asset pricing measurement are used to achieve those objectives (Malgwi & Dahiru, 2014; Mohd Dali, Mudasir, & AbdulHamid, 2008). The benefit of financial metrics in assessing the performance of companies is it offers a real perception of the operating, investing, and financing activities. Comparing the performance of these activities from time to time enables the managements to make the necessary financial decisions. Moreover, explaining the costs of exchanges and exerting sufficient effort in the use of resources enhance goal efficiency and effectiveness which investors aspire (Alswalmeh & Dali, 2019b; Subramanyam & Wild, 2009).

Profitability indicators, credit (risk), valuation and market capitalization significant factors for a company's performance. There is a strong relationship between high efficiency of profitability and the performance. Credit (risk) is the important factors for evaluating the ability to meet obligations. It's considered a great indicator for the continuity of the company's activity. Valuation and market capitalization are a significant indicator of the company's performance in the financial markets. If the assessment is backed by the

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accounting and market indicators, then financial performance more controlled to achieve the financial objectives (Gibson, 2009; Subramanyam & Wild, 2009).

1.1. Problem Statement

Company’s performance indicates a “result obtained in management, economics, accounting and marketing. This printed-features of the company’s competitiveness, efficiency and effectiveness and its procedural, structural and administrative” (Verboncu & Zalman, 2005).

According to many previous researches, there exist many common and different factors for a company's performance. Analysts in business companies face challenges to determine factors affecting company's performance. Accounting and market indicators are one of the significant factors that necessary to verify its impact on the company's performance continuously (Nm, 2016). Indeed, Alswalmeh & Dali (2019a) found that many researchers in the world targeted on the accounting and market indicators that can affect toward company’s performance, and their impact on productivity of companies. This study is intend to identify the accounting and market indicators affecting for performance and their impact on a company's performance in the market.

Therefore, based on the problem statement, this study intend to answer the question: What are the accounting and market indicators that affecting for company's performance? Thus, the study aims to identify the accounting and market indicators that are determined to affect company’s performance.

2. Conceptual Framework

This study focused on determining the accounting and market indicators affecting company's performance on the basis of the investigated variables in the recent literature on the companies’ performance to proceed with this research. The secondary data collected in this study include book, journals, and online databases. In this context, the research study conceptualized out on the accounting and market indicators as independent variables, and company's performance as dependent variables as illustrated in Figure (1).

Figure 1: Conceptual Framework

Based on the statement, a theoretical framework has been developed to represent the relationship between four different types of accounting and market indicators, namely profitability analysis, credit risk analysis, valuation analysis, and market capitalization with the company’s performance. The following sections contain discussion relating to each constructed variable, as well as hypothesis development.

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2.1. Company's Performance

Bourguignon (1995) presented three acceptable approaches of a company’s performance.

First, performance is the work. This means that performance is a process, not a result which appears every time and its content is almost secondary to its own dynamics. Second, performance is the result of this procedure, a subsequent evaluation of the results. Third, performance means success, is non-existent and is a certified representation of the success of various categories of activities using the accounting information. Accordingly, the term

“company’s performance” means three interpretations simultaneously, 1) "work" 2)

"outcome" and 3) "success". The "work" is related to the purpose of the company, "outcome"

represents achievements for the resources used and "success" is considering the environment in which the company is located. In other words, the first concept refers to the mission of the company, the second to the extent of the quality of the company’s management of its resources, and the third to the ability of the company to adapt to the context of external factors.

2.2. Profitability Analysis

Profitability analysis “is the evaluation of a company’s return on investment.” Profitability means the ability of companies to obtain profit from all the business activities. It shows how efficiently the management can make a profit using all the resources available Gibson (2009).

