THE RELATIONSHIP BETWEEN ENVIRONMENTAL RISK MANAGEMENT AND COST OF CAPITAL (Study on Indonesia Companies listed in Indonesia Stock Exchange 2009-2011)
By: Akira Aula Afif NIM: 109081100017
DEPARTMENT OF MANAGEMENT INTERNATIONAL CLASS PROGRAM FACULTY OF ECONOMICS AND BUSINESS SYARIF HIDAYATULLAH STATE ISLAMIC UNIVERSITY JAKARTA 1434 AH/2013 AD
THE RELATIONSHIP BETWEEN ENVIRONMENTAL RISK MANAGEMENT AND COST OF CAPITAL (Study on Indonesia Companies listed in Indonesia Stock Exchange 2009-2011)
Undergraduate Thesis Submitted to the Faculty of Economics and Business As Partial Fulfillment of Requirement For Acquiring Bachelor Degree of Economics
By: Akira Aula Afif NIM: 109081100017
Under Supervision of:
Supervisor I Supervisor II
Prof. Dr. Margareth Gfrerer Dr. Arief Mufraini, LC., M.Si ID. 19770122 200312 1 001
DEPARTMENT OF MANAGEMENT INTERNATIONAL CLASS PROGRAM FACULTY OF ECONOMICS AND BUSINESS SYARIF HIDAYATULLAH STATE ISLAMIC UNIVERSITY JAKARTA 1434 AH/2013 AD
ii
CERTIFICATION OF COMPREHENSIVE EXAM SHEET
Today is Thursday April 25, 2013 has been conducted on the student comprehensive examination:
1. Name : Akira Aula Afif 2. Studen Number : 109081100017 3. Department : Management (International Class) 4. Thesis title : Relationship Between Environmental Risk Management and The Cost of Capital (Study on Indonesia Companies Listed in Indonesia Stock Exchange 2009-2011)
After cereful observation and attention to appearence and capabilities relevant for comprehensive examination process, it was decided that the above student passed for the comprehensive examination was accepted as one of requirements to obtain a Bachelor of Economics in The Faculty of Economics and Business Syarif Hidayatullah State Islamic University Jakarta.
Jakarta, April 25, 2013
Prof. Dr. Abdul Hamid, MS (______) ID: 19570617 198503 1 002 Examiner I
Ade Suherlan, MBA, MM. (______) ID: 19800525 2009 12 1 001 Examiner II
Prof. Dr. Margareth Gfrerer (______) Expert Examiner
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CERTIFICATION OF THESIS EXAM SHEET
Today is Wednesday September 25th, 2013 has been conducted on the student thesis examination:
1. Name : Akira Aula Afif 2. Student Number : 109081100017 3. Department : Management 4. Thesis Title : The Relationship Between Environmental Risk Management nd Cost Of Capital ( Study on Indonesian Companies Listed in Indonesia Stock Exchange 2009- 2011)
After careful observation and attention to appearance and capabilities relevant for thesis examination process, it was decided that the above student passed and the thesis was accepted as one of the requirements to obtain a Bachelor of Economics in The Faculty of Economics and Business Syarif Hidayatullah State Islamic University Jakarta.
Jakarta, September 25, 2013
1. Prof. Dr. H. Abdul Hamid, MS (______) ID. 19570617 198503 1 002 Chairman
2. Sri Hidayati, S.Ag, M.Ed (______) ID. 19770608 201101 2 003 Secretary
3. Prof. Dr. Margareth Gfrerer (______) First Supervisor
4. Dr. Arief Mufraini, LC., M.Si (______) ID. 19770122 200312 1 001 Second Supervisor
5. Dr. Indoyama Nasaruddin, SE, MAB (______) ID. 19741127 200112 1 002 Expert Examiner
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v
CURRICULUM VITAE
Personal Detail
Full Name : Akira Aula Afif
Nickname : Akira
Address : Jl. Bondol Block C No. 21, Jakamulya, Bekasi Selatan, 17146
Mobile Number : 081511538797
E-mail : [email protected]
Date of Birth : Tokyo, June 30, 1993
Sex : Male
Religion : Moslem
Nationality : Indonesian
Competence and Personality :
Formal Education
School Year Elementary Uplands School Penang 2000 – 2001 SD Tunas Jakasampurna 2001 – 2004 Bekasi Junior High School Jabriya Indian School 2004 – 2005 Kuwait New Kuwait Phillipines 2005 – 2007 International School Senior High School SMA Tunas Jakasampurna 2007 – 2009 Bekasi University State Islamic University 2009 – current Syarif Hidayatullah Jakarta. Major : Management International
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Informal Education
Spanish Course (2013 – present)
Working Experience
Internship at Yamaha (2012)
Organization Experience
Member of Tunas Patriot Bekasi Club (2007 – 2009) Member of Persipasi Bekasi U – 15 (2007) Member of PMII (2009 – 2010)
Conference Participation
Seminar about Insurance in globalization era ( 20 May 2010 ) Seminar about the Gulen Model of Education ( 20 October 2010 ) Seminar about war of smartphone operating system ( 4 May 2011 ) Conference of Model United Nations ( 22 – 23 December 2012 ) World Export Development Forum ( 15 – 17 October 2012 ) Seminar about Marketing Politics ( 30 May 2013 )
Activity of Co-curricular
Company visit to Perum Peruri ( 2010 ) Company visit to BMW Indonesia (2011)
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Abstract
Relationship between Evironmental Risk Management and Cost of Capital
The purpose of this research is to find the relationship between environmental risk management and the cost of capital. The research uses simple regression approach as a statistical method. Environmental risk management variable is measured by the environment indicators stated in the sustainability report of Indonesian companies listed in Indonesia Stock Exchange in the year of 2009 until 2011. The cost of capital is measured by cost of equity, cost of debt, and the overall average cost of capital (WACC). Based on purposive sampling method and established criteria, there are 14 companies from various sectors selected as sample. So there are 42 sample units. The result of this study shows that environmental risk management have a significant negative relationship with the cost of capital of the company.
Keyword: Environmental risk management, cost of capital, cost of equity, cost of debt
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Abstrak
Relationship between Evironmental Risk Management and Cost of Capital
Penelitian ini bertujuan untuk mencari hubungan antara manajemen risiko lingkungan dan biaya modal perusahaan. Metode statistic yang digunakan dalam penelitian ini adalah analisis kuantitatif dan regresi sederhana. Variable environmental risk management diukur dengan indicator lingkungan pada laporan keberlanjutan perusahaan Indonesia yang terdaftar di Indonesia Stock Exchange dari tahun 2009 sampai 2011. Biaya modal diukur dengan cost of equity, cost of debt, dan rata-rata keseluruhan biaya modal (WACC). Berdasarkan purposive sampling dan criteria yang sudah ditetapkan, maka terdapat 14 perusahaan dari berbagai sector yang terpilih menjadi sampel penelitian. Sehingga terdapat 42 unit sampel. Hasil penelitian menunjukan bahwa environmental risk management berpengaruh negative significan terhadap keseluruhan biaya modal perusahaan.
Keyword: Environmental risk management, cost of capital, cost of equity, cost of debt
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Foreword
Assalamuu’alaikum Wr. Wb.
All praise to Allah SWT as the hearer, the seer and above all an abundance of grace, Taufiq, as well as his guidance. So, because Allah SWT I can finish this research on time. And shalawat always gives to our beloved Prophet Muhammad
SAW and all his families and friends who always helped him in establishing
Dinullah in this earth.
With the strength, intelligence, patience, and strong desire from Allah
SWT, I am able to finish this mini thesis as graduation pre requirement for bachelor degree. I believe there is an invisible hand which has helped me going through this process.
My special thanks for my Mom, Dian Sudirman, who has been helping and supporting her son to finish the thesis. You are the embodiment of angle in human form. So, I want to make you always smile because your smile is the efficacious magic that can boost my spirit to reach my dream and face the world.
Thank you for every struggle that you made for your family. Thanks mom, even a thousand of word can’t explain how really happy I am to be your son.
I also would like to extend my gratitude to my father, Sudirman Haseng , who always support my study and always motivates me to become a person with quality. I just can pray that Allah SWT will give you back for everything that you x have done. Thank you for every support that you give to me. For my siblings,
Akiko Nada Atsmara, Azka Aulia Rizqi, and Afifah Hanaa Nuralaf, who always support, and give the input regarding this thesis. Thank you because very much for helping me achieving the bachelor degree.
I believe I am nothing without each one of you who has helped me in finishing this mini thesis. Thus, in this very special moment, let me say many thanks to all of them have been helping me in the process of this thesis, including:
1. Prof. Dr. H. Abdul Hamid. MS as Dean of the Faculty of Economics
and Business who helped me in completing this mini thesis and
received Bachelor Degree.
2. Ahmad Dumyathi Bashori, MA as Head of International Program.
3. Prof. Dr. Margareth Greferer as the first thesis supervisor. Thank you
for the guidance and gave directions to me so I can finish this great
thesis.
4. Dr. M. Arief Mufraeni, Lc., Msi as the second supervisor that gave me
a lot of inputs, advice, and also gave solutions regarding the problems
I’ve faced in doing this thesis.
5. All lectures who have thought patiently, may what they have given are
recorded in Allah SWT almighty.
6. Thanks to Mr. Sugi for processing all of my academic administrations
in this university.
7. Wonders of the Al-Quran nul Qarim and As-Sunnah which has
become the light in this life.
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8. My Grandmother and the ampera crew for giving me the place and
time to focus on my thesis.
9. All my friends in management international batch 2009.
Riski,surya,ali,ari,yaser,angga and other members in d’kosan “you
guys are insane”. Andre, pian, oji, haris, lukman, Gerry, firaz for
having a great time during our studies and playing.
10. Seniors and juniors of management and Accounting international who
motivates me and give me spirit.
11. Special thanks to my girlfriend Innez for working and helping
together to finish our thesis. I also thank for the support that you’ve
given to me all time.
I realize that this thesis is still far from perfection, thus suggestions and constructive criticism from all parties are welcome, in order to improve my thesis.
Finally, only Allah SWT will return all and I hope this thesis will be useful to all parties, especially for writers and readers in general, may Allah SWT bless us and recorded as the worship of Allah’s hand. Amin.
