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Abstract
Corporate governance (CG) and corporate social responsibility (CSR) are important subjects for corporate sustainability that affect firm value (FV). At the same time research results in several countries provide diverse empirical evidence. This study analyzes the impact of corporate governance (CG) and corporate social responsibility (CSR) on firm value (FV) through the cost of capital (CoC) in public companies of Indonesia. The research sample includes 27 companies that publish sustainability reports and corporate governance reports, with an observation period from 2010 till 2016. This study presents the analysis of three firm value proxies (Tobin’s q (TQ), Price Earnings Ratio (PER), and Price to Book Value (PBV)). Results of hypotheses testing using Partial Least Squares (PLS) show that CG and CSR have both direct and indirect effects on FV. These findings are consistent for all three firm value assessments. According to direct testing, CG has a negative effect on FV, while CSR has a positive effect. The CoC acts as a mediating variable in this relationship. The CG and CSR have a negative effect on CoC, while CoC has a negative effect on FV. The findings show that CG and CSR can improve the company performance and corporate image internally and externally, thereby increasing the investors` confidence, and companies have the opportunity to obtain inexpensive funding sources that can reduce CoC. A decrease in CoC can increase profitability and have an impact on FV increasing.
Highlights
firm value (FV) is reflected in stock price and represents the investor’s perception of companies (Fama, 1978)
This study examines the effect of Corporate governance (CG) and corporate social responsibility (CSR) implementation for the period 2010–2016 on the FV and the role of capital costs as a mediating variable of the companies listed on the Indonesia Stock Exchange
It finds significant CG and CSR have effects on FV, and the results are consistent for all FV proxies
Summary
FV is reflected in stock price and represents the investor’s perception of companies (Fama, 1978). Management strategy is needed to reduce the CoC It can be done by implementing CG and ethical behavior to improve the company performance and corporate image to increase FV. Investment security will provide opportunities for companies to obtain inexpensive funding sources and eventually lower the cost of capital This is in line with agency theory that corporate governance mechanisms reduce information asymmetry and agency conflict, thereby, increasing investor confidence. Different results were found by Jo and Harjoto (2011) in companies in the United States CG implementation reduces informafrom 1993 till 2004, Berthelot et al (2012) in 199 tion asymmetry and increases investor confidence companies in Canada from 2004 till 2005 with 355 in the company’s fund management, thereby reobservations, and Kumar and Singh (2013) in 176 ducing monitoring costs and expected rates of re-.
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