Harward & Upto (1961) defined profitability as “the ability of a given investment to earn a return from its use” that can be distributed to shareholders or reinvested in the company to enhance solvency. A company’s overall value is a key determinant of its ability to generate profit on the capital invested. Analysts would consider profitability to be a key focus of their analytical efforts. Profitability indicators measure the company’s efficiency in achieving profits, policies and investment decisions taken under different situations by management, which are the focus of interest of investors, lenders and management.

2.3. Credit Risk Analysis

Credit (risk) analysis means to “evaluate the ability to meet obligations.” Robinson, Greuning, Henry, & Broihahn (2009) defined credit risk as “the risk of loss caused by a counterpart or debtor’s failure to make a promised payment.” Credit (risk) analysis depends on three major types, liquidity, capital structure and solvency. Subramanyam and Wild (2009) explained that liquidity reflects “the availability of company resources to meet short- term cash requirements at specific time.” Solvency reflects a “company’s long-run financial viability and its ability to meet long-term obligations.” Capital structure reflects a company’s sources of financing and its economic trait. Liquidity analysis is aimed to evaluate the ability of companies’ operating activities to generate profits from sales and working capital requirements.

2.4. Valuation Analysis

A valuation analysis provides understanding on the financial profile of companies. It gives investors the ability to choose the appropriate valuation model to make decisions about their investments. The financial analysis also provides useful information to complete the valuation analysis. Fundamental analysis involves valuing the company’s equity performance and assess its relative attractiveness as an investment. Robinson, Greuning, Henry, &

Broihahn (2009) argued the end product of valuation analysis is often an explanation and recommendation about investment, while the theoretical valuation models are useful in selecting indicators that would be useful in future analysis. Moreover, the rise of these indicators is a positive indicator for all investors, creditors and interested parties.

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2.5. Market Capitalization

The market capitalization of a company is a factor of the value of the company, but it is an interim metric based on the current stock market. The true value of the company is represented by its balance sheet, product positioning and profits. Other variables may not reflect market capitalization due to asymmetric information. Koller, Goedhart, & Wessels (2010) defined the performance of the stock market as a measure of returns over a period in which stock returns are measured based on personal portfolio of manager’s preferences, usually on daily, weekly, monthly and yearly basis. While there are various ways to measure the stock market performance, the common important measure includes the use of market capitalization figures.

2.6. Hypothesis Development

Base on the theoretical framework research, research hypothesis as follows:

1) H1: Profitability analysis has an impact on company performance.

2) H2: Credit Risk analysis has an impact on company performance.

3) H3: Valuation analysis has an impact on company performance.

4) H4: Market capitalization has an impact on company performance.

3. Proposed Methodology

This study integrates finance theories with the financial analysis theories in explaining the effect of the accounting and market indicators on company’s performance. The term of accounting and market indicators represent the profitability analysis, credit risk analysis, and valuation analysis as well as market capitalization using the financial ratios. The term company’s performance represents the stock return of the company. A quantitative approach based on secondary data will be used in this study. This involves a correlational study, descriptive and hypothesis testing approach. This study will focus on Islamic companies in the Amman Stock Exchange, due to the importance of investing in Islamic companies which increased this period, contributing to invest in Islamic companies, and developed researches in terms of Shariah. The data will gathered manually from the annual financial report for each company and the statistical bulletin of the company's return published on the Amman Stock Exchange website. Multivariate regression analysis will be used to evaluate the association between the variables.

4. Conclusion

The study proposes a conceptual framework to test the accounting and market indicators towards company’s performance by a review of existing studies and theories. The model fit will be confirmed after the collection of the research data and analysis. This study is important as it offers potential investors a better understanding of the factors affecting the company's performance. Further, investors will be able to appropriately decisions their investments and identify relevant factors that affect performance. The study developed the conceptual framework based on the accounting and market indicators to investigate company’s performance. It is expected that profitability analysis, credit risk analysis, valuation analysis and market capitalization are a significant factor could directly affect the company’s performance.

This research had presented at 8th international Islamic economic system conference 2019 (I-iECONS 2019)

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