Wassalamualaikum Wr. Wb
Jakarta,September 2013
Akira Aula Afif
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TABLE OF CONTENTS
INFORMATION PAGE
Cover ...... i
Certification from Supervisor ...... ii
Certification of Comprehensive Exam Sheet ...... iii
Certification of Thesis Exam Sheet ...... iv
Sheet Statement Authenticity Scientific Work ...... v
Curriculum Vitae ...... vi
Abstract ...... viii
Abstrak ...... ix
Foreword ...... x
Table of Content ...... xiii
List of Table ...... xvii
List of Figure ...... xix
xiii
CHAPTER I : INTRODUCTION
A. Background of Study ...... 1
B. Problem Definition ...... 5
C. Objectives of study ...... 5
D. Significance of study ...... 6
CHAPTER II : LITERATURE REVIEW
A. Theory Development ...... 7
1. Introduction ...... 7
2. Company Risks………………………………… 7
3. Definition of Risk Management ...... 8
a. Environmental Risk Management ...... 10
b. Difference Between Risk Management
and Risk Assessment ...... 11
4. Definition of Cost of Capital ...... 11
a. Definition of Cost of Equity ...... 13
b. Definition of Cost of Debt ...... 14
5. Relationship between Environmental Risk
Management and Cost of Capital ...... 15
B. Previous Research ...... 17
C. Logical Framework ...... 19
D. Hypothesis ...... 20
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CHAPTER III : RESEARCH METHODOLOGY
A. Scope of Research ...... 21
B. Sampling Methods ...... 22
C. Data Collection Methods ...... 23
D. Analysis Method ...... 23
1. Descriptive Analysis ...... 23
2. Normality Test ...... 24
a. Graph Analysis ...... 24
b. Statistical Test ...... 24
3. Hypothesis Test ...... 25
a. Coefficient of Determination Test ...... 25
b. Partial Regression Test (T-test) ...... 26
E. Variable Operation ...... 26
1. Independent Variable ...... 26
2. Dependent Variable ...... 26
CHAPTER IV : FINDING AND ANALYSIS
A. General description of research object ...... 30
1. Overview of selected companies ...... 30
2. Overview of business development of selected
companies ...... 31
B. Analysis and discussion ...... 32
xv
1. Descriptive Statistics ………………………….. 32
a. Independent variable ...... 32
b. Dependent variable ...... 37
1. Cost of equity (COE) ...... 37
2. Cost of debt (COD)…………………...… 40
3. Cost of Capital (WACC)…………..…… 44
2. Normality Test ...... 48
a. Normality Test for Cost of Equity ...... 48
b. Normality Test for Cost of Debt ...... 50
c. Normality Test for WACC ...... 52
3. Hypothesis Test ...... 54
a. Coefficient Determination Test ...... 54
b. Partial Test ...... 56
CHAPTER V : CONCLUSION AND RECOMMENDATION
A. Conclusion ...... 62
B. Recommendation ...... 63
REFERENCES ...... 65
APPENDIX ...... 68
xvi
LIST OF TABLES
No. Description Page
1.1 Real cases of company wastes ...... 3
3.1 Operational Variable ...... 27
3.2 List of environment indicators in sustainability report ...... 28
4.1 Environmental Index ...... 32
4.2 Descriptive statistics for environment index………………………. 33
4.3 COE Ratio ...... 37
4.4 Descriptive statistics for COE ratio………..………………………. 38
4.5 COD Ratio ...... 40
4.6 Descriptive statistics for COD ratio………..………………………. 41
4.7 WACC Ratio ...... 44
4.8 Descriptive statistics for WACC ratio………..……………………. 45
4.9 Kolmogorov-smirnov test of COE ...... 49
4.10 Kolmogorov-smirnov test of COD ...... 51
4.11 Kolmogorov-smirnov test of WACC ...... 53
4.12 Coefficient Determination Test for COE ...... 54
xvii
4.13 Coefficient Determination Test for COD ...... 55
4.14 Coefficient Determination Test for WACC ...... 55
4.15 Result T-Test for COE ...... 57
4.16 Result T-Test for COD ...... 58
4.17 Result T-Test for WACC ...... 59
xviii
LIST OF FIGURES
No. Description Page
4.1 Environment index 2009 ...... 34
4.2 Environment index 2010 ...... 35
4.3 Environment index 2011 ...... 36
4.4 COE ratio in 2009 ...... 38
4.5 COE ratio in 2010 ...... 39
4.6. COE ratio in 2011 ...... 39
4.7. COD ratio in 2009 ...... 42
4.8 COD ratio in 2010 ...... 43
4.9 COD ratio in 2011 ...... 43
4.10 WACC ratio in 2009 ...... 46
4.11 WACC ratio in 2010 ...... 46
4.12 WACC ratio in 2011 ...... 47
4.13 Histogram graphic of COE…………………………………………..... 48
4.14 Normal P-Plot graphic for COE……………………………...... 49
4.15 Histogram graphic of COD…………………………………………..... 50
xix
4.16 Normal P-Plot graphic for COD……………………………...... 51
4.17 Histogram graphic of WACC………………………………………….. 52
4.18 Normal P-Plot graphic for WACC……………………………...... 53
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CHAPTER I
INTRODUCTION
A. Background of the Study
To produce goods ready for consumption, the company needs materials and other
supporting factors, such as raw materials, auxiliary materials, equipment and labor. The
company is a technical entity that aims to produce goods or services. The company is also
called the venue for the production process that combines factors of production to produce
goods and services. Nowadays, there are still many companies who just think about
themselves, how they get profit, and how they survive in the market. But what about their
environment? As we can see now, usually the environment of companies in Jakarta are
already polluted by the waste of the companies. They throw their waste anywhere like in
rivers and subsequently the sea. Their waste causes diseases which harm the lives around the
firms.
The idea that a firm‘s environmental (―green‖) performance and overall economic
performance are positively related (Murphy 2002) has not always received universal
acceptance within the research community. In the conventional such activities represent
costs to the firm which should be minimized whenever possible. Specifically, in investors
view pollution control expenditures as a drain on resources that could have been invested
profitably, and do not reward the companies for socially responsible behavior‖ (Mahapatra
1984).
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In their theoretical perspectives, previous authors have argued that if the firm makes
―greener‖ (i.e., more efficient) use of its resources it will be more economically effective.
Such ―greener‖ use can come from for example generating less pollution and waste from the resources employed or by using fewer resources. While there have been some dissenting voices along the way ( Chen and Metcalf 1980; Mahapatra 1984), when researchers find a positive relationship between environmental and economic performance, they generally credit it to such improved resource utilization which in turn leads to overall increases in organizational effectiveness.
Some authors assume that environmental protection mainly causes costs to a company whereas others believe that environmental protection generally pays off and thus improves the firm‘s bottom line (Cohen et al., 1995). The relationship between environment and economic performance may differ in depending on the regulatory regime in a country, the cultural setting, customer behavior, the type of industries or size of companies analyzed, the time span, etc (Schaltegger and Synnestvedt, 2002).
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Table 1.1 Some real cases of company wastes
No Name of Company Type of Activity Elements Location of Pollutants Pollution
1 PT Sawit Sejahtera Palm Oil Liquid Waste Batu-Batu Nabati (SSN) river Aceh
2 PT Nagamas Mulya Palm Oil Liquid Waste Citalas river Riau
3 PT. Surabaya Agung Pulp and Paper Liquid Waste Surabaya river Kertas
4 PT Bintang Tri Putratex, Tekstil dan Batik Liquid Waste Banger Pekalongan PT Kesmatex, river CV Ezritex
5 PT Bintang Raya Canning and fish Liquid Waste Muncar river meal Banyuwangi PT. Maya Muncar Canning and fish PT. Fisindo Kusuma meal Sejahtera fish meal PT. Indosari Laut fish meal
6 PT. Tonikotex Textiles Liquid Waste Tangerang river
7 PT. DKB, PT Daya Shipyard Industry Solid waste/sand Tanjung Priok Radar Utama, PT. Bayu blasting Sea Bahari, PT. Wayata Kencana
8 PT. Jace Oktavia waste treatment Ferrosand waste Batu Aji Mandiri (steel slag) Batam
Source: www.indowarta.co
The table above shows some cases that happened in different areas in Indonesia. These are done by several companies and has different wastes that harm the lives of the surroundings. The companies are responsible for the environmental problems that they encounter caused by themselves.
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Most research on the environmental-economic performance relationship has been predicated on the idea that (internal) strategic environmental investments result in improved resource efficiency (Bansal and Roth, 2000; Branzei et al., 2004; Buysse and Verbeke,
2003). While the effects of such strategic choices are often clear even to the financial markets, internal financing is not the only phenomena that drive organizational performance.
Institutional and other external factors also have a profound effect on the performance
(survival) of firms (Singh, Tucker, and House, 1986).
Institutional and other external factors also have a profound effect on the performance
(survival) of firms (Singh, Tucker and House 1986). While several researchers have examined how the stock market reacts to improved environmental performance through market returns (Dowell et al. 2000; Gottsman and Kessler 1998; Mahapatra 1984; Nina
Febriana 2012) little attention has been paid to such external influences on the environmental-economic performance relationship itself.
There are also researches which are in contrast. Christmann (2000) finds out that an environment profile of a firm could lead to a heavy cost incurred by the company. Stephanus
(2012) proved that there is no influence of the corporate social responsibility to the cost of equity. From the results of the researches tells us that there is a gap that appear regarding the topic of environment and economic performance of the company.
Based on this background, the title of the study is “ The Relationship Between
Environmental Risk Management and Cost of Capital”.
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B. Problem Definition
The improved environmental risk management improves the market‘s risk perception of
the firm. There is evidence in the literature that investors and analysts take account of
improvement in environmental risk factors when making investment decisions and
recommendations (Heinkel, Kraus, and Zechner, 2001; Mackey, Mackey, and Barney,
2007). This perception should, in turn, cause the financial market allow low risk premiums
on equity, or allow the firm to get higher levels of leverage, which can cause a lower cost of
capital for the firm. To examine the relationship between environmental risk management
and cost of capital, this research underlays these following questions:
1. Does the environmental risk management has a relationship with the firm‘s cost of
equity?
2. Does the environmental risk management has a relationship with the firm‘s cost of
debt?
