Corporate Governance and Firm Value: The Mediating Effect of Financial Performance and Firm Risk

Abstract

This study aims to analyze and explain the relationship between the corporate governance and the firm value, either direct, or indirect through the financial performance and the firm risk. The research object is the mining sector companies listed in Indonesia Stock Exchange for the period of 2009-2014. The corporate governance is measured from information disclosure index based on OECD principles of corporate governance. The firm value is quantified from the Tobin’s q and Price to Book Value (PBV). Return on Assets (ROA) and Net Profit Margin (NPM) are used to determine the financial performance. The firm risk is computed from the systematic risk and idiosyncratic risk. A Structural Equation Modeling (SEM) is utilized to analyze the data. The research result shows that the corporate governance has positive significant effect to the financial performance and negative significant effect to the firm risk, but it has no direct significant effect to the firm value. The corporate governance has significant effect to the firm value through the financial performance. Meanwhile, the corporate governance has no significant effect to the firm value through the firm risk. In addition, the financial performance has positive significant effect to the firm value, while the firm risk has no significant effect to the firm value.

Keywords: corporate governance, financial performance, firm risk, firm value