Chapter 1. Introduction

Transcription

1 Chapter 1 Introduction 1.1 Background Bankruptcy had been looming in our universe, this implicit on the real economy. In the year 2008, there was a big financial recession in which many stated that this was the greatest financial depression in the United States of America (US). It caused many firms to go bankrupt.. What had caused this financial recession to happen was that there was easy credit condition created in year 2000 to 2003, whereby federal fund rate drop to lowest level and encourage borrowing. Furthermore, the commodity price hit record high, and many countries are seeking more risky asset, where they are available to gain more profit from the different of the interest they earned and offered to their customers. In 2004, the fed decided to increase the interest rate gradually. As there is a rising housing bubble. For the housing bubble, many companies are regarded to be looming in high risk assets in which have high leverage with cash on hand. This is due to the availability of money in the US, companies tend to issue more bonds to get money. How they turn the money into profit was by issuing loan to the customers to buy property. As there was easy excess to cash, hence companies take higher risk by giving many lower income people to own their own house. 1

2 The comparison was in 1990 the debt against the personal income was 77% to 127% in The private debt in the US increases from 123% of Gross Domestic Product (GDP) to 290% in third quarter These looming of debt have a very high risk of companies defaulting. This created a bubble in the US economy. Hence the Federal reserve need to raised rate to help in solving the distress. However is too late and the bubble burst and created the largest recession in history since The Great Depression in 1936 In late 2008, in Indonesian market, Indonesia stock exchange (ISX), one of the biggest caused of financial collapse happened. One of the most traded stocks, both by volume and value of the daily trade, Bumi Resource Tbk where Bakrie & Brothers Tbk as the parent company. In this case, Bumi Resource Tbk has been issuing sub-debt agreement where it is being sold to the securities. However, when the due date was reached, the company was unable to repay the debt and also the interest bearing in the sub debt agreement. This causes many investors to dump the share due to the loss of confidence in the company s future performance in the financial report. This also happen among other Bakrie Group, which is Bakrieland Development Tbk and Bakrie Sumatera Plantation tbk. In the research done by Edward I Altman with Tushar Kant and Thongchai Rattanaruengyot, it studied the caused of bankruptcy and ways to avoid the Chapter 11 which is called bankruptcy protection. This research used method which eventually known as Z-score. It analyst various stand of which indicate the danger of the wrongly manage companies. The research is being done in the US 2

3 in search of identifying signals of which these companies shows before they go bankrupt. In the research done by Nikolaos Eriotis which have a topic of How firm characteristics affect capital structure: an empirical study which concentrate on the Greece companies by comparing the debt ratio of the firms and their growth, which shows no relation between their quick ratio and their interest coverage ratio. Size appears to maintain a positive relation and according to the dummy variable there is a differentiation in the capital structure among the firms with a debt ratio greater than 50 per cent and those with a debt ratio lower than 50 per cent In the research done by Jianguo Chen, Kwong Leong Kan and Hamish Anderson, New Zealand, Size, book/market ratio and riskfactor returns: evidence from China A-share market shows result that the results produced strong evidence that size and book-to-market (BM) ratio could be well explained by these alternative risk variables. Additionally, the alternative variables are better at explaining returns in terms of adjusted R-squares. Investors will be safer with other alternative research in the way assisting lesser risk. Further research done by Mine U_gurlu and Hakan Aksoy, Turkey, Prediction of corporate financial distress in an emerging market:the case of Turkey where it covers the Turkey market. It finds out that The logistic regression model is found to have higher classification power and predictive accuracy, over the four years prior to bankruptcy, than the discriminant model. In this research, the discriminant and logit models identify the same number of significant predictors out of the total variables analyzed, and six of these are common in both. EBITDA/total 3

4 assets are the most important predictor of financial distress in both models. The logit model identifies operating profit margin and the proportion of trade credit within total claims ratios as the second and third most important predictors, respectively Many investors are mostly investing due to rumors and current news activities; hence the most exposure will be on these minor investors. How could this research help to minimize the lost is by reading the financial report of the company, not just by reading the financial repot blindly, but also by using other tools to find the signal of whether there is problem in the company in which not able to be detected from just reading the financial report. The first Asian Crisis that happened in the year 1997 started in Thailand and spread to other countries such as Indonesia and Korea. Indonesia was having a very strong rate against the US dollar hence many companies had been taking many foreign debt which was dominated in the US. As the crises were felt in Indonesia, may companies started to dump the Rupiah and invest in the US dollar, hence those who invested in the Jakarta Stock Exchange, sell their stocks and drop to the lowest in September. Furthermore Moody s downgraded Indonesia's long-term debt to junk bond. As the condition got worse, many companies were hit till they went bankrupt mostly due to the inability to repay their debt on time and with looming interest rates. And in 2001, when the US was hit by the 911 tragedy, it hits the whole world, and many companies that could not manage their finances, were doubt to fail. Many exporters of products to the US were badly hit as the US market 4

