Good Corporate Governance: Firm Performance and Ownership Causality Test

Abstract

Ownership structure, among other things, is one mechanism in corporate gover- nance. In this context, ownership has a monitoring function. Another corporate governance mechanism is the market for corporate control. If managers did not act in the best interest of shareholder, then firm performance will decrease. The decreasing of firm performance will be followed by the changing in ownership. This will raise an interesting question, whether ownership caused by firm perfor- mance or vice versa. The objectives of this study to test whether monitoring func- tion or market for corporate control that was implement as a corporate gover- nance mechanism in Indonesia using causality model. A panel Granger-causal- ity test base on Ganger (1969) applied to test the causality. Samples in this study were manufacture listed companies in Indonesia Stock Exchange during 2012- 2016. Ownership concentration was proxy by the Herfindahl Index of Domestic Institution ownership. The firm performance indicators in this study were effi- ciency, measured by Operating cost to Sales ratio, and Sales to Asset ratio and Tobin’s Q. The results of the study showed that there was a bi-causality relation- ship between ownership concentration and both firm performance indicators. These suggested that the monitoring function and the market for corporate con- trol were implemented as a corporate governance mechanism in Indonesia. Keywords: