BUSINESS RISK, FINANCIAL RISK AND FIRM PERFORMANCE AN EMPIRICAL STUDY OF INDONESIAN MANUFACTURING SECTOR

Introduction: This paper empirically examines the impact of degree of
operating leverage (DOL) and degree of financial leverage (DFL) to firm
performance by using size as control variable. Firm performances used
are return on equity (ROE) and market to book ratio (MTB).
Methods: Statistical tool used is pooled regression while sample used is
all Indonesian manufacturing firms listed in Indonesia Stock Exchange
from 2009-2013.
Results: The findings revealed that high fixed asset firms pose higher DOL
compared to those of lower ones; and highly financial leveraged firms
pose significantly higher DFL compared to those of lower financial
leveraged ones. Further, both DOL and DFL impacting ROE in negative
manner but only DOL is statistically significant, while all variables (DOL,
DFL and Size) impacting MTB in negative manner but only size is
statistically significant.
Conclusion and suggestion: The finding shows that Indonesian stock
market investors do not regard risks as important elements in making
investment decisions. The findings, however, pose a quite low R squared
value of 1.39% for ROE and 2.4% for MTB. This means only those
percentage of ROE and MTB can be explained from the variables used in
this research. Thus, the author encourge more variables should be
included in the future research, including macro economic variables, as it
is one of the key component in firm performance.