3. Does the environmental risk management has a relationship with the firm‘s overall cost
of capital?
C. Objectives of the Study
To be more specific, the study was undertaken in order to:
1. To know whether the environmental risk management is related to the firm‘s cost of
capital in Indonesia.
2. To know the significance of the relationship between the environmental risk
management and the firm‘s cost of capital in Indonesia.
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D. Significance of the Study
The results of this study are significant in various aspects.
Firstly, on the basis of the findings of the study, the report has identified the reasons behind
the relationship between environmental risk management and the cost of capital
Secondly As consideration for the company in making decision towards the influence of
environmental risk management to the cost of capital.
Thirdly, it gives the researcher the opportunity to gain inside knowledge in the relationship
between environmental risk management and the cost of capital.
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CHAPTER II
LITERATURE REVIEW
A. Theory Development
1. Introduction
The review will start with the understanding of company risks, risk management,
environmental risk management, and the cost of capital. In the next step this literature
intends to elaborate a critical evaluation of the relationship between the environmental risk
management and the cost of capital.
2. Company Risks
According Taswan (2006), business is sharing the risk, not only sharing profit. The
more a company discloses its risk, the more the ability to avoid such risks. Amran et al
(2009) mentions some risks in a company as follows:
a. Financial risk are risks associated with financial instruments like market risk, credit,
liquidity and interest rate.
b. Operational risk are risks associated with customer satisfaction, product
development, sourcing, product failure, and the environment.
c. Technology and information processing risk are risks associated with access,
availability, and technology and information infrastructure of the company.
d. Integrity risk are risks associated with the fraud in the management or byemployees,
illegal acts, and reputation.
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e. Risk strategy are risks associated with environmental monitoring, industrial,
business portfolio, competitors, regulatory, and political power.
Muslich (2007) stated that companies which are aware of the risks and conduct risk
management are capable to survive because they could handle the current risk and ready to
face future incoming risks.
3. Definition of Risk Management
The word 'risk' has two distinct meanings. It can mean in one context a hazard or a
danger, that is, an exposure to mischance or peril. In the other context, risk is interpreted
more narrowly to mean the probability or chance of suffering an adverse consequence, or of
encountering some loss. Because the word 'risk' can be used in these different ways the term
has led to some confusion.
Vaughan (1978) raised several definitions of risk as follows:
Risk is the chance of loss
Chance of loss is associated with an exposure to the possibility of losses. In the case of
100% chance of loss, the loss is a certainty so that there is no risk.
Risk is the possibility of loss
The term possibility means that the probability of an event is somewhere between zero
and one.
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Risk is uncertainty
Uncertainty is an individual assessment of the risk situation based on knowledge and
attitude of the individual concerned.
Risk is the dispersion of actual from expected results
Statisticians defines risk as the degree of deviation of a value around a central position or
around the point on average.
Risk is the probability of any outcome different from the one expected
Risk is not the probability of a single event, but the probability of several outcomes
which might be different from the one expected.
One of the most general definitions of risk was defined by the International Organization for Standardization in the ISO 31000 standard. According to this standard, risk is defined as the effect of uncertainty on objectives (ISO, 2009).
According to Smith (1990) risk management is defined as the identification, measurement, and control of financial risks that threaten an asset and the income of a company or project that may cause damage or loss to the company.
Amran et al (2009) expresses that risk management is very beneficial for the company in managing the risk-owned. Risk management is conducted by company to manage the risks and opportunities that relate to the achievement of corporate goals.
The purpose of risk management is to ensure that measures are taken to protect people, the environment and assets from harmful consequences. Risk management includes measures to avoid hazards and reduce potential harms. Risk management is one of the goals in an organization. It is acknowledged that risk cannot be eliminated but must be managed
(Aven and Vinnem, 2007)
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a. Environmental Risk Management
Environmental management is a mixture of science, policy, and socio economic applications. It focuses on the solution of the practical problems that humans encounter in cohabitation with nature, exploitation of resources, and production of waste (McGraw-Hill,
P.831).
Investors and companies have become more and more conscious of the many ways that environmental issues affect their businesses, presenting not only challenges but also opportunities. Environmental issues generate business risks that have to be carefully handled. Regulations related to businesses and the environment constantly improve and almost often create uncertainties for companies bringing significant implications for their financial performance. Consumer‘s reactions and other environmentally motivated actions create serious non-regulatory risks that may reduce a company‘s markets or affects its financial strength(Fall, 2001).
Case (1999) stated that many business leaders realized that environment factors can lead to economic growth around the world and agrees that environmental management can improve the bottom line performance of the company. Cost savings have been identified through:
Reduce the usage of raw materials through more efficient production techniques
Reuse or recycle wastes
Reducing the amount of energy used, such as gas and electricity
Cutting water consumptions
Lowering air emissions
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b. Difference Between Risk Management and Risk Assessment
According to the Environmental Protection Agency, a risk assessment is ―the evaluation of scientific information on the hazardous properties of environmental agents, the dose- response relationship, and the extent of human exposure to those agents‖ (EPA Glossary of
IRIS Terms).
Once risk has been assessed and characterized, ―political, social, economic and engineering implications together with risk-related information‖ are gathered ―in order to develop, analyze and compare management options and select the appropriate managerial response to a potential chronic health hazard‖ (EPA Glossary of IRIS Terms). This process is called risk management. Together these steps comprise the scientific approach to risk
(Stern, 2007).
According to Pritchard (2012), risk assessment is defined as risk estimation and risk evaluation or can be said as risk analysis, while risk management is the process of implementing decisions on managing risks. Risk management involves identifying, analyzing, and taking steps to reduce or eliminate the loss faced by an organization or individual.
4. Definition of Cost of Capital
Cost of capital has two meanings, depending on the investor and company point of view. From the point of view of investors, the cost of capital is the opportunity cost of the funds invested in a company (keown,1999). While from the standpoint of company, the cost of capital the cost incurred by the company to obtain the necessary funding (Iramani, 2005).
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Cost of capital is the expected rate of return that the market participants require in order to attract funds to a particular investment. In economic terms, the cost of capital for a particular investment is an opportunity cost—the cost of forgoing the next best alternative investment. In this sense, it relates to the economic principle of substitution—that is, an investor will not invest in a particular asset if there is a more attractive substitute (Pratt and
Grabowski 2010).
The cost of capital usually is expressed in percentage terms, that is, the annual amount of dollars that the investor requires or expects to realize, expressed as a percentage of the dollar amount invested (Pratt and Grabowski 2010).
According to Sharfman and Fernando (2007), cost of capital is the rate that investors use to discount a firm‘s future cash flow. The higher the cost of capital, the lower the present value of the firm‘s future cash flow. Firms lower cost of capital will be more highly valued than firms with higher cost of capital and therefore more attractive to investors.
Ogier, Rugman, and Spicer (2004) stated that cost of capital is a financial resource given to an enterprise or a project which is paid back in a period of time. The cost of capital increases with risk. The riskier an investment, the higher the reward needed to attract investors.
According to Lee (1990) and Brigham (1994), the cost of capital is important because:
In the capital budgeting decision, requires the estimation of cost of capital
Business decisions such as issuing bonds, choose of leasing or purchase of
assets also requires the estimation of cost of capital.
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Financial managers aim to maximize firm value by minimizing costs
including cost of capital.
According to Iramani and Hidalgo (2005), the practice of financing or funding of the company is acquired from various sources. Thus the real cost borne by the company's is the overall cost of all financing sources are used. According to Damodaran (2001) calculating the firm‘s overall cost of capital is by the weighted average cost of capital (WACC). The firm‘s after-tax weighted average cost of capital (Modigliani and Miller 1958)
퐸 퐷 푟 = 푟 + 푟 푊퐴퐶퐶 퐷 + 퐸 퐸 퐷 + 퐸 퐷
Where
E = market value of firm‘s equity; D = market value of firm‘s debt;
rE = the firm‘s cost of equity capital;
rD = the firm‘s cost of debt capital.
a. Definition of Cost of equity capital
Damodaran (2001) defines equity as a financial instrument that has a residual claim on the firm, does not provide tax advantages from the firm‘s cash outflow, has an infinitive age, and providing management control to its owner.
According to Siregar and Ali (1995) cost of equity is the rate that should be achieved by the company in order to fulfill the expected return which is required by the shareholders for the funds that have been invested in the company. This definition from Siregar and Ali is in
13 line with the definition by Damodaran (2001) which defines the cost of equity as the expected return of investors that includes the risk premium of equity or the required rate of return by the investor on the investment in the equity.
Cost of equity capital is the cost which is taken out to fund the source of financing
(Modigliani and Miller 1958). Mardiyah (2002) stated that cost of equity capital can be identified as the minimum level of return which is required by investors.
According to Riyanto (1996), the cost of equity capital is the part that should be issued by the company to give satisfaction to the investors on a particular level of risk. Stated that companies have the duty to reveal reports regarding the company which have an impact on the costs incurred. Therefore, the cost of equity is the cost incurred by the company to provide information to the public (shareholders, investors, and the society in general).
According to Chancera (2011), the cost of equity capital measurements are influenced by valuation models used by company. One of the valuation models is Capital Asset Pricing
Model (CAPM) (Sharpe 1964; Littner 1965)
푟퐸 = 푟퐹 + 훽 (푟푀 − 푟퐹 )
Where
rF = the risk free rate; rM = the return on the market portfolio; β = the firm‘s systematic risk.
b. Definition of cost of debt
Debt is defined by Damodaran (2001) as a financial tool that possess a contractual claim on the cash flows and assets of the company, resulting a tax deductable payment, has a maturity, and has a priority claim on cash flow during the period of operation as well as
14 bankruptcy. The company has the option to conduct debt financing in the form of bank loans, bonds, and leasing.
Young and O‘byrne (2001) confess that cost of debt is the interest rate that must be paid by the company if they obtain funds or capital by way of loans from the lenders or creditors.
By borrowing from outside the company, then it will raise a debt interest which became costs for the company.
Fabozzi (2007) define the cost of debt as the desired rate of return by the lender at time when they provide funding to the company. Pittman and Fortin (2004) measures the cost of debt as interest expense paid by the company during the year divided by the average number of long-term and short-term loans during the year.
According to Brigham (1994) and Lee (1990) the relevant cost of debt is the cost of issuing new debt (after taxes) or interest paid by the company to new bondholders. Cost of debt can be calculated as follow:
After-Tax cost of debt = Rd (1-tc)
Where
Rd = Interest rate of debt tc = corporate tax rate
5. Relationship between Environmental Risk Management and Cost of Capital
As firms make strategic investments that reduce emissions and pollution, it ease risk either from governmental regulators or from non-governmental stakeholders. This reduces both immediate risks from known hazards and future risks from unknown hazard and both
15 hazards bring uncertain level of financial impact. By reducing potential hazards the firm reduces number of potential claimants through fines, settlements or other compliance and therefore firms‘ economic resources can be directed to dividends to stockholders, debt payments, internal investments or acquisitions. This strategy improved risk perception of the company by the market (King and Shaver 2001).
Sharfman and Fernando (2007) stated that doing environmental risk management activities by improving environmental performance can reduce the possibility that firms will face extreme environmental events (Union Carbide‘s Bhopal disaster or the Exxon Valdez oil spill) that can require heavy cash outflows arise from compensation and clean-up costs, and thereby brings firm closer to bankruptcy.
Environmental risk management investments are usually long term and cannot be easily reversed. Perhaps such stability makes more credible from the view of the firm‘s future debt holders (Chidambaran, Fernando, and Spindt 2001).
In summary the literature shows that the environment is directly affecting the bottom line, often with very different consequences for companies even within the same sector. In many industries, environmental issues have implications that can significantly affect companies‘ financial results.
16
B. Previous Research
This literature review tries to find out the research already conducted in this field and to
what this thesis could contribute. The following researches have already been conducted in
this field:
1. Environmental Risk Management and the Cost of Capital (Study on publicly-
held US firms ) (Sharfman and Fernando, 2007) :
This research is about a study of 267 U.S. firms shows that improved environmental
risk management is associated with a lower cost of capital. These findings provide an
alternative perspective on the environmental – economic performance relationship, which
has been dominated by the view that improvements in economic performance stem from
better resource utilization. Firms also benefit from improved environmental risk
management through a reduction in their cost of equity capital, a shift from equity to debt
financing, and higher tax benefits associated with the ability to add debt. These findings
help build better theory regarding the outcomes of strategic improvements in
environmental risk management.
2. Environmental Externalities and Cost of Capital (Chava, 2010)
This research analyze the impact of a firm‘s environmental profile on its cost of
equity and debt capital. Using implied cost of capital derived from analysts‘ earnings
estimates, this research find that investors demand significantly higher expected returns
on stocks excluded by environmental screens (such as hazardous chemical, substantial
emissions and climate change concerns) compared to firms without such environmental
concerns. Lenders also charge a significantly higher interest rate on the bank loans issued
17 to firms with these environmental concerns. These provide evidence that environmental profile of a firm is not simply a proxy for an omitted component of its default risk.
Further, firms with these environmental concerns have lower institutional ownership and fewer banks participate in their loan syndicate than firms without such environmental concerns. These results suggest that exclusionary socially responsible investing and environmentally sensitive lending and the consequent increase in the cost of equity and debt capital has the potential to prompt firms to internalize their environmental externalities.
3. Corporate Environmental Management and Credit Risk (Bauer and Hann,
2010):
This study analyzes environmental management and its implications for bond investors. Poor environmental practices influence the credit standing of borrowing firms through the legal, reputational, and regulatory risks associated with environmental incidents. The researchers devise environmental performance measures based on information from an independent rating agency, and provide evidence that these measures explain the cross-sectional variation in credit risk for a sample of 582 U.S. public corporations between 1995 and 2006. The findings suggest that firms with environmental concerns pay a premium on their cost of debt financing and are assigned lower credit ratings. In contrast, firms with proactive environmental engagement benefit from a lower cost of debt financing. The results are robust to numerous controls for company and bond specific characteristics, alternative model specifications, and industry member.
18
C. Logical Framework
Independent Variable Dependent Variable
Environment Risk Management Cost Of Capital (WACC)
Environment Indicator Rasio WACC, Cost of Equity, and Cost from Sustainibility report of Debt
Hypothesis Test:
Simple Regression
Analysis
Conclusion
19
D. Hypothesis
From the explanation concern with this research, hypothesis that can be formulated as
follows:
H1 : The higher the level of environmental risk management the lower the cost of
equity capital.
H2 : The higher the level of environmental risk management the lower the firm‘s cost
of debt capital for a given level of debt.
H3 : The higher the level of environmental risk management the lower the firm‘s
weighted average cost of capital (WACC).
20
CHAPTER III
RESEARCH METHODOLOGY
A. Scope of Research
This research is empirical study of hypothesis testing to prove the relationship between
environmental risk management and the cost of capital. Where in this study, which act as the
independent variable is the environmental risk management measured by environment
indicators in the sustainability reports. Meanwhile, the dependent variable is the cost of
capital (WACC), debt capital, and equity capital.
The environment risk management data is using the environment indicators in the
sustainability report. Kytle and Ruggie (2005) expresses that company‘s risk can be reduced
and managed through better CSR programs.
This research is a quantitative research with the steps of descriptive relationship and
evaluation. The research will examine sustainability reports and financial statements of 14
Indonesian company listed in Indonesia Stock Exchange within timeframe 2009 to 2011. In
total, there are 42 reports that will be analyzed. This research is using purposive sampling
method. The scope of this research is limited to the reports of the selected companies.
21
B. Sampling Method
Sampling method is a research method which the data is taken from the population.
Sample is a part of population which is taken for the purpose of research. Sample consist of
member of population. The sample in this research is the selected Indonesian companies
listed in the Indonesia Stock Exchange in the period within 2009 – 2011.
This research will conduct a purposive sampling. Regarding to the population in this
research must meet the following criteria:
1. The Emitent has published their sustainiblity reports on an annual basis within 2009-
2011.
2. The Emitent applies GRI cross index as the guidance for the sustainability report.
3. The Emitent has published their sustainability report on the company‘s website.
4. The companies used for sample are the listed companies in Indonesia Stock Exchange
in the period 2009-2011
5. The companies published their sustainability report and annual report separately.
22
C. Data Collection Method
This research is using secondary source data. The data are obtained from the company‘s
website, which consist of company‘s sustainability report and annual report.
The data collection method in this research is using regression panel data. According to
Farah (2011) panel data analysis is method of learning a particular topic from multiple sites
and periodically observed within the prescribed period. Data panel is a technique which
combines time series data and cross-section data. The combination of the data enhances the
quality and quantity of the data.
D. Analysis Method
This research will use the method of content analysis. Each type of information of
environment indicators in the sustainability report will be scored by using numbers. Zero
numbers for no disclosure of environment indicators in sustainability report and 1 for the
revealed disclosure of environment indicators in sustainability report.
The variables in this research will be tested through the method of descriptive analysis
and hypothesis testing, as follow as:
1. Descriptive Analysis
This study is used to determine the general description of the research data. The
research variables includes environmental risk management, cost of equity, cost of
debt, and cost of capital. Description of the variables is presented to determine the
value of mean minimum, maximum, and standard deviation of the variables.
23
2. Normality Test
Normality test is used to determine the distributed data is normal or not. There are
two ways to test, i.e. the graph analysis and statistical tests (Ghozali, 2011).
Graph Analysis
When using graph analysis, normality test can be done by looking at the spread of the
data (dots) on the diagonal axis of the graph or by looking at the histogram from the
residual.
(1) If the dots spread around the diagonal line and follow the direction of the diagonal
line, the regression model meets the normality assumption.
(2) If the dots spread away from diagonal lines and / or do not follow the direction of
the diagonal line, the regression model does not meet the normality assumption.
Statistical test
Kolmogorov-Smirnov Z (1 - Sample KS) uses for making decision regarding the
normality test.
(1) If the value Asymp. Sig. (2-tailed) less than 0.05, it means that the data are not
normally distributed
(2) If the value Asymp. Sig. (2-tailed) of more than 0.05, it means that the data are
normally distributed.
24
3. Hypothesis Testing
This research uses 1 independent variable and 3 dependent variables. The analysis
method use for the hypothesis testing is simple regression method .
Simple regression analysis is a method to measure a linear relationship between
one independent variable(X) and the dependent variable (Y). This analysis is to
determine the direction of the relationship whether it is positive or negative relation
between the two variables. For testing the hypothesis is used model as follow by:
Y1 =α + β Env
Y2= α + β Env
Y3= α + β Env
Description:
Y1 = Cost of Equity Y2 = Cost of debt Y3 = Cost of Capital α = constant β Env = Beta environment
a. Coefficient Determination (R2)
Coefficient determination measures the ability of independent variable (Environment
risk management) elaborate dependent variables (Cost of equity, Cost of debt, Cost of
capital). Coefficient determination value shows how much variation in the data can be
explained by the regression model built. R2 has a value range between 0 and 1. If the
25
R2 get near to 1, it means that the regression model is precise or the independent
variable can elaborate dependent variable.
b. Partial Regression Test (T-Test)
The T-Test is used to determine whether the independent variable (X) in the
regression model partially has a significant effect on the dependent variable (Y). If
the significant T is more than 0,05 so H1,H2, or H3 is rejected. While if significant T
is less than 0,05 so H1,H2, or H3 is accepted. If H1,H2, and H3 are accepted means
that there is a significant relationship between independent and dependent variables.
E. Variable Operation
1. Independent Variable
There is only one independent variable in this research. The independent variable
is economic indicator in the sustainability report. In the sustainability repot, there are
30 environmental indicators (table 3.2). The environment index for testing the
compliance of sustainability reporting by follow as formulation:
Environment Index = n x 100% k
Description :
n : the environment indicators performed by company k : total of environment indicators in sustainability report
2. Dependent Variable
There are 3 dependent variables in this research. The dependent variable consist of:
26 a. Cost of Equity
Cost of equity shows the return that the stockholders require for their investment in a company. A firm‘s cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership. b. Cost of Debt
Cost of debt is a part of the company‘s capital structure. The debt consists of various bonds, loans and other forms of debt. This is a measure to determine the overall rate being paid by the company to use debt financing. c. Cost of Capital (WACC)
WACC consists of cost of equity and cost of debt. WACC determines how a company can raise money as its source of funding.
Table 3.1 Operational Variable
Variable Measurement Scale Independent Variable: Environmental Indicators in .Environment Index Ratio sustainability report Dependent Variable:
Cost of equity CAPM Ratio
Cost of Debt After-Tax cost of Ratio debt
Cost of Capital WACC Ratio
27
The environment risk management data are taken from the sustainability reports of the company from 2009-2011. The following table presents the environment indicators of the sustainability report.
Table 3.2 List of environmental indicators in Sustainability report
No Indicators
EN1 Materials used by weight or volume EN2 Percentage of materials used that are recycled input materials EN3 Direct energy consumption by primary energy source EN4 Indirect energy consumption by primary source EN5 Energy saved due to conservation and efficiency improvements EN6 Initiatives to provide energy sufficient or renewable energy based products and services, and reductions in energy requirements as a result of these initiatives EN7 Initiatives to reduce indirect energy consumption and reductions achieved EN8 Total water withdrawal by source EN9 Water sources significantly affected by withdrawal of water EN10 Percentage and total volume of water recycled and reused EN11 Location and size of land owned, leased, managed in, or adjacent to protected areas and areas of high biodiversity value outside protected areas EN12 Description of significant impacts of activities, products, and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas EN13 Habitats protected or restored EN14 Strategies, current actions, and future plans for managing impacts on biodiversity EN15 Number of IUCN Red List species and national conservation list species with habitats in areas affected by operations, by level of extinction risk EN16 Total direct and indirect greenhouse gas emissions by weight EN17 Other relevant indirect greenhouse gas emissions by weight EN18 Initiatives to reduce greenhouse gas emissions and reductions achieved EN19 Emissions of ozone depleting substances by weight EN20 NO, SO, and other significant air emissions by type and weight EN21 Total water discharge by quality and destination EN22 Total weight of waste by type and disposal method EN23 Total number and volume of significant pills
28
No Indicators
EN24 Weight of transported, imported, exported, or treated waste deemed hazardous under the terms of the Basel Convention Annex I, II, III, and VIII, and percentage of transported waste shipped internationally EN25 Identity, size, protected status, and biodiversity value of water bodies and related habitats significantly affected by the reporting organization‘s discharges of water and runoff EN26 Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation EN27 Percentage of products sold and their packaging materials that are reclaimed by category EN28 Monetary value of significant fines and total number of non-monetary sanctions for non compliance with environmental laws and regulations EN29 Significant environmental impacts of transporting products and other goods and materials used for the organization‘s operations, and transporting members of the workforce EN30 Total environmental protection expenditures and investments by type
In total there are 30 environmental disclosure. Score one (1) will be given for the disclosure environment indicator and score zero (0) for environment indicators which is not disclosure.
29
CHAPTER IV
FINDING AND ANALYSIS
A. General description of Research Object
This chapter presents and discusses the finding of the research conducted. The research is a descriptive study of environmental indicators in 42 sustainability reports which are compliant with GRI G3. The cost of capital of the selected companies was compiled from the data from the annual reports of the companies listed in Indonesia Stock Exchange in the year of 2009-2011.
The period 2009-2011 is choosen in order to fulfill the requirements of the research method. The hypothesis is tested by the simple regression method. The selection of the sample is chosen by criteria of population that have been explained in research methodology in the previous chapter.
1. Overview of selected companies
In 2009-2011, the companies that are listed in Indonesia Stock Exchange are 451 companies. The purposive sampling is used for choosing the samples. From the 451 companies listed, there are only 14 companies which fulfill the criteria in the time series of 3 years.
Therefore, in total there are 42 sustainability reports and 42 annual reports of the companies.
The reports are taken from the company‘s website. As an independent variable, environment risk management data are the environmental indicators in the sustainability report.
The sustainability reports are voluntarily reported by the companies. The 14 companies that present their reports are as follow:
30
Table of 14 selected companies
Name of Company Sector PT. Adaro Energy Energy PT. Antam Mining PT. Astra Agro Lestari Agriculture PT. Astra International Automotive PT. Holcim Indonesia Cement PT. Bumi Resource Mining PT. Petrosea Mining PT. Bukit Asam Mining PT. Telekomunikasi Indonesia Telecommunication PT. Timah Mining PT. Bakrie Sumatra Plantations Agriculture PT. Bank Negara Indonesia Bank PT. Perusahaan Gas Negara Energy PT. United Tractors Machinery and mining
2. Overview of business development 14 selected companies
The 14 selected companies consist of 6 mining sector companies, 2 agriculture company,
2 energy company, 1 automotive company, 1 cement, 1 bank company and 1 telecommunication company. The reason that most of the companies selected are from the mining sector is because the mining companies have direct contact to the natural resources and care about the environment. Therefore, have a big responsibility to disclosure sustainability report.
31
B. Analysis and Discussion
1. Descriptive analysis
The independent variable in this research is the environment risk management. From the indicators in the sustainability report, only the environment indicator is used in this research result the environment index.
a. Independent Variable ( Environment Risk Management)
Table 4.1 Environment Index 2009-2011 Name of Company 2009 2010 2011 0.567 1 1 PT.Adaro Energy 1 0.967 1 PT. Antam 1 1 1 PT. Astra Agro Lestari 0.267 0.733 0.833 PT. Astra International 0.567 0.567 0.567 PT. Holcim Indonesia 1 1 1 PT. Bumi Resources 1 1 1 PT. Petrosea 1 1 1 PT. Bukit Asam 0.8 1 1 PT. Telkom Indonesia 1 1 1 PT. Timah 0.667 0.667 0.8 PT. Bakrie Sumatra Plantations 0.233 0.3 0.267 PT. Bank Negara Indonesia 0.133 0.833 0.8 PT. Perusahaan Gas Negara 0.233 0.233 0.233 PT. United Tractors 0.133 0.233 0.233 Minimum 1 1 1 Maximum 0.67621 0.80714 0.82142 Mean Source: processed data Note: environment index served in decimals
32
Table 4.1 is the preview of the environment index of the 14 selected companies annually from 2009-2011. Environment index score 1 signify that the companies performed all environment indicators in the company‘s sustainability report based on GRI G3. The following table presents the descriptive statistics of environment index in 3 years:
Table 4.2 Descriptive statistics for environment index Minimum 0.133
Maximum 1 Mean 0.768262
Standard Deviation 0.297707
Kurtosis -0.59251 Skewness -0.96017 Source: processed data
The table above shows the descriptive data of the selected companies. As can be seen that in every year, there are companies scoring 1 as maximum score. The average value increases from 2009-2011 indicate that more companies perform the environment indicators. The Kurtosis and skewness value in all year are below < 2 which has the meaning that data of environment index is normal.
The graphic of the performance of the 14 companies in disclosing the environment indicators in the sustainability report are presented as follows:
33
Figure 4.1 Environment Index in 2009 1.2 1 0.8 0.6 0.4 0.2 0
environment index 2009
Source: processed data
As seen on table 4.1, The average of environment index in 2009 is 0.676. There are 7 companies which are below the average. They are PT. Adaro Energy, PT. Astra International,
PT. Holcim, PT. Bakrie Sumatra Plantations, PT. Bank Negara Indonesia, PT. Perusahaan Gas
Negara and PT. United tractor. The lowest score is 0.133 or 13% by PT. Perusahaan Gas Negara.
The other 7 companies are PT. Antam, PT. Astra Agro Lestari, PT. Bumi resource, PT. Petrosea,
PT. Bukit Asam, PT. Telkom and PT. Timah above the average value. The maximum value is 1 or 100% meaning that they reveal all of the environment indicators.
34
Figure 4.2 Environment Index in 2010 1.2 1 0.8 0.6 0.4 0.2 0
Environment index 2010
Source: processed data
The average value of environment index in 2010 is 0.807. The average value in 2010 is larger than 2009. The number of companies that performed all environment indicator in the sustainability report also increase becoming 7 companies. There are 5 companies with value below the average value. PT. United Tractor has the lowest value of 0.233 or 23%. The remaining 9 companies have value above the mean. PT. Antam has the value 0.967 or 96% with missing 1 from the 30 environment indicator and PT. Perusahaan Gas Negara have not conduct 5 out of 30 environment indicators.
35
Figure 4.3 Environment Index in 2011
1.2 1 0.8 0.6 0.4 0.2 0
Environment index 2011
Source: processed data
The average of Environment Index in 2011 is the highest than the other average value in the last two previous years. With the average value of 0.82 or 82%, the number of companies performing every environment indicator is 8 companies. PT. Holcim, PT. Bakrie Sumatra
Plantations, PT. Bank Negara Indonesia, PT. Perusahaan Gas Negara, and PT. United Tractors.
PT. United Tractors is consistent with value of 0.233 or 23% and become the lowest value among the other companies with value.
From 2009-2011, the figure shows that the number companies that have done all environment performance is increasing and it indicates an increase in the 14 selected company‘s environment risk management
36 b. Dependent Variable
The dependent variable in this research consists of cost of equity(COE), cost
of debt(COD), and cost of capital(WACC).
1. Cost of equity
The following table shows the cost of equity ratio from 2009-2011.
Table 4.3 Cost of Equity Ratio 2009-2011 Name of Company COE 2009 COE 2010 COE 2011 6.6728 4.378937 -1.29433 PT.Adaro Energy 6.161303 1.583543 -0.68651 PT. Antam 6.949012 4.980465 -0.0512 PT. Astra Agro Lestari 5.725663 1.566888 0.144076 PT. Astra International 5.938021 3.75417 -0.01915 PT. Holcim Indonesia 4.832035 2.699358 -2.87698 PT. Bumi Resources 9.850063 3.978115 1.768514 PT. Petrosea 6.070888 2.984112 -0.62156 PT. Bukit Asam 6.646029 4.48573 3.440077 PT. Telkom Indonesia 5.85624 -0.48406 0.195002 PT. Timah 5.071009 1.204888 -1.45309 PT. Bakrie Sumatra Plantations 4.952185 4.128326 -1.33749 PT. Bank Negara Indonesia 6.163609 5.569604 -0.32976 PT. Perusahaan Gas Negara 5.803819 4.076227 -0.54708 PT. United Tractors Minimum 4.832035 -0.48406 -2.87698
Maximum 9.850063 5.569604 3.440077
Mean 6.192334 3.207593 -0.26211
Source: processed data Note: Data served in percentage
37
As seen in table 4.2, there are various numbers of COE ratio from 2009-2011. From 2009-2011, the value decrease indicates that the 14 companies performed well in minimalizing the cost of equity. The following table presents the descriptive statistics of cost of equity ratio:
Table 4.4 Descriptive statistics of cost of equity ratio Minimum -2.87698
Maximum 9.850063
Mean 3.04594
Standard Deviation 3.038146
Kurtosis -0.95642
Skewness -0.10868
Source: processed data
The table above shows the descriptive statistics of the COE ratio in 2009-2011. From the
Kurtosis and Skweness value, it can be seen that the COE data in the 3 year period is normal.
