187-2nd ICBER 2011 PG 798-805 Financial Performance Analysis

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2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING nd nd THE FINANCIAL PERFORMANCE ANALYSIS USING ALTMAN Z-SCORE AND ITS EFFECT TO STOCK PRICE BANKING SECTOR IN INDONESIAN STOCK EXCHANGE. Rida Prihatni SE. Ak. MSi.1 Adam Zakaria SE. Ak. MSi. 2 1,2 Accounting Lecturer at Accounting Department Faculty of Economics State University of Jakarta, Indonesia Mail address: Faculty of Economics, State University of Jakarta Building R, Jalan. Rawamangun Muka, Jakarta
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  2 nd INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 nd ICBER 2011) PROCEEDING   798 THE FINANCIAL PERFORMANCE ANALYSIS USINGALTMAN Z-SCORE AND ITS EFFECT TO STOCK PRICEBANKING SECTOR IN INDONESIAN STOCK EXCHANGE. Rida Prihatni SE. Ak. MSi. 1  Adam Zakaria SE. Ak. MSi. 2   1,2 Accounting Lecturer at Accounting Department Faculty of EconomicsState University of Jakarta, IndonesiaMail address: Faculty of Economics, State University of JakartaBuilding R, Jalan. Rawamangun Muka, Jakarta Timur, IndonesiaPh.: +62 21 4721227 Fax: +62 21 4706285  E-mail address:hatney_yes@yahoo.comazdelima@yahoo.com, adam@feunj.ac.id    Abstract The objectives of this research are to explore whether banks have financial difficulties and itseffect to companies’s stock price. Data gathered from banking sector during year 2004-2008listed in Indonesian Stock Exchange. The results show that all banks used in this sample arecategorized in financial difficulties but in fact, those banks are still running the operationnormally. Then, positive and negative Z-Score did not significantly different in stock pricefrom 5 days before and 5 days after publication date of financial report. Keywords: Financial Performance, Z-Score, Stock Price.  2 nd INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 nd ICBER 2011) PROCEEDING   799 1.    Background  Stock market and money market has played its role in order to mobilize public fundto enhance country’s development process and distribute wealth through saving, deposit,buy and sell transactions. In the long-run, this condition certainly supports peoplewelfare. To ease stated purpose, Indonesian government launched many deregulationpolicies / packages for banking sector.June 1983 package can absorbed public funds in order support business sector bysetting deposit rate and giving loans without intervered by central bank. Furthermore,October package was also released regarding easier procedures of new bank opening.February 1991 package then became control factor since minimum 8 % CAR wasintroduced. Subsequently, Banking Act No. 7/1992 then followed by Government RuleNo. 70/1992 have determined organizational procedures and miminum capital owned.May package 1993 focused on lower minimum CAR allowed, maximum lending limit forrelated parties. In April 1997, minimum reserve for every bank was initiated. Due to nonperforming loan in property sector, maximum lending limit to related parties is refocusedin July package 1997.During deregulation progress, factors have caused improper banking practice forexample insider lending, high interest rate, limited access to banking system and loansgiven to luxury sectors such as apartment, golf field, business district building etc. InNovember 1997, 16 banks were banned to run their business operation/liquidation whileothers were forced to merge. Afterthat, few banks were found bancrupty and bailed out bygovernment then deposit guarantee institution was released in order to heal thepsychological issue resulted from past experience.In 2004, Indonesian Central Bank issued regulations No 6/9/2004 related tominimum of 8 % CAR and maximum of 5 % NPL in order to not classify having or nothaving difficulty in going concern bank. Furthermore, every bank must have risk management committee no later than June 30 th , 2007 according to Indonesian CentralBank rule No 8/4/2006. That rule requires banks to have Risk Management Committee,Audit Committee, and Nomination and Remuneration Committee as an independentposition established by Board of Commissioner to oversee and coordinate any task relatedwith Board of Director and its subordinate.Stock Exchange Act No. 8/1995 has also enhanced companies listed di IndonesianStock Exhange (formerly Jakarta and Surabaya Stock Exchange), trading volume andmarket capitaliziation. Composite index closed at 3,645 poins in November 1, 2010. Bank Mandiri, BCA, BNI and BRI are the examples of big capitalization companies.Altman model can predict financial bankruptcy with combined financial ratio toovercome the financial analyst’s weakness by applying regression technique anddescriminant analysis. Altman Z-Score can be applied for benefits of testingcharacteristics of company’s business failure by determining variable which would beeffectively to predict financial difficulty in the future. This model can also be used foranalyzing and evaluating company’s financial performance through ratios.By using multivariate descriminant analysis, combined ratios can predict variesbusiness sectors as an early warning system bank which is indicated bankruptcyeventhough this model can not predict exact time bank would suffer bancruptchy (Altman  2 nd INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 nd ICBER 2011) PROCEEDING   800, 2000). Other research done resulted that investors adjusted their new solvency positionthen stock price reflected (Supardi, 2003). Researh conducted to explore the effect of fundamental information to stock price at best 100 companies listed in Jakarta Stock Exchange in 2002 ranked by investor magazine. The result showed that net operatingmarging, assets turn over and market value are positively associated to stock price.  