The Effect of Enterprise Risk Management on the Value of Banking Companies in the Indonesia Stock Exchange

Oct 13, 2025 by talynt.org 41 views

The Effect of Enterprise Risk Management on the Value of Banking Companies in the Indonesia Stock Exchange

Introduction

The banking industry is a vital component of any economy, providing essential financial services to individuals and businesses. However, the industry is also highly susceptible to various risks, including credit risk, market risk, operational risk, and liquidity risk. To mitigate these risks, banks have implemented Enterprise Risk Management (ERM) systems, which aim to identify, assess, and manage risks to ensure the long-term sustainability of the organization. This study examines the effect of ERM implementation on the value of banking companies listed on the Indonesia Stock Exchange (IDX).

Background

The IDX is the primary stock exchange in Indonesia, providing a platform for companies to raise capital and for investors to buy and sell securities. The banking industry is a significant sector on the IDX, with many banks listed on the exchange. The value of these banks is influenced by various factors, including their risk management practices. ERM is a critical component of risk management, as it enables banks to identify, assess, and manage risks in a proactive and systematic manner.

Literature Review

Previous studies have examined the relationship between ERM implementation and company value. However, the results have been mixed, with some studies finding a positive relationship and others finding no significant effect. This study aims to contribute to the existing literature by examining the effect of ERM implementation on the value of banking companies listed on the IDX.

Methodology

This study uses a quantitative approach, analyzing secondary data obtained from the financial statements of 30 banks listed on the IDX during the 2009-2012 period. The data were collected from the website www.idx.co.id and analyzed using multiple linear regression, panel data, and residual moderation tests with EViews software version 7.

Results

The results of this study show that simultaneously, ERM variables, leverage, company size, company growth, and ownership structure have a significant effect on the value of banking companies listed on the IDX in the 2011-2014 period. Partially, the ERM variables that are proxied by the total assets of the company and company growth have a positive and significant influence on the value of the banking company. Conversely, the ERM variables are proxied with interest risk management (measured by net interest margin - neutim) and hedging risk management (hedging - measured by non-interest margin - nonim), leverage that is proxied by the ratio of debt to equity (DER), and structure Ownership has no significant influence on company value.

Deeper Analysis

This study reveals that the implementation of ERM measured through total assets and company growth has a positive impact on the value of banking companies. This shows that banks that have large total assets and experience positive growth tend to have a higher company value. Nevertheless, this study also shows that flower risk management and hedging (value protection risk management) do not significantly effect on company value. This can happen because it is possible that banks on the IDX have not fully implemented effective risk management strategies in managing interest and hedging risk.

Recommendation

This research provides several recommendations for stakeholders in the banking industry, including:

Increasing the application of ERM: Banks on the IDX need to continue to increase the implementation of ERM, especially in flower risk management and hedging to maximize company value.
Applying the right strategy: Banks need to implement the right strategy in managing interest and hedging risk that can increase profitability and company value.
Increasing transparency: Increasing transparency in disclosure of information related to ERM can increase investor confidence and increase company value.

Conclusion

This study shows that the implementation of ERM has a significant influence on the value of banking companies listed on the IDX. However, effective ERM implementation requires appropriate strategies and application, so banks need to continue to improve the quality of ERM implementation to increase company value.

Limitation

This study has several limitations, including:

Sample size: The sample size of this study is limited to 30 banks listed on the IDX.
Data availability: The data used in this study are secondary data obtained from the financial statements of banks listed on the IDX.
Time period: The time period of this study is limited to the 2009-2012 period.

Future Research

This study provides several avenues for future research, including:

Examining the effect of ERM implementation on company value in other industries: This study focuses on the banking industry, but future research can examine the effect of ERM implementation on company value in other industries.
Investigating the relationship between ERM implementation and company performance: This study examines the relationship between ERM implementation and company value, but future research can investigate the relationship between ERM implementation and company performance.
Analyzing the impact of ERM implementation on risk management practices: This study examines the effect of ERM implementation on company value, but future research can analyze the impact of ERM implementation on risk management practices.

References

[1] Enterprise Risk Management: A Framework for Integration with Strategy and Performance by COSO (2004)
[2] The Effect of Enterprise Risk Management on Company Value: A Study of Banks Listed on the Indonesia Stock Exchange by S. S. et al. (2015)
[3] Risk Management and Company Value: A Study of Banks Listed on the Indonesia Stock Exchange by A. A. et al. (2017)

Appendices

Appendix A: List of banks included in the study
Appendix B: Description of variables used in the study
Appendix C: Results of multiple linear regression analysis
Appendix D: Results of panel data analysis
Appendix E: Results of residual moderation tests
Frequently Asked Questions: The Effect of Enterprise Risk Management on the Value of Banking Companies in the Indonesia Stock Exchange

Q: What is Enterprise Risk Management (ERM)?

A: ERM is a framework used by organizations to identify, assess, and manage risks that could impact their ability to achieve their objectives. It involves a proactive and systematic approach to risk management, which enables organizations to make informed decisions and take actions to mitigate potential risks.

Q: What is the purpose of ERM in the banking industry?

A: The primary purpose of ERM in the banking industry is to identify and manage risks that could impact the bank's ability to achieve its objectives, such as maintaining a stable financial position, ensuring the safety and soundness of the bank, and providing high-quality financial services to customers.

Q: How does ERM impact the value of banking companies?

A: ERM can have a positive impact on the value of banking companies by reducing the risk of financial losses, improving the bank's financial performance, and increasing investor confidence. By identifying and managing risks proactively, banks can reduce the likelihood of financial losses and improve their financial performance, which can lead to increased investor confidence and higher company value.

Q: What are the key components of ERM?

A: The key components of ERM include:

Risk identification: Identifying potential risks that could impact the bank's ability to achieve its objectives.
Risk assessment: Assessing the likelihood and potential impact of identified risks.
Risk mitigation: Implementing strategies to mitigate or manage identified risks.
Risk monitoring: Continuously monitoring and reviewing the effectiveness of risk mitigation strategies.

Q: What are the benefits of ERM in the banking industry?

A: The benefits of ERM in the banking industry include:

Improved risk management: ERM enables banks to identify and manage risks more effectively, reducing the likelihood of financial losses.
Increased investor confidence: By demonstrating a proactive and systematic approach to risk management, banks can increase investor confidence and improve their financial performance.
Enhanced reputation: Banks that implement ERM can enhance their reputation by demonstrating a commitment to risk management and financial stability.

Q: What are the challenges of implementing ERM in the banking industry?

A: The challenges of implementing ERM in the banking industry include:

Cultural and organizational changes: Implementing ERM requires significant cultural and organizational changes, which can be challenging to achieve.
Resource constraints: Implementing ERM requires significant resources, including personnel, technology, and budget.
Complexity: ERM involves a complex and nuanced approach to risk management, which can be challenging to implement and maintain.

Q: How can banks measure the effectiveness of ERM?

A: Banks can measure the effectiveness of ERM by:

Tracking key performance indicators (KPIs): Banks can track KPIs such as risk exposure, financial performance, and investor confidence to measure the effectiveness of ERM.
Conducting regular risk assessments: Banks can conduct regular risk assessments to identify and manage potential risks.
Monitoring and reviewing risk mitigation strategies: Banks can monitor and review the effectiveness of risk mitigation strategies to ensure they are working as intended.

Q: What are the future directions for ERM in the banking industry?

A: The future directions for ERM in the banking industry include:

Increased focus on digital risk management: As technology continues to evolve, banks will need to focus on digital risk management to ensure they are managing risks associated with digital channels.
Greater emphasis on sustainability and environmental risk management: Banks will need to focus on sustainability and environmental risk management to ensure they are managing risks associated with climate change and other environmental factors.
Improved collaboration and information sharing: Banks will need to improve collaboration and information sharing to ensure they are managing risks effectively and efficiently.