The graphic of the COE ratio of the selected companies are presented as follow
Figure 4.4 COE ratio in 2009 12 10 8 6 4 2 0
COE 2009
Source: processed data
The average value of COE in 2009 is 6.19%(table 4.2). PT. Adaro, PT. Astra Agro
Lestari, PT. Petrosea and PT. Telkom has value above the mean with PT. Petrosea as the highest
38 value of 9.85%. The other 10 companies COE ratio are below the average and PT. Bumi resources is the lowest value of 4.83%.
Figure 4.5 COE Ratio in 2010 6 5 4 3 2 1 0 -1
COE 2010
Source: processed data
In 2010, the average value of COE decrease to the level of 3.21% (table 4.2). As seen on figure 4.5, there are 8 companies with value higher than in average value and 6 companies below the mean. The highest value in 2010 belongs to PT. Perusahaan Gas Negara with 5.57% and the lowest value among the 14 companies is PT. Timah with -0.48%.
Figure 4.6 COE ratio in 2011 4
2
0
-2
-4
COE 2011
Source: processed data
39
The average value of the selected companies decrease in the time frame of 3 years from
2009-2011(as seen in table 4.2). The average COE in 2011 is -0.02% the lowest among the previous 2 years. It can also be seen on figure 4.6 that the COE ratio of all companies rapidly decreases. Most companies have a negative value. This happens because the return market in
2011 is lower that the risk free. As explained in the previous chapter, in the formula of COE, return market(rm) needs to be minus by risk free(rf). This case generates a minus score of COE.
There are 4 companies with the COE ratio above the average while the remaining 10 were below the average. The maximum value is 3.44% by PT. Telkom Indonesia and minimum is -2.87% by PT. Bumi Resources.
2. Cost of debt
The second dependent variable in this research is the cost of debt (COD). The following
table shows the equity ratio:
Table 4.5 Cost of Debt ratio 2009-2011 Name of Company COD 2009 COD 2010 COD 2011 1.915877 2.249826 4.19375 PT.Adaro Energy 2.06771 0.353814 0.385034 PT. Antam 1.850049 0.43917 0.244753 PT. Astra Agro Lestari 0.919771 0.722427 0.747469 PT. Astra International 7.88641 4.663538 3.899565 PT. Holcim Indonesia 1.921741 5.51843 3.834665 PT. Bumi Resources 1.238667 2.452852 2.030955 PT. Petrosea 6.86783 10.14663 8.970481 PT. Bukit Asam 2.951698 3.240745 2.885916 PT. Telkom Indonesia 2.120567 0.782193 0.904811 PT. Timah
40
Name of Company COD 2009 COD 2010 COD 2011 2.874778 2.471034 2.233871 PT. Bank Negara Indonesia 2.739946 1.753738 1.413748 PT. Perusahaan Gas Negara 1.274831 1.171521 1.071151 PT. United Tractors Minimum 0.919771 0.353814 0.244753
Maximum 7.88641 10.14663 8.970481
Mean 3.01096 2.788565 2.630718
Source: processed data Note: COE ratio served in percentage
In table 4.3, the average cost of debt incurred by the selected 14 companies decrease from 2009-
2011. It is a good performance and minimalizing costs is what companies expected to occur. The following table presents the descriptive statistics of cost of debt ratio:
Table 4.6 Descriptive statistics of cost of debt ratio Minimum 0.244753
Maximum 10.14663
Mean 2.810081
Standard Deviation 2.320174
Kurtosis 1.285006
Skewness 1.548452
Source: processed data
The table shows that the data of COD is normal as seen in the value of kurtosis and skewness which is below 2.
41
The graphic of the COD of the 14 companies are presented as follow:
Figure 4.7 COD ratio in 2009 10 8 6 4 2 0
COD 2009
Source: processed data
The average value of cost of debt in 2009 is 3%. The three peaks as seen on figure 4.7 belongs to PT. Holcim with 7.88%, PT. Bukit Asam with 6.87% and PT. Bakrie Sumatra
Plantations with 5.52%. PT. Holcim‘s value is the maximum. The other 11 companies have this value below the average value. They are PT. Adaro 1.91%, PT.Antam 2.07%, PT. Astra Agro
Lestari 1.85%, PT. Astra International 0.92%, PT. Bumi Resources 1.92%, PT. Petrosea 1.24%,
PT. Telkom 2.95%, PT. Timah 2.12%, PT. Bank Negara Indonesia 2.87%, PT. Perusahaan Gas
Negara 2.74% and PT. United Tractors 1.27%. PT. Astra International is set for having the lowest cost of debt in 2009.
42
Figure 4.8 COD ratio in 2010 12 10 8 6 4 2 0
COD 2010
Source: processed data
In 2010, the mean is 2.79%, lower than in 2009. PT Holcim, PT. Bumi resource, PT.
Bukit Asam, PT. Telkom, and PT. Bakrie Sumatra Plantations has value above the average. PT.
Bukit Asam has the highest value of 10.15%. The other 9 companies are below the average value and PT. Antam has the least cost of debt among the 14 companies with value of 0.35%.
Figure 4.9 COD ratio in 2011 10 8 6 4 2 0
COD 2011
Source: processed data
After the average COD decrease in 2010, the trend happens again in 2011. The average value in 2011 decreases to 2.63%. The highest peak belongs to PT. Bukit Asam with 8.97 %.
43
Besides PT. Bukit Asam, PT. Antam 4.19%, PT. Holcim 3.89%, PT. Bumi Resources 3.83%,
PT. Telkom 2.88%, and PT. Bakrie Plantations 4.01% are the companies having COD value above the mean. The minimum value of COD in 2011 shows PT. Astra Agro Lestari which has a value of 0.24%
3. Cost of Capital (WACC)
The third dependent variable is the overall cost of capital (WACC). The following table
shows the WACC ratio:
Table 4.7 WACC Ratio 2009-2011 Name of Company WACC 2009 WACC 2010 WACC 2011 3.882407 3.226812 1.979165 PT.Adaro Energy 5.441370 1.312849 -0.37429 PT. Antam 6.178057 4.291124 0.000372 PT. Astra Agro Lestari 3.564060 1.161447 0.449398 PT. Astra International 7.002154 4.068808 1.20588 PT. Holcim Indonesia 2.308872 4.990902 2.763075 PT. Bumi Resources 7.322246 3.280048 1.920196 PT. Petrosea 6.297063 4.857493 2.164337 PT. Bukit Asam 4.819720 3.944812 3.213834 PT. Telkom Indonesia 4.759658 -0.12276 0.40806 PT. Timah 5.285258 2.210546 1.366218 PT. Bakrie Sumatra Plantations 3.049871 2.692042 1.781949 PT. Bank Negara Indonesia 4.265800 3.549557 0.446509 PT. Perusahaan Gas Negara 3.863838 2.752474 0.112759 PT. United Tractors Minimum 2.308872 -0.12276 -0.37429
44
Maximum 7.322246 4.990902 3.213834
Mean 4.860027 3.015439 1.245533
Source: processed data Note: WACC ratio served in percentage
In Table 4.4, the average WACC decrease from 2009-2011. This output is in line with the trend of average score of COE and COD. The following table presents the descriptive statistics of WACC ratio:
Table 4.8 Descriptive statistics of WACC ratio Minimum -0.37429
Maximum 7.322247
Mean 3.040333
Standard Deviation 2.001626
Kurtosis -0.62428
Skewness 0.17821
Source: processed data
The result of kurtosis and skewness explain that both are below <2 which means WACC data is normal.
45
The graphic of WACC ratio of the selected companies are presented as follow
Figure 4.10 WACC ratio in 2009 8 6 4 2 0
WACC 2009
As can be seen in figure 4.10, the average value of WACC in 2009 is 4.86%. PT. Antam ,
PT. Astra Agro Lestari, PT. Holcim, PT. Petrosea, PT. Bukit Asam and PT. Bakrie Sumatra
Plantations are the companies score above the average. 7.32% is the maximum score by PT.
Petrosea. While PT. Adaro , Astra International, PT. Bumi Resources, PT. Telkom, PT. Timah,
PT. Bank Negara Indonesia, PT. Perusahaan Gas Negara, and PT. United Tractors are below the average value. 2.3% by PT. Bumi Resources is the minimum WACC value in 2009.
Figure 4.11 WACC ratio in 2010 6 5 4 3 2 1 0 -1
WACC 2010
Source: processed data
46
In 2010, the mean of WACC decrease to 3% with the maximum of 5% and minimum -
0.12%. The maximum value belongs to PT. Bumi Resources and PT. Timah as the minimum.
These 8 companies PT. Adaro, PT. Astra Agro Lestari, PT. Holcim, PT. Bumi resources, PT.
Petrosea, PT. Bukit Asam, PT. Telkom and PT. Perusahaan Gas Negara are placed above the
WACC mean. The remaining 6 companies are ranked below the mean are PT. Antam, PT. Astra
International, PT. Timah, PT. Bakrie Sumatra Plantations, PT. Bank Negara Indonesia, and PT.
United Tractors.
Figure 4.12 WACC Ratio in 2011 4 3 2 1 0 -1
WACC 2011
Source: processed data
In 2011, the average value is 1.24%. The downward trend of WACC ratio of the 14 selected companies from 2009-2011 happened. PT Telkom has the highest WACC value of
3.21% followed by PT. Adaro, PT. Bumi Resources, PT. Petrosea, PT. Bukit Asam, PT. Telkom,
PT. Bakrie Sumatra Plantations, PT. Bank Negara Indonesia which have WACC value above the average. The remaining 7 companies which are PT. Antam, PT. Astra Agro Lestari, PT. Astra
International, PT. Holcim, PT. Timah, PT. Perusahaan Gas Negara, and PT. United Tractors get the value below the average which indicates that they performed well in minimizing the overall cost of capital.
47
2. Normality Test
a) Normality Test for Cost of Equity
Normality test can be done with the analysis chart. Based on Figure 4.13 shows that the histogram graph display can be concluded that the histogram graph gives a normal distribution pattern. While the normal graph plots shown in Figure 4.14 shows that the points spread around the diagonal line, and follow the direction of the line diagonal spread. This suggests that the residual values are normally distributed.
Figure 4.13
Histogram Graphic
Source : processed data
48
Figure 4.14
Normal Probability Plot Graphic
Source : processed data
The result of graphic analysis above could raise doubts as more subjective in its decision- making. To strengthen the analysis of the graphic above, the statistical analysis used the
Kolmogorov-Smirnov Z. The results of the Kolmogorov-Smirnov Z can be seen in table 4.5.
Table 4.9 Result Kolmogorov-Smirnov Z test One-Sample Kolmogorov-Smirnov Test
Unstandardized Residual N 42 Mean 0E-7 Normal Parametersa,b Std. Deviation .03121840 Absolute .120 Most Extreme Differences Positive .097 Negative -.120 Kolmogorov-Smirnov Z .777 Asymp. Sig. (2-tailed) .582 a. Test distribution is Normal. b. Calculated from data. Source: processed data
49
Based on the above table shows that the value asymptonic significance of 0.582. Because asymptonic significance value greater than 0.05, it can be concluded that the model has a residual value of normal distribution.
b) Normality Test for Cost of Debt
Normality test for COD conducted with histogram graphic analysis can be seen in figure
4.15. Based on the histogram display, it can be concluded that the histogram graph gives a normal distribution pattern. Test for normality using normal graphics plot can be seen in Figure
4.16. Based on the images can be seen that the points spread around the diagonal line, and its distribution following the direction of the diagonal line. This shows that the model has a residual value of normal distribution.
Figure 4.15 Histogram Graphic
Source: processed data
50
Figure 4.16 Normal Probability Plot
Source : processed data
Normality test results using the above graph analysis supported by statistical analysis using the
Kolmogorov-Smirnov test Z. The results of the Kolmogorov-Smirnov Z of COD can be seen in table 4.6 below.
Table 4.10 Result Kolmogorov-Smirnov Z test One-Sample Kolmogorov-Smirnov Test
Unstandardized Residual
N 42
Mean 0E-7 Normal Parametersa,b Std. Deviation .04466766 Absolute .190 Most Extreme Differences Positive .190 Negative -.116 Kolmogorov-Smirnov Z 1.234
Asymp. Sig. (2-tailed) .095 a. Test distribution is Normal.
b. Calculated from data. Source: processed data
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Based on the table above shows that the value asymptonic significance of 0.095. Because asymptonic significance value greater than 0.05, it can be concluded that the model has a residual value of normal distribution.
c) Normality test for WACC
Normality test model for WACC has the same result with the two previous models.
Normality test with histogram graph analysis can be seen in Figure 4.17. Based on the histogram display can be concluded that the histogram graph has a normal distribution. While the test for normality using normal graphics plot can be seen in Figure 4.18. Based on the graph shows that the points spread around the diagonal line, and its distribution following the direction of the diagonal line. This shows that the model has a residual value of normal distribution.
Figure 4.17 Histogram Graphic
Source : processed data
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Figure 4.18 Normal Probability Plot
Source : Processed data
Normality test results using graph analysis is supported by the normality test using the statistical analysis of the Kolmogorov-Smirnov Z. While the results of the Kolmogorov-Smirnov
Z can be seen in table 4.7 below.
Table 4.11 Result Kolmogorov Smirnov Z test One-Sample Kolmogorov-Smirnov Test
Unstandardized Residual N 42 Mean 0E-7 Normal Parametersa,b Std. Deviation .04446278 Absolute .174 Most Extreme Differences Positive .174 Negative -.148 Kolmogorov-Smirnov Z 1.131 Asymp. Sig. (2-tailed) .155 a. Test distribution is Normal. b. Calculated from data. Source: processed data
53
Based on the table above shows that the value asymptonic significance of 0.155. Because asymptonic significance value greater than 0.05, it can be concluded that the model has a residual value of normal distribution.
3. Hypothesis Test
a. Coefficient of Determination (R2)
Coefficient determination measures the ability of independent variable (ENVI)
elaborate dependent variables (COE,COD,WACC). Coefficient determination
value shows how much variation in the data can be explained by the regression
model built.
1) Coefficient Determination testing (R2)(COE)
Coefficient of determination (R2) shows how far ENVI variables explain the
variation of COE variables. Based on the model output summary in Table 4.8
shows that the R2 value of 0.077. This suggests that a 7.7% change in the
variable COE can be explained by the variable ENVI. While the remaining
92.3% is explained by other causes outside the model.
Table 4.12 Result of Coefficient Determination Testing for COE
Model Summaryb
Model R R Square Adjusted R Std. Error of the Estimate Square 1 .278a .077 .054 .0316062228 a. Predictors: (Constant), Environment b. Dependent Variable: COE Source: processed data
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2) Coefficient Determination testing (R2)(COD)
Coefficient of determination (R2) shows how far ENVI variable explain the
variation of COD variable. Based on the model output summary in table 4.9
the R2 value is 0.081. This indicates that 8.1% change in the variable COE
can be explained by the variable ENVI.
Table 4.13 Result of Coefficient Determination Testing for COD Model Summaryb
Model R R Square Adjusted R Std. Error of the Estimate Square 1 .285a .081 .058 .0452225620 a. Predictors: (Constant), Environment b. Dependent Variable: COD Source: processed data
3) Coefficient Determination testing (R2)(WACC)
Coefficient of determination (R2) shows how far ENVI variable explain the
variation of the variable WACC. Based on the model output summary in Table
4.10 the R2 value is 0.104. This suggests that a 10.4% change in the variable
WACC can be explained by the variable ENVI. While the remaining 89.6% are
explained by other causes outside the model.
Table 4.14 Result of Coefficient Determination Testing for WACC
Model Summaryb
Model R R Square Adjusted R Std. Error of the Estimate Square
1 .322a .104 .081 .0450151318 a. Predictors: (Constant), Environment b. Dependent Variable: WACC Source: processed data
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b. Partial Test (T-Test)
The T-Test is used to determine whether the independent variable (ENVI) in the
regression model partially has a significant effect on the dependent variable
(COE, COD and WACC). If the significant T is more than 0,05 so H1,H2, or H3
is rejected. While if significant T is less than 0,05 so H1,H2, or H3 is accepted. If
H1,H2, and H3 are accepted that means there is a significant relationship between
independent and dependent variables.
Secondly comparing the value of T-statistic and T-table. T-statistic come from
resulting of SPSS calculation, but T-table come from seeing the table of
statistical. If T-statisctic is more than T-table, so it means there is significant
between independent variable and dependent variable. However, if the T-statistic
is less than T-table, so it means there is no significant between independent
variable and dependent variable.
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1) T-Test for COE
Table 4.15 Result of T-test for COE
Coefficientsa
Model Unstandardized Coefficients Standardized t Sig. Coefficients B Std. Error Beta (Constant) .027 .006 4.534 .000 1 Environment -.037 .020 -.278 -1.831 .075 a. Dependent Variable: COE Source: processed data
Based on table 4.14, the SPSS result of coefficient regression formed a simple regression equation as follow
COE = 0.027 – 0.037
Equation results indicate that the independent variable (ENVI) has a negative regression coefficient of -0.033. It can be concluded that every 1% increase in ENVI will lower the COE by
0.033%. The constant value in this equation is 0.027. This indicates that if there is no impact or change on the ENVI, the value of COE remains 0.027.
Based on table 4.14 the obtained significance value is 0.75. The case in this research is using a significance level of (α) 0.05. But if the significance level of (α) 0.1 is used, H1 is accepted. Since the significance value is in the range of 0.05 and 0.1, can be concluded that H1 is accepted. This means that there is relationship between risk management environment with the
COE. Meanwhile, t-statistic value is -1.831. The t-tstatistic value is lower than the -t-table value obtained -1.684. This indicates a negative significance between the two variables.
57
2) T-Test for COD
Table 4.16 Result of T-test for COD
Coefficientsa
Model Unstandardized Coefficients Standardized t Sig. Coefficients B Std. Error Beta (Constant) .032 .008 3.812 .000 1 Environment -.054 .029 -.285 -1.878 .068 a. Dependent Variable: COD Source: processed data
Based on table 4.15, the SPSS result of coefficient regression formed the simple regression equation as follow
COD = 0.032 – 0.054
The equation results indicate that the independent variable (ENVI) have a negative regression coefficient of -0.054. It can be concluded that every 1% increase in ENVI will lower the COD of 0.054%. The constant value in this equation is 0.032. This means that if there is no impact or change on the ENVI, the value of COD is 0.032.
Based on table 4.15 obtained significance value is 0.68. The case in this research is using a significance level of (α) 0.05. But if the significance level of (α) 0.1 is used, H2 is accepted.
Since the significance value is in the range of 0.05 and 0.1, can be concluded that H2 is accepted.
This means that there is relationship between environment risk management with the COD.
Meanwhile, t-statistic value is -1.878. The t-tstatistic value is lower than the -t-table value obtained -1.684. Although there is significance in the relationship between environment risk management with cost of debt, it occurs a negative relationship.
58
3) T-Test for WACC
Table 4.17 Result of T-test for WACC
Coefficientsa
Model Unstandardized Coefficients Standardized T Sig. Coefficients B Std. Error Beta (Constant) .031 .008 3.652 .001 1 Environment -.061 .029 -.322 -2.153 .037 a. Dependent Variable: WACC Source: processed data
Based on table 4.16, the SPSS result of coefficient regression formed a simple regression equation as follow
WACC = 0.031 – 0.061
The equation result indicates that the independent variable (ENVI) has a negative regression coefficient of -0.061. It can be concluded that every 1% increase in ENVI will lower the WACC of 0.061. The constant value in this equation is 0.031. This means that if there is no impact or change on the ENVI, the value of WACC is 0.031
Based on table 4.16 obtained significance value is 0.37. The case in this research is using a significance level of (α) 0.05 means that H2 is accepted. This means that there is relationship between environmental risk management with the WACC. Meanwhile, t-statistic value is -2.153.
The t-tstatistic value is lower than the -t-table value obtained -1.684. Although there is
59 significance in the relationship between environment risk management with overall cost of capital, it happens a negative relationship.
This study consists of 3 hypotheses that aims to seek relationship between environment risk management and the cost of capital measured by environmental indicators in sustainability report (independent variable) and COE,COD, and WACC (dependent variable).
In this research, the environment risk management of the company, which is measured, based on GRI G3 environment indicators did affects the overall cost of capital(WACC) as well as the cost of equity(COE) and the cost of debt(COD). The calculation of the SPSS shows a negative relationship between environment risk management when applying independent variable and COE,COD, or WACC.
This research shows that in 2009-2011 the significance levels of COE and COD is near
5% while the significance level of WACC is below 5%. This reflects that there is significance between environment risk management to COE, COD, and WACC.
The output of the research indicates environmental risk management conducted by companies affects the overall cost of capital in a small number. It gives little effect to the perception of investors in making investment decisions. Improvement in environmental risk management could reduce the risk of the company so investors will be more interested to invest their funds. Besides improving, more Indonesian companies are expected to reveal their CSR report as a necessity in order to care and be aware of the environment. The fact that nowadays the CSR reports of Indonesian companies are still voluntarily reported by the companies. The reason that CSR is a relatively new case in Indonesia, majority of the investors still has a low perception regarding the case.
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This study was supported by research conducted by Sharfman and Fernando (2007) with the research in US companies about the environment risk management and the cost of capital and resulted reduction in the cost of capital by the improvement of the environment risk management. Sudheer Chava (2010) analyze the impact of a firm‘s environmental profile on its cost of equity and debt capital and concludes that a good environmental profile of a firm has a significant effect on its cost of capital. The result is also supported by the research done by Nina
Febriana (2012) at 94 companies listed in Indonesia stock exchange, that resulted that the corporate social responsibility negatively and significantly associate with cost of equity capital.
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CHAPTER V
CONLUSION AND RECOMMENDATION
A. Conclusion
The intention of this research is to find out the relationship of environmental risk management and the cost of capital in Indonesian listed companies during the period of 2009-
2011. Environmental risk management is measured by environment indicators of the sustainability report disclosure by companies. While the overall cost of capital is measured by the COE, COD, and WACC. The analysis is using the simple regression method with the assistance of SPSS software.
The problem definition in this research includes:
1. To find out whether there is a relationship between environmental risk
management and the cost of equity. The result showed that there is a negative
significant relationship. It means that the increase in the environmental risk
management will decrease the cost of equity.
2. To clarify the relationship between environmental risk management and the cost
of debt of company. The result in the previous chapter explains a negative
significant relationship happens. The increase of environmental risk management
has an impact in reducing the cost of debt.
3. The focus on this research was the fact whether there is a relationship between
environmental risk management towards the firm‘s overall cost of capital. Based
on the findings on the 14 selected Indonesian companies, it can be concluded that
the result showed from 2009-2011 that there is a negative significant relationship
62
between environmental risk management with the WACC. The output of the
result also shows that there is a minor effect.
The benefit of this research is for a development of financial management on the management of environmental risks toward the cost of capital of the company.
B. Recommendation
From the research that has been done, the suggestions that can be given are as follows:
1. All Indonesian listed companies should be more transparent in reporting their corporate
social responsibility reports. By being transparent, the reports will be more accessible by
public and grow social awareness on the importance of environment issues.
2. Companies are expected to reveal environmental improvements that have been made
through the Corporate Social Responsibility programs. Disclosure of environmental
performance in the CSR programs is needed to measure the ability of the company
handling environment risks that will benefit for the company as well as being attractive to
investors and the public.
3. Companies should perform environmental risk management through improvements in
environmental performance. Environmental performance is all about how well the
company manages the environmental aspects of its activities and the impact on the
environment. With the improvement of its environmental performance, the company is
expected to have a low risk that will minimize the cost of capital.
4. Future studies that examine the relationship of environmental risk management and the
cost of capital should expand the study period. This is because the investment in
environment improvement is based on long term investment aspect. Disclosure of
63 environmental performance is also not directly responded by investors at the time that the company disclosure the sustainability report.
64
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Appendix I
2009 Environment COE COD WACC
Adaro 0.567 6.6728 1.915877 3.882407657 Antam 1 6.161303 2.06771 5.441370712 AAL 1 6.949012 1.850049 6.178057074 Astra Intl 0.267 5.725663 0.919771 3.564060094 Holcim 0.567 5.938021 7.88641 7.002154286 Bumi Resource 1 4.832035 1.921741 2.308872329 Petrosea 1 9.850063 1.238667 7.322246843 Bukit Asam 1 6.070888 6.86783 6.297063877 Telkom 0.8 6.646029 2.951698 4.8197209 Timah 1 5.85624 2.120567 4.759658755 BSP 0.667 5.071009 5.523573 5.285258803 BNI 0.233 4.952185 2.874778 3.049871345 PGN 0.133 6.163609 2.739946 4.265800984 United Tractors 0.233 5.803819 1.274831 3.863838063
2010 Environment COE COD WACC
Adaro 1 4.378937 2.249826 3.226812 Antam 0.967 1.583543 0.353814 1.312849 AAL 1 4.980465 0.43917 4.291124 Astra Intl 0.733 1.566888 0.722427 1.161447 Holcim 0.567 3.75417 4.663538 4.068808 Bumi Resource 1 2.699358 5.51843 4.990902 Petrosea 1 3.978115 2.452852 3.280048 Bukit Asam 1 2.984112 10.14663 4.857493 Telkom 1 4.48573 3.240745 3.944812 Timah 1 -0.48406 0.782193 -0.12276 BSP 0.667 1.204888 3.073994 2.210546 BNI 0.3 4.128326 2.471034 2.692042 PGN 0.833 5.569604 1.753738 3.549557 United Tractors 0.233 4.076227 1.171521 2.752474
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2011 Environment COE COD WACC
Adaro 1 -1.29433 4.19375 1.979165 Antam 1 -0.68651 0.385034 -0.37429 AAL 1 -0.0512 0.244753 0.000372 Astra Intl 0.833 0.144076 0.747469 0.449398 Holcim 0.567 -0.01915 3.899565 1.20588 Bumi Resource 1 -2.87698 3.834665 2.763075 Petrosea 1 1.768514 2.030955 1.920196 Bukit Asam 1 -0.62156 8.970481 2.164337 Telkom 1 3.440077 2.885916 3.213834 Timah 1 0.195002 0.904811 0.40806 BSP 0.8 -1.45309 4.013884 1.366218 BNI 0.267 -1.33749 2.233871 1.781949 PGN 0.8 -0.32976 1.413748 0.446509 United Tractors 0.233 -0.54708 1.071151 0.112759
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Appendex II
SPSS output for COE
Model Summaryb
Model R R Square Adjusted R Std. Error of the Square Estimate 1 .278a .077 .054 .0316062228 a. Predictors: (Constant), Environment b. Dependent Variable: COE
ANOVAa
Model Sum of Squares df Mean Square F Sig. Regression .003 1 .003 3.353 .075b 1 Residual .040 40 .001 Total .043 41 a. Dependent Variable: COE b. Predictors: (Constant), Environment
Coefficientsa
Model Unstandardized Coefficients Standardized t Sig. Coefficients B Std. Error Beta (Constant) .027 .006 4.534 .000 1 Environment -.037 .020 -.278 -1.831 .075 a. Dependent Variable: COE
70
71
One-Sample Kolmogorov-Smirnov Test
Unstandardized Residual N 42 Mean 0E-7 Normal Parametersa,b Std. Deviation .03121840 Absolute .120 Most Extreme Differences Positive .097 Negative -.120 Kolmogorov-Smirnov Z .777 Asymp. Sig. (2-tailed) .582 a. Test distribution is Normal. b. Calculated from data.
72
SPSS output for COD
Model Summaryb
Model R R Square Adjusted R Std. Error of the Square Estimate 1 .285a .081 .058 .0452225620 a. Predictors: (Constant), Environment b. Dependent Variable: COD
ANOVAa
Model Sum of Squares df Mean Square F Sig. Regression .007 1 .007 3.529 .068b 1 Residual .082 40 .002 Total .089 41 a. Dependent Variable: COD b. Predictors: (Constant), Environment
Coefficientsa
Model Unstandardized Coefficients Standardized t Sig. Coefficients B Std. Error Beta (Constant) .032 .008 3.812 .000 1 Environment -.054 .029 -.285 -1.878 .068 a. Dependent Variable: COD
73
74
One-Sample Kolmogorov-Smirnov Test
Unstandardized Residual N 42 Mean 0E-7 Normal Parametersa,b Std. Deviation .04466766 Absolute .190 Most Extreme Differences Positive .190 Negative -.116 Kolmogorov-Smirnov Z 1.234 Asymp. Sig. (2-tailed) .095 a. Test distribution is Normal. b. Calculated from data.
75
SPSS output for WACC
Model Summaryb
Model R R Square Adjusted R Std. Error of the Square Estimate 1 .322a .104 .081 .0450151318 a. Predictors: (Constant), Environment b. Dependent Variable: WACC
ANOVAa
Model Sum of Squares df Mean Square F Sig. Regression .009 1 .009 4.634 .037b 1 Residual .081 40 .002 Total .090 41 a. Dependent Variable: WACC b. Predictors: (Constant), Environment
Coefficientsa
Model Unstandardized Coefficients Standardized t Sig. Coefficients B Std. Error Beta (Constant) .031 .008 3.652 .001 1 Environment -.061 .029 -.322 -2.153 .037 a. Dependent Variable: WACC
76
77
One-Sample Kolmogorov-Smirnov Test
Unstandardized Residual N 42 Mean 0E-7 Normal Parametersa,b Std. Deviation .04446278 Absolute .174 Most Extreme Differences Positive .174 Negative -.148 Kolmogorov-Smirnov Z 1.131 Asymp. Sig. (2-tailed) .155 a. Test distribution is Normal. b. Calculated from data.
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79