2. Research Questions Based on aforementioned descriptions, we develop research questions as follows:   1)   How is companies’s financial performance using Altman approach for banking sectorlisted in Indonesian Stock Exchange?2)   Is there any difference between companies’ stock prices which suffer financialdifficulties and not suffer financial difficulties?  3. Technical Terms Financial distress is a condition which company delisted because of net loss for fewyears, negative equity and merge (Luciana, 2004). It also resulted from debt default(Kahya and Theodossiou, 1999). In the long-run, company’s inability to pay liabilities tothird party because of lack of resources have, it would head to bankruptcy.Few studies have been done to explore benefit of financial ratios to predictcompanies’ financial difficulties as an early warning system. Altman used 66 samplesconsists of 33 companies in bankruptchy and another 33 companies not in bancruptchy.By using Multivariate Discriminant Analysis, Altman discover that profitability, liquidityand solvency ratios to assess bankruptchy in 95 % accuracy rate a year before companies’bankruptchy. This rate is varies in 72 %, 29 %, and 36 % accuracy rate for 2 years, 4years and 5 years before bankruptcy, respetively.Research using 3 syariah banks in Indonesia during period 2005-2007 resulted thatall banks were predicted bankrupt (Endri, 2009 Perbanas Quarterly review??). Anotherresearch regarding bankruptcy prediction were also done (Hadad, 2004; Rahmat 2002.),According to Indonesian Central Bank Rule No. 6/10/PBI/2004 the criterias used forBank Not in Financial Difficulties are capital, asset quality, earning, management,liquidity, sensitivity to market. While Indonesian Central Bank Circular Letter No6/23/DPNP concerning level of financial condition ratings consist of very good, goodenough, less good and not good.Stocks issued by public company as source of funds to finance the operation andinvestment purposes. Stock price can be reflected from company’s financial conditions, itis caused by factors such as fundamental of financial conditions, supply and demand,interest rate, currency exchange, foreign investment in capital market, composite index,news and rumors.  4. Framework of Study Since we pursue for 2 objectives regarding the relative score to determine whetherbanks are categorized in bankruptcy or not and its effect to stock prices, this researchsurely summarized based on previous explanations in introduction and technical terms.  2 nd INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 nd ICBER 2011) PROCEEDING   801  5. Research Methodology Samples used from 18 banks listed in Indonesian Stock Exchange, formerly JakartaStock Exchange, during 2004-2008. Moreover, variables measured are financialperformance using Altman approach and stock prices. Audited financial reports as mainsources in gathering data then used for Altman Z-score financial ratios computation.Selected Banks’ stock prices for those periods are 5 days before to 5 days afterpublication date of financial report.Altman financial ratios comprise:1.  Ratio Working Capital to Total Assets .2.  Ratio Retained Earnings to Total Assets .  3. Ratio Earning Before Interest and Taxes to Total Assets .4. Ratio Book Value of Equity to Book Value of Total Debts .Altman’s formula is explained below:Z-Score = 6.56 WC/TA + 3.26 RE/TA + 6.72 EBIT/TA + 1.05 BVE/BVDThe criteria used to predict financial difficulties are:1. If Z-S core > 2.60 means that bank is not in financial difficulties.2. If Z-S core <2.60 means that bank is in financial difficulties.Formula used for relative stock price is: (Jogiyanto, 2000):R it =   P it – P it-1   P it-1Rit = Realative stock price at certain date.Pit = Stock price at certain date.Pit-1 = Stock price at a day before.Furthermore, average relative stock price for before and after publication date of financial report counted using this formula: Ŷ =   Σ Yn Σ Y = relative stock price before and after publication date. Ŷ = average relative stock price before and after publication date.n = number of daysThe objective of independent t-tes is to compare 2 unconnected groups average inorder to prove whether those have significantly same / different average values.Independent sample t-test then conducted to determine whether 2 independent sampleshave a different average value. Subsequently, that test compares the different between 2average values and error standard. This results show stock prices difference for bankscategorized in and not in financial difficulties. 6. Discussion6.1. Descriptive Statistics. Table 1. Altman Approach Financial Ratios Year Description WC/TA RE/TA EBIT/TA MVE/BVD(%) (%) (%) (%) 2004 Min. -62,30% -15,21% 0,34% 6%Max. 22,75% 5,69% 5,7% 15%Mean -25,67% 1,34% 2,3% 10%2005 Min. -68,32% -13,04% -4,4% 5%Max. 5,4% 7,3% 4,5% 15%
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