Examination of Empirical Evidence of Organic Growth Strategy a Study on Indonesia Public Listed Companies

Abstract

The main objective of this research is to re-examine and adjust the original model of Organic Growth Index (OGI), developed by Ref. [9] and applied into Indonesian public listed companies with earnings generated organically rather than through income manipulation, financial engineering, or through mergers and acquisitions (M&A). As this original model excludes banks, financial institutions, REITs and insurance companies, the OGI assessment need to be adjusted to include those sectors. This research modified the first step of OGI, by applying residual income (RI) instead of economic value added (EVA) to avoid the complexity of EVA calculation for financial institutions and REITs companies. This research compares the result with the reference research16 which has initially applied the OGI analysis towards the Indonesia public listed companies. Their research based on 70 samples were taken from Kompas 100 Stock Index from the period of 2004 to 2007 which also exclude financial institutions companies. This research has used similar objects comprises of Kompas 100 companies, nonetheless through OGI modification with objective of including banks, financial institutions and insurance companies, covered period from 2008 to 2012, albeit interval of 5 years, consistent with original OGI. The OGI model designed to explain value-creating companies that have consistently outperformed industry competition through organic growth. The original test begins by selecting the best EVA which is modified into RI model to accommodate the assessment of financial institutions companies. The result of this study shows that there are only 2 percent of Indonesian public listed companies identified as OGI winners, significantly less than the previous Waworuntu and Tjhatra’s research of 10% and also less than previous Hess study. This study also indicated that more Indonesian public companies actively involved in M&A activities.