Vol 6 cover single

IAMURE International Journal of Business and Management is produced by IAMURE Multidisciplinary Research, an ISO 9001:2008 certified by the AJA Registrars Inc.

Vol. 6 March 2013

and

Editorial Board Editor in Chief Michael C. Cant, Ph. D. University of South Africa, South Africa Associate Editors Nalin Abeysekera, Ph. D. Open University of Sri Lanka, Sri Lanka Tatik Suryani, Ph. D. STIE Perbanas, Surabaya, Indonesia Rommel P. Sergio, Ph. D. Canadian University of Dubai, United Arab Emirates P. Malyadri, Ph. D. Osmania University, India Roel Palo Anicas, Ph. D. Saudi Electronics and Home Appliances Institute, Kingdom of Saudi Arabia Publishing Manager Jony V. Berