The mediating role of market value to company dynamic performance

Permada, Dewi Nari Ratih; Hussein, Ananda Sabil; Risna Wijayanti; Ratnawati, Kusuma Article The mediating role of market value to company dynamic performance Global Business & Finance Review (GBFR) Provided in Cooperation with: People & Global Business Association (P&GBA), Seoul Suggested Citation: Permada, Dewi Nari Ratih; Hussein, Ananda Sabil; Risna Wijayanti; Ratnawati, Kusuma (2024) : The mediating role of market value to company dynamic performance, Global Business & Finance Review (GBFR), ISSN 2384-1648, People & Global Business Association (P&GBA), Seoul, Vol. 29, Iss. 6, pp. 187-200, https://doi.org/10.17549/gbfr.2024.29.6.187 This Version is available at: https://hdl.handle.net/10419/306022 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. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. 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-nc/4.0/ I. Introduction In the past two years, Indonesia faced economic downturns due to the COVID-19 pandemic, resulting in instability and a significant drop in purchasing Received: Mar. 13, 2024; Revised: Apr. 11, 2024; Accepted: May. 1, 2024 † Corresponding author: Dewi Nari Ratih Permada E-mail: [email protected] power (Qolbi, 2021). Assessing a company's comprehensive performance amid these changing economic conditions is crucial. There are several problems from previous study which became the backbone of this research and became the background for us carrying out this research. Market value seems to be the problem that underlies several companies' performance as research subjects which has decreased. The problem with market value indirectly GLOBAL BUSINESS & FINANCE REVIEW, Volume. 29 Issue. 6 (JULY 2024), 187-200 pISSN 1088-6931 / eISSN 2384-1648 Https://doi.org/10.17549/gbfr.2024.29.6.∣187 ⓒ2024 People and Global Business Association GLOBAL BUSINESS & FINANCE REVIEW www.gbfrjournal.org for financial sustainability and people-centered global business1) The Mediating Role of Market Value to Company Dynamic Performanc e Dewi Nari Ratih Permada † , Ananda Sabil Hussein, Risna Wijayanti, Kusuma Ratnawati B rawijaya University, Indonesi a A B S T R A C T Purpose: This study examines the performance of 35 Indonesian Consumer Non-Cyclical Companies through fixed asset, cost of goods sold, and operating expenses as independent variables and market value as mediating variable to company dynamic performance. Design/methodology/approach: Dynamic performance describes how much the company's ability to comprehensively processing their business (fixed assets (FA), operational expense (OE) and cost of goods sold(COGS)) to produce value which signalled the market as market value or capitalization. Data envelopment analysis (DEA) used to produce numerical data for FA, OE, and COGS. The data collected through company's annual report for 14 years. Findings: Our data suggest that all of company inputs such as fixed assets, operational expenses and cost of goods sold have a negative path coefficient to Dynamic Performance. Data suggest that the more productive a company, the smaller its dynamic performance. Moreover, the higher the market value of a company, the smaller the company dynamic performance. Simultaneously, mediating role of more likely it is to has the effect of reducing company dynamic performance. Research limitations/implications: The mediating variable in this study is market value which is not related to the input variables in this study. For further research, it can use moderating variables related to investment risk, profit projections, economic growth, and public policy because macro things are more visible in the company's operations in the eyes of stakeholders. Originality/value: This research provides a new understanding related to efficiency, where efficiency is not necessarily generated from a series of production processes, but it needs to be observed that certain values of each input variable can produce a negative relationship to the achievement of dynamic performance. Keywords: Consumer Non-Cyclical Companies; dynamic performance; market value; production capabilities Copyright: The Author(s). This is an Open Access journal distributed under the terms of the Creative Commons Attribution ⓒ N on-Commercial License (https://creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted non-commercial use, distribution , and reproduction in any medium, provided the original work is properly cited. GLOBAL BUSINESS & FINANCE REVIEW, Volume. 29 Issue. 6 (JULY 2024), 187-200 188 changes the stock market patterns of certain manufacturing companies (cosmetics and beauty, household consumers, textiles and apparel as well as the consumer electronics industry) pre and post COVID-19 (Jan, 2022), decreasing company performance in Saudi Arabia from 2009 to 2019 due to COVID-19 became detrimental effect which harmed the company market value by reducing both their total investment, let down the psychology of investors decision to invest the enterprise or company becoming to reduce overall income (Makni, 2023). Several studies show that if there are problems with market value, such as declining stock returns even after the COVID-19 pandemic (Paula-Vianez, 2023), investors' decisions to invest in enterprises or companies will decrease due to seeing future uncertainty or adverse events (ex. COVID-19 pandemic, stock market depression, less relevance of products to the market and a significant decline in productivity) (Harris, 2020 and Makni, 2023) will have an effect on company performance, namely a significant positive effect on 6 different manufacturing companies pre and post COVID-19. 19 pandemic, thereby making companies improve stable performance intensively even after the COVID-19 pandemic took place (Dahan, 2024). However, from all the studies that have been reviewed, there is still a lack of detailed discussion regarding company dynamic performance, so it is an important point in this research to study company dynamic performance in addition to studying the mediation of market value on company dynamic performance. Dynamic performance, reflecting adaptability over time, serves as a metric encompassing production sustainability, business efficiency, and economic resilience during crises (Hong et al., 2018; Luftman et al., 2017; Ferreira et al., 2020). This adaptability, measured through financial data parameters and iterative processes, ensures efficient input-to-output transformations, defining a company's success (Wang et al., 2021; Ting et al., 2020; Brandenburg & Hahn, 2021). Unlike conventional financial ratio-based assessments, dynamic performance considers input changes in unstable economic situations, offering a more comprehensive measure of company inputs. Emphasizing efficiency in processing resources to yield optimal outputs, this approach factors in both current and past years' achievements, providing a holistic view of a company's success (Muchtar et al., 2018). Focusing on operational expenses, fixed assets, and the cost of goods, this research explores their roles as input variables, mediated by market value, in determining dynamic performance. Operational expenses, representing daily costs for core business activities, impact a company's revenue generation, while efficient cost management enhances net profit and market value (Nimtrakoon, 2015). II. Literature Review A. Corporate Finance Theory and Company Dynamic Performance The Modigliani-Miller Theorem, as elucidated by Copeland (1988), underscores the imperative for companies to execute operations, financial management, and investment efficiently. Ideally, a financial manager or CFO oversees cash flow management, while business managers focus on company processes, innovation, product sales, and maintaining fixed assets. Financial investors play a pivotal role in providing financial facilities (Vernimmen, 2014). Tirole (2006) adds key factors to the theorem, including the impact of company-owned assets, referred to as bubbles, on costs of goods sold and market value. Balancing fixed assets is crucial, considering the correlation with maintenance costs and the risk of a bubble collapse. Efficiently managing company operations, encompassing investments, operational expenses, fixed assets, and facility maintenance, becomes paramount for survival in the business realm, according to company behavioural finance. Vernimmen (2014) emphasizes three main tenets in corporate finance return, risk, and value ―― essential for effective and efficient company operations. This research aligns with these principles, integrating Dewi Nari Ratih Permada, Ananda Sabil Hussein, Risna Wijayanti, Kusuma Ratnawati 189 them into both company input (fixed assets, cost of goods sold, and operational expenses) and output (market value) to gauge dynamic performance. Dynamic performance of a company or firm is influenced by several factors, be it the company's input or the company's output. Operational expenses of the company as company's input have a positive influence on company dynamic performance based on Pehlivan (2020) through ineffective R&D and marketing expenditure where if the company often carries out operating expenses in the form of ineffective R&D and marketing expenditure it will make the company intensify its dynamic performance to maintain it's business operations (Zehir, 2018). Fixed assets also have a significant impact on business performance. Several previous studies presented results that there is a negative relationship between fixed asset investment and enterprise performance (Zheng, 2021 and Lin, 2022). Added value and sustainable competitive advantage can improve a company's dynamic performance. Company capabilities are supported by resources that have their own uniqueness, in the sense that they are valuable, rare, costly to imitate and nonsubstitutable (Barney, 2021). For this reason, management must continue to increase its resources, especially intangible resources (Company Dynamic Performance), so that it is able to produce dynamic performance from year to year. What needs to be emphasized in this research is that this research applies a concept where dynamic performance is the dependent variable which will then be mediated by mediating variables in the form of output (Sales and Market Value). The independent variables in this research are input (Operational Expense, Fixed Asset, and Cost of Goods Sold). Company dynamic performance is an assessment of efficiency and effectiveness carried out at one time so that performance is a function of two variables, efficiency, and empowerment (Siminica, et al., 2008). Human resources and other resources to create efficiency within the company. The performance measurement system is a set of concise and clear measures for the financial sector and non-financial sector that supports the organizational decisionmaking process by management by collecting, processing, and analysing measurable data from performance information (Gimbert et al., 2010). Therefore, one way to measure and assess company performance is through DEA analysis on the company's input and output aspects. B. Effect of Company Inputs Toward the Company Dynamic Performance Company inputs, encompassing operational expenses, fixed assets, and cost of goods sold (COGS), plays a pivotal role in shaping dynamic performance. Operational expenses, vital for supporting company operations, include costs like sales and administration, distinct from COGS or depreciation. Examples range from machine depreciation to raw material purchases and employee salaries. H1a. posits that operational expenses, viewed as company liabilities, negatively impact dynamic performance. Fixed assets, characterized by their valuable and fixed nature, contribute long-term financial benefits to business operations. H2a. asserts that fixed assets, representing company liabilities, negatively affect dynamic performance. COGS, integral to cost management, significantly influences dynamic performance. Research indicates that lower leverage in managing COGS enhances dynamic performance, highlighting the importance of efficient cost flow management. H3a. suggests that COGS as a company liability negatively affects dynamic performance. In summary, the total direct effect on dynamic performance stems from operational expenses, fixed assets, and COGS as independent variables. GLOBAL BUSINESS & FINANCE REVIEW, Volume. 29 Issue. 6 (JULY 2024), 187-200 190 C. Mediating Effect of Market Value Toward the Company Dynamic Performance One part of the company's output that is emphasized in this research is market value. The company output emphasized in this research acts as a mediating variable for the company's dynamic performance variables. The company's dynamic performance does not only assess the company's achievements from financial ratios in the current year but also concerns the achievements of the previous year, so it is very important to maintain fluctuations/dynamics of success from year to year. The use of dynamic performance refers to the level of efficiency that can be achieved over a certain period. Therefore, discussions about dynamic performance will always involve previous performance achievements which influence the current year's performance assessment (Muchtar et al., 2018). Market value, which is part of the company's output, is directly proportional to the share price. A decrease in share prices causes market value to decrease further. This will affect the level of investor confidence which is increasingly decreasing. And if the level of investor confidence decreases, the company will lose the opportunity to obtain additional capital from investors (Naveed et al., 2020) to invest and develop the business. The following is the stock price index for companies in the primary consumer goods sector based on the IDX Industrial Classification as in the image below. This research underscores market value as a significant component of company output, acting as a mediating variable for dynamic performance. Beyond assessing current financial ratios, dynamic performance evaluates achievements from both the present and preceding years, emphasizing the importance of maintaining success fluctuations annually (Muchtar et al., 2018). Market value, integral to the company's output, is directly linked to share prices. A decrease in share prices leads to a further decline in market value, diminishing investor confidence. Reduced investor confidence hinders the company's ability to secure additional capital for business investment and development (Naveed et al., 2020). The stock price index for primary consumer goods sector companies, based on the IDX Industrial Classification, reveals a decline attributed to decreasing sales and productivity, reflecting the impact of reduced market demand on company income (Qolbi, 2021). Figure 1 descripe the decline in stock prices since 2018. In navigating dynamic environments, companies must implement effective strategies to remain competitive (Chandra, 2018). H4a. posits that market value, as a mediator, influences company input toward dynamic performance. In summary, the total direct influence of company output as a moderating variable on dynamic performance is depicted in the model. Figure 1. Primary consumer goods sector company share price index (Indonesia stock exchange, 2021) Dewi Nari Ratih Permada, Ananda Sabil Hussein, Risna Wijayanti, Kusuma Ratnawati 191 From the hypothetical framework, dynamic performance in this research is the outcome variable, measured by inputs, sales and that market value as outputs is a mediator. III. Methodology The research approach applied a quantitative methodology based on an explanatory and positivist paradigm also mediates theory that have a relation to variable of research as a basis to construct a thinking framework to develop hypotheses. The research used path analysis using SmartPLS. The population of this research are 111 company which listed on the Indonesia Stock Exchange (IDX) and sample in this research conduct 35 Consumer Non-Cyclical Companies or manufacturing company listed on IDX using panel data regression sampling method of 35 company from 2009 to 2020. To analyze the data, precondition needed to be applied to the raw data. We used data envelopment analysis method to evaluate the dynamic performance of company rather it have efficient or inefficient performance for the research. Research by Wang et al. (2021) developed the conventional DEA method into Dynamic-DEA following previous research conducted by Tone & Tsutsui (2010) which stated that Dynamic-DEA was able to evaluate performance precisely because it chose more than one variable in its measurement. The production capability variables are the fixed asset, cost of goods sold and operational costs, while the production value variable is the company's market value. Dynamic-DEA calculations provide useful weights to ensure objectivity and provide suggestions for improvements for performance calculations using financial ratios. Efficiently managing production cost components can enhance a company's gross profit (Salvi, 2020). Table 1 is describe input and output varibles that became Dynamic performance whices counted with DEA methodically. Maintaining low operational costs is crucial when a company achieves a high gross profit to ensure sustained high net profit (Baima, 2020). Efficiency, in this context, extends beyond the production process and necessitates effective management of overall company operations. The dynamic performance scope closely aligns with accounting data used in DEA, as accounting information is comprehensive and serves as a primary source for evaluating company performance (Harrison, J., & Rouse, P., 2016). DEA stands out as a sophiVariables Description Productivity Fixed Assets (FA) The sum of land, property, equipment, and other in the previous year. Cost of Goods Sold (COGS/CGS) Cost of sales less depreciation, amortization, and research and development expenses. Operating Expenses (OE) The sum of administrative expenses, advertising expenses, and research and development expenses. Market Signal Market Value The multiplication of the market price per-share and the total number of common shares. Table 1. Definition of input and output variables in company dynamic performance Figure 2. Hypothetical framework GLOBAL BUSINESS & FINANCE REVIEW, Volume. 29 Issue. 6 (JULY 2024), 187-200 192 sticated method for assessing company performance, offering nuanced rankings beyond simple performance ratios and efficiency models (Büschken, 2009). As demonstrated in the image, DEA analyses both input and output in assessing company performance. Another method commonly used to measure company efficiency in order to assess the company's dynamic performance apart from using DEA is through the stochastic frontier efficiency method and econometric models. The stochastic frontier efficiency method emphasizes two main factors, namely integrating relative efficiency and stochastic intimidation to measure company performance (Eling, 2010). In other words, the stochastic frontier efficiency method pays attention to deviations from best practices consisting of white "noise" or random errors and company inefficiency (Theodoridis, 2008). The essential difference underlying the stochastic frontier analysis efficiency method and the DEA method lies in the efficiency orientation, where DEA is non-parametric focuses more on the company's input and output orientation to assess company performance. This is an advantage of using the DEA method compared to other methods in research needs to analyze dynamic performance by focusing on the input and output aspects of companies whose turnover tends to be dynamic from time to time. The DEA calculation model, derived from previous research by Wang et al. (2021a), utilizes fixed assets, cost of goods sold, and operating costs as input proxies for dynamic performance. Output proxies include sales and market value of the company. These proxies collectively represent company efficiency. However, even though DEA is a method that is easy to use in analysing efficiency and measuring company dynamic performance, the DEA method also has shortcomings in its application, namely that the DEA method only measures relative efficiency without direction of causality so it cannot directly inform users about the best solution for increasing efficiency. and the dynamic performance of a company (Chen, 2021) as well as DEA's dependence on appropriate input and output company data so that it can provide reliable results (Costa, 2023). DEA does not take into account differences in the scale of operations between the units analysed. As a result, units with different operating scales may receive unfair efficiency scores (Chen, 2021). Data, collected from IDX over fourteen years of company performance, was chosen for its substantial time span, allowing for in-depth analysis of dynamic performance changes. The three-year operational cycle for DEA application over 12 years enabled the calculation of dynamic performance ten times. The data, in the form of ratios or scores, will be processed in Path Analysis using SmartPLS 3.0. IV. Results and Discussion A. Descriptive The outcomes of the Data Envelopment Analysis (DEA) are represented through scatterplot graphs (see Figure 3), dividing companies into four quadrants based on efficiency and market value. Quadrant 4, with 43% of the companies, showcases a scenario where firms possess