Why Firm Value Matters to Investors
Firm value is a key indicator of how investors perceive a company's performance and future prospects. For publicly listed manufacturers in Indonesia, factors ranging from profitability and corporate governance to financial reporting practices can influence how the market values a company.
A 2026 study by Sherly Anggraini and Ita Trisnawati of Trisakti School of Management, Jakarta, examines eight factors associated with firm value among manufacturing companies listed on the Indonesia Stock Exchange (IDX). The analysis covers financial data from 2022 to 2024 and provides evidence that some financial and governance indicators matter more to investors than others.
The findings show that profitability and the presence of independent commissioners have a positive effect on firm value. In contrast, real earnings management and liquidity have a negative effect. Institutional ownership, audit committee size, firm size, and tax avoidance were not found to have a statistically significant effect.
These results offer useful insights for companies seeking to strengthen investor confidence and for investors assessing the financial and governance characteristics of Indonesian manufacturing businesses.
Study of 108 Manufacturing Companies
Anggraini and Trisnawati analyzed 108 manufacturing companies, producing 324 company-year observations for the 2022–2024 period. The companies were selected using specific criteria, including the availability of financial statements, reporting in Indonesian rupiah, a December 31 fiscal year-end, profitability during the observation period, institutional ownership, and appropriate tax data.
The researchers used publicly available company financial statements and IDX data. The relationships between the variables were examined through multiple regression analysis using SPSS.
Firm value was measured using Price to Book Value (PBV), while the analysis included institutional ownership, audit committee, real earnings management, profitability, liquidity, firm size, tax avoidance, and the proportion of independent commissioners.
The research builds on previous studies of corporate governance and firm value while expanding the analysis to include financial reporting practices and several financial characteristics.
Profitability Emerges as a Major Driver
Among the variables examined, profitability showed a strong positive relationship with firm value.
The profitability coefficient was 19.181, with a significance value of 0.000, indicating a statistically significant positive effect. In practical terms, companies that generate stronger returns from their assets tend to receive higher valuations from the market.
Profitability can provide investors with an indication of a company's ability to generate earnings and potentially provide returns through dividends or future growth.
The researchers' findings are consistent with numerous previous studies examining profitability and firm value in Indonesian companies.
Independent Commissioners Strengthen Firm Value
Corporate governance also played an important role.
The proportion of independent board commissioners had a positive coefficient of 1.513, with a significance value of 0.000. This indicates that stronger independent oversight was associated with higher firm value.
Independent commissioners are expected to provide objective oversight of company management and help reduce conflicts between shareholders and managers. Their presence can therefore contribute to stronger corporate governance and greater investor confidence.
For publicly listed companies, the result highlights the importance of effective—not merely formal—corporate oversight.
Real Earnings Management Can Reduce Investor Confidence
One of the most important findings concerns real earnings management, which had a negative coefficient of -0.545 and a significance value of 0.000.
Real earnings management involves managerial decisions that alter actual business activities in ways that influence reported earnings. Such actions can include changing operational decisions, discretionary expenditures, or production activities.
The findings suggest that when these practices become opportunistic, they can undermine the quality and credibility of reported financial performance. Investors who recognize such practices may perceive greater risk, reducing confidence in the company and ultimately lowering its market valuation.
The result supports earlier evidence reported by Prieto and Lee, Simamora and colleagues, and Srikanth and Kaushik.
Excessive Liquidity May Signal Inefficient Asset Use
Liquidity also showed a statistically significant negative relationship with firm value. The coefficient was -0.133, with a significance value of 0.019.
Liquidity is important because companies need sufficient current assets to meet short-term obligations. However, extremely high liquidity does not necessarily indicate stronger financial performance.
According to the researchers, excessive liquidity may indicate that too many current assets are not being used productively. If funds remain idle rather than being invested in productive activities, profitability and investor perceptions may suffer.
The finding suggests that companies need to maintain a balance between financial safety and productive use of their resources.
Four Variables Show No Significant Effect
The analysis found no statistically significant effect for four other variables.
Institutional ownership had a significance value of 0.330, while the audit committee recorded 0.117. Firm size had a value of 0.057, narrowly exceeding the conventional 0.05 threshold. Tax avoidance showed the weakest statistical relationship, with a significance value of 0.960.
These findings indicate that simply having substantial institutional ownership, a certain number of audit committee members, a large asset base, or tax-saving practices does not automatically translate into higher firm value.
For investors, the results suggest that the quality and effectiveness of corporate and financial performance may be more important than structural characteristics considered in isolation.
Implications for Companies and Investors
The findings provide several practical lessons for Indonesian manufacturing companies.
Companies can strengthen market confidence by improving profitability while ensuring that business activities are conducted sustainably rather than relying on practices that artificially improve short-term earnings. Management should also ensure that available liquidity is deployed efficiently.
At the governance level, effective independent commissioners can contribute to stronger oversight and investor confidence. Their role should extend beyond fulfilling formal regulatory requirements to actively monitoring management and protecting shareholder interests.
For investors, the results suggest that profitability, earnings quality, liquidity management, and corporate governance deserve close attention when evaluating manufacturing companies listed on the IDX.
As Anggraini and Trisnawati's analysis indicates, stronger reported earnings alone are not sufficient if they are accompanied by questionable operational decisions or inefficient use of company resources.
Researcher Insight
The researchers' findings can be understood as evidence that investors respond not only to how much profit a company generates, but also to how that performance is achieved and how effectively the company is governed.
In their analysis, Anggraini and Trisnawati of Trisakti School of Management demonstrate that profitability and independent oversight are associated with higher firm value, while real earnings management and excessive liquidity are associated with lower valuations. This reinforces the importance of transparent financial reporting, effective governance, and efficient financial management in publicly listed companies.
Limitations and Future Research
The researchers acknowledge several limitations. The observation period covers only three years, from 2022 to 2024. The data also remained non-normally distributed after outlier testing, while heteroscedasticity was identified in several independent variables.
Future research could therefore extend the observation period, increase the number of observations, and apply transformations or alternative statistical approaches to address these methodological issues.
Expanding the research to other industries could also help determine whether the relationships observed among Indonesian manufacturing companies apply more broadly across the Indonesian capital market.
About the Authors
Sherly Anggraini is a researcher affiliated with Trisakti School of Management, Jakarta, Indonesia, with research interests in accounting, corporate governance, financial performance, and firm value.
Ita Trisnawati is also affiliated with Trisakti School of Management and serves as the corresponding author of the article. Her research is focused on accounting and corporate financial issues, including firm value, corporate governance, and financial reporting.
Source
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