The Influence Of Distress Risk, Firm Size, And Book To Market Ratio On Stock Returns In Manufacturing Companies Listed On The Indonesia Stock Exchange For The Period 2010-2014

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The Influence of Distress Risk, Firm Size, and Book to Market Ratio on Stock Returns in Manufacturing Companies Listed on the Indonesia Stock Exchange for the Period 2010-2014

Introduction

The Indonesia Stock Exchange (IDX) is one of the largest stock exchanges in Southeast Asia, with a wide range of companies listed across various sectors. The manufacturing industry is a significant contributor to the country's economy, and understanding the factors that influence stock returns in this sector is crucial for investors and company managers. This study aims to identify and analyze the influence of distress risk, firm size, and book to market ratio on stock returns from the manufacturing industry listed on the IDX during the period 2010 to 2014.

Background

The manufacturing industry is a critical sector in the Indonesian economy, accounting for a significant portion of the country's GDP. The industry has experienced significant growth in recent years, driven by increasing demand for manufactured goods both domestically and internationally. However, the industry is also subject to various risks, including distress risk, which can have a significant impact on stock returns. Distress risk refers to the possibility of a financial crisis in a company that can affect its performance. In the context of the manufacturing industry, companies with low distress risk levels tend to be more stable and have good performance, which in turn can increase investor confidence.

Methodology

This study used a multiple linear regression analysis to examine the influence of distress risk, firm size, and book to market ratio on stock returns from the manufacturing industry listed on the IDX during the period 2010 to 2014. The population in this study consisted of all manufacturing companies listed on the IDX. The analysis method used is multiple linear regression with a significance level of 5%. The results showed that simultaneously, distress risk, firm size, and book to market ratio had a significant influence on stock returns from the manufacturing industry listed on the IDX.

Analysis of the Effect of Variables

1. Distress Risk

Distress risk is a critical factor that can affect stock returns in the manufacturing industry. Companies with low distress risk levels tend to be more stable and have good performance, which in turn can increase investor confidence. This shows that investors prefer to invest in companies that have lower risks, thereby increasing stock returns. The results of this study showed that distress risk has a significant positive effect on stock returns, indicating that companies with low distress risk levels tend to perform better and provide higher returns to investors.

2. Firm Size

The size of the company (firm size) is usually measured based on total assets or total income. Larger companies often have competitive advantages, better access to resources, and the ability to survive in uncertain market conditions. In this study, a larger company size contributes positively to stock returns, shows that investors tend to give more value to companies that are larger and more stable. The results of this study showed that firm size has a significant positive effect on stock returns, indicating that larger companies tend to perform better and provide higher returns to investors.

3. Book to Market Ratio

The Book to Market ratio measures the company's book value compared to its stock market prices. A high ratio shows that the stock may be undervalued (lowly valued) by the market, so that it becomes an attraction for investors to buy. This has implications that companies with a good book to market ratio have the potential to provide a higher return along with the improvement of the market value of its shares. The results of this study showed that book to market ratio has a significant positive effect on stock returns, indicating that companies with a good book to market ratio tend to perform better and provide higher returns to investors.

Conclusion

The results of this study provide important insights for investors and company managers in investment decision making. Understanding the effect of distress risk, firm size, and book to market ratio can help in predicting the performance of the shares of manufacturing companies on the Indonesia Stock Exchange. The success of the company in managing risk, the right size, and a good valuation strategy will be crucial in increasing stock returns in the future. Therefore, it is important for investors to consider these factors when investing in the manufacturing sector.

Recommendations

Based on the findings of this study, the following recommendations are made:

  • Investors should consider the distress risk level of a company when making investment decisions. Companies with low distress risk levels tend to perform better and provide higher returns to investors.
  • Investors should also consider the size of a company when making investment decisions. Larger companies tend to perform better and provide higher returns to investors.
  • Investors should consider the book to market ratio of a company when making investment decisions. Companies with a good book to market ratio tend to perform better and provide higher returns to investors.
  • Company managers should focus on managing risk, achieving the right size, and implementing a good valuation strategy to increase stock returns.

Limitations

This study has several limitations that should be noted. Firstly, the study only examined the influence of distress risk, firm size, and book to market ratio on stock returns from the manufacturing industry listed on the IDX during the period 2010 to 2014. Secondly, the study used a multiple linear regression analysis, which may not capture the complex relationships between the variables. Finally, the study did not examine the influence of other factors that may affect stock returns, such as economic conditions and industry trends.

Future Research Directions

This study provides a foundation for future research on the influence of distress risk, firm size, and book to market ratio on stock returns in the manufacturing industry. Future studies could examine the influence of these factors on stock returns in other industries or sectors. Additionally, future studies could examine the influence of other factors that may affect stock returns, such as economic conditions and industry trends.
Frequently Asked Questions (FAQs) on the Influence of Distress Risk, Firm Size, and Book to Market Ratio on Stock Returns in Manufacturing Companies Listed on the Indonesia Stock Exchange

Q: What is distress risk, and how does it affect stock returns?

A: Distress risk refers to the possibility of a financial crisis in a company that can affect its performance. Companies with low distress risk levels tend to be more stable and have good performance, which in turn can increase investor confidence and lead to higher stock returns.

Q: What is the significance of firm size in determining stock returns?

A: Firm size is a critical factor that can affect stock returns. Larger companies tend to have competitive advantages, better access to resources, and the ability to survive in uncertain market conditions, which can lead to higher stock returns.

Q: How does the book to market ratio affect stock returns?

A: The book to market ratio measures the company's book value compared to its stock market prices. A high ratio shows that the stock may be undervalued (lowly valued) by the market, so that it becomes an attraction for investors to buy. Companies with a good book to market ratio tend to perform better and provide higher returns to investors.

Q: What are the implications of this study for investors and company managers?

A: The results of this study provide important insights for investors and company managers in investment decision making. Understanding the effect of distress risk, firm size, and book to market ratio can help in predicting the performance of the shares of manufacturing companies on the Indonesia Stock Exchange. The success of the company in managing risk, the right size, and a good valuation strategy will be crucial in increasing stock returns in the future.

Q: What are the limitations of this study?

A: This study has several limitations that should be noted. Firstly, the study only examined the influence of distress risk, firm size, and book to market ratio on stock returns from the manufacturing industry listed on the IDX during the period 2010 to 2014. Secondly, the study used a multiple linear regression analysis, which may not capture the complex relationships between the variables. Finally, the study did not examine the influence of other factors that may affect stock returns, such as economic conditions and industry trends.

Q: What are the future research directions based on this study?

A: This study provides a foundation for future research on the influence of distress risk, firm size, and book to market ratio on stock returns in the manufacturing industry. Future studies could examine the influence of these factors on stock returns in other industries or sectors. Additionally, future studies could examine the influence of other factors that may affect stock returns, such as economic conditions and industry trends.

Q: What are the practical implications of this study for investors and company managers?

A: The results of this study have practical implications for investors and company managers. Investors should consider the distress risk level, firm size, and book to market ratio of a company when making investment decisions. Company managers should focus on managing risk, achieving the right size, and implementing a good valuation strategy to increase stock returns.

Q: How can investors use the results of this study to make informed investment decisions?

A: Investors can use the results of this study to make informed investment decisions by considering the distress risk level, firm size, and book to market ratio of a company. Investors should also consider the overall performance of the company and the industry trends when making investment decisions.

Q: What are the potential risks and challenges associated with investing in manufacturing companies listed on the Indonesia Stock Exchange?

A: The potential risks and challenges associated with investing in manufacturing companies listed on the Indonesia Stock Exchange include distress risk, firm size, and book to market ratio. Investors should carefully consider these factors when making investment decisions.

Q: How can company managers use the results of this study to improve their company's performance and increase stock returns?

A: Company managers can use the results of this study to improve their company's performance and increase stock returns by focusing on managing risk, achieving the right size, and implementing a good valuation strategy.