low market value yet demonstrate high dynamic performance. In contrast, quadrant 3, comprising 74% of companies, reflects instances where companies exhibit both low market value and dynamic performance. Quadrant 1, with only 0.028% of companies, signifies a situation where firms have both high market value and dynamic performance. Operational expenses, as a company input, show a trend in quadrant 4 (43% of companies) with low operational expenses and high dynamic performance, while quadrant 3 (46% of companies) indicates low operational expenses and dynamic performance. Fixed assets, another company input, display a trend in quadrant 4 (48.5% of companies) with low fixed assets and high dynamic performance, and quadrant 3 (46% of companies) reflects low fixed assets and dynamic performance. Lastly, cost of goods sold, as a company input, indicates a trend in quadrant 4 (23% of companies) with low costs but high dynamic performance, while quadrant 3 (65.7% of companies) Dewi Nari Ratih Permada, Ananda Sabil Hussein, Risna Wijayanti, Kusuma Ratnawati 193 shows low costs and dynamic performance. A key component of business valuation, fixed assets, vary greatly among the tested companies, from millions to billions of dollars. This variability highlights how different sector participants have different asset holding sizes and strategic resource allocation plans. The distribution is notably skewed to the right by outliers with unusually high fixed asset values, suggesting the existence of businesses with sizable asset bases that have a major impact on the sector's overall asset valuation. Cost of goods sold (COGS), a crucial indicator of cost control and operational effectiveness, displays high spending levels among businesses. The COGS distribution exhibits a modest right skew, indicating diverse spending habits and differing degrees of cost conservation tactics employed by industry players. The non-cyclical consumer goods sector's dynamic production and operational strategies are reflected in the unpredictability of COGS. Another important financial statistic, operational expenses, shows a significant variation in spending patterns among the organizations under study. This variance highlights the varying financial commitments and operational techniques that companies in the sector have chosen to employ. The operational expense distribution Figure 3. Descriptive mapping Sum Min Max Mean Skewness Kurtosis In thousands (USD) Fixed Asset 2,068,569.309 5.446 5,2081.133 3,693.874 4.079 18.669 Cost of Goods Sold 5,486,010.718 10.803 110,608.655 9,796.448 2.720 8.274 Operational Expense 853,875.014 -92.405 15,831.694 1,524.777 2.763 7.921 Sales 7,182,737.171 4.412 124,881.266 12,826.316 2.596 7.004 Market Value 13,448,425.750 0.024 5,793.650 24,015.046 4.914 27.170 Table 2. Descriptive statistics for all data envelopment analysis (DEA) variables GLOBAL BUSINESS & FINANCE REVIEW, Volume. 29 Issue. 6 (JULY 2024), 187-200 194 shows a pattern that is right-skewed, indicating the existence of businesses with above-average operating costs that impact patterns in spending across the industry. Within the non-cyclical consumer goods sector, a robust market presence and customer demand are indicated by the substantial average sales volume. The sales data distribution does, however, skew slightly to the right, suggesting that while the majority of businesses have sales figures below average, a small number of enterprises outperform the average in terms of sales, maybe as a result of creative marketing approaches or unique product offerings. Market values show notable differences in valuation amongst participants in the industry. The market value distribution is strongly skewed to the right, highlighting the existence of companies with extraordinarily high market valuations that have a significant impact on the market capitalization of the entire sector. B. Hypothesis Testing Data suggest that the company output (market value) path coefficient value which in this study acts as a mediating variable on company dynamic performance is -0.064 with the interpretation that the higher the market value owned by the company, the more likely it is to has the effect of reducing company dynamic performance. The overall company input path coefficient (operational expense, fixed assets and Cost of goods sold) has a negative coefficient so it can be interpreted that the higher the company input of a company, the lower the company's dynamic performance. Then, to test whether market value as company output is a mediating variable on company dynamic performance, a coefficient comparison is carried out between the path coefficient of input company on variable Y (company dynamic performance) and the path coefficient of company input on company output which acts as a mediating variable (market value). It is known that the path coefficient of company input to the mediating variable is greater than the path coefficient of company input to company dynamic performance, thus indicating that company output (market value) is a full mediating variable on company dynamic performance C. Company Inputs and Dynamic Performance The impact of operational expenses on company output, specifically reducing market value, is substantiated by Uddin's (2020) research, highlighting an inverse relationship between operational expenses Figure 4. Path analysis using SmartPLS