5 affected the whole world, in that way, many companies in Indonesia fails to perform. From the above discussion, it is known that the companies in Indonesia Stock Exchange are very vulnerable to the world news and tragedy, hence in this research, the author need to predict the probability of the companies to withstand the future growth. Hence enable the future investors to know which companies to invest in. From the above research, the author would be using Edward I Altman method of calculating the probability of the bankruptcy of the company from happening which is by detecting in early stages, hence able to acknowledge the investors of certain sign of condition of the company. This is also due to the vulnerability of the companies toward anything happen in the domestic or the foreign activities. Data will be used from the companies listed in the Indonesia Stock Exchange which then would select seven out of ten industries. Altman Model consists of 5 variables which will be explained in chapter Scope Based on background section and the title of this thesis paper, the scope determines: Vulnerability of Indonesian companies in facing the economic crisis using Altman Model. Regard with limited and more focused research, the scope involves: The object of this research is publicly listed companies in Indonesian Stock Exchange (hereafter ISX) or Bursa Efek Jakarta (BEJ). The sample will be consisting of those stocks listed in the ISX but not including the finance, property 5

6 and trade industries, taking into account the availability of data, the published financial statements for three years from 2006 to year Banking and property industry have different way of reporting, especially in banking industry, whereby these companies need to file different way of reporting. As for trade industry, companies might operate in many different products. 1.3 Aims and Benefits The aim of this research To evaluate the vulnerability of Indonesian Companies in facing economic crisis using Altman Model ( 1993) Benefits of this research To assist investors in making decision on the companies to invest their wealth Create a fundamental analysis more thoroughly that is by additional formula to further justify the research. To create awareness of the company manipulating of the financial statements 1.4 Hypothesis As there are many companies that collapse in the year 1997 and 2008, for instance in 1997, there are many banks that go to collapse due to over leverage. There was also the same thing happened in 2008, whereby the companies that cause the crisis to impact Indonesia, it started by the Bakrie and Brothers, in which the share it own in its subsidiary was put as a collateral for credit purposes. However, 6

7 when the due date reached, it failed to pay up the interest and collateral, hence losing the investors faith toward Indonesian companies as a whole. From these events, I would consider that, in general, Indonesian companies are not very strong. If my assumption is correct, then we should expect that most Indonesian companies are ranked low in Altman s Z-score. As for the null hypothesis, my assumption would be rejected and the companies in ISX will have a high score in Altman s Z-score. 1.5 Research Methodology The research is an exploratory study and hypothesis testing. The type of investigation on this research is co relational study since the author outlining the important variables associated with the problem. This research applies to the companies being listed in the ISX which consist of seven out of the nine sectors, taking into account the availability of data, the published financial statements for year ended 2006 to The main objective of this research is to clarify the vulnerability of Indonesian companies, within public listed companies in Indonesia Stock Exchange (ISX) in year , in facing economic crisis. The research methodology will be detailed later in Chapter 3. 7

8 1.6 Thesis Structure Writer has defined this thesis into 5 sections, as follows: Chapter 1: Introduction This section covers 5 sub headings including background, Scope, Aims and Benefits, Research methodology, and Thesis Structure. Chapter 2: Theoretical Foundation This section covers theoretical foundation that provides relevant theories and explanations in this research. It will discuss Altman Model. Chapter 3: Research Methodology This chapter clarifies the aims of the research, types and sources of data used in the research, sample and data research of public listed companies in IDX, hypothesis research and development, data analysis method, and data interpretation. The Author would only concentrate 7 out of the 9 Industries Chapter 4: Findings and Discussions This chapter constitutes the center of this thesis that demonstrates and explains the findings and results of this research. It proposes about the analysis of correlation relative efficiency for companies listed in Indonesia Stock Exchange. In which the operation of the companies are in the safe hand or probably in dangerous zone. Chapter 5: Conclusion and Recommendation This final chapter presents the conclusion of this thesis based on research findings along with the recommendation that is useful and is considered for most readers and for any further research to this topic. 8