Positive contribution of the good corporate governance rating to stability and performance: evidence from Indonesia

Rr Iramani,Muazaroh Muazaroh,Abdul Mongid

doi:10.21511/ppm.16(2).2018.01

Rr Iramani, Muazaroh Muazaroh + Show 1 more

Open Access

https://doi.org/10.21511/ppm.16(2).2018.01

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Abstract

This paper aims to examine the impact of Good Corporate Governance (GCG) practice on bank stability and performance. Governance is measured using the GCG rating that covers eleven aspects. The authors apply instrumental regression to link governance to performance and stability. The study covers a sample of 150 banks. The result shows that bank stability can mediate bank governance and bank performance. On the determinant of bank performance, it can be concluded that the GCG rating is positive and directly influences bank performance. Bank stability is also positive for bank performance indicating the indirect contribution of the GCG rating to bank performance. NPL, LDR, CAR and bank’s size (LASSET) are all negative and significant. The aim of this paper is to provide strong empirical evidence on the importance of governance and stability for performance. The limitations of this paper are the size of the sample and that it only covers public banks which are theoretically required to apply better governance in all aspects of their business by the Capital Market Authority.

Highlights

Governance is a concept that has many dimensions
Referring to Laeven and Levine (2009), Mongid and Muazaroh (2017), Williams (2014) and Love (2011), this paper examines how a good corporate governance index impacts bank stability and bank performance in Indonesia using the case of public banks
Using the case of public banks, we can conclude that Good Corporate Governance (GCG) is positive and significant for bank stability

Summary

INTRODUCTION

Governance (corporate governance) is a concept that has many dimensions. it is very difficult to fully define what governance is about. Haryati and Kristijadi (2014) observed a positive impact of GCG implementation on the performance of the banks They found that of the eleven indicators of corporate governance, transparency and the provision only to related parties is a key indicator in the GCG assessment. The goal is to test the level of or increase the bank’s soundness by applying prucorporate governance practices that lead to im- dential principles and risk management in conproved performance levels of a company before ducting its business activities Regarding their the global financial crisis (1999–2006). GCG is gression to test the impact of the GCG rating on positive to bank profitability as a higher rating bank stability and performance, bank stability is means a better decision-making process, sur- defined and measured using ZSCORE.

EMPIRICAL RESULT

Findings

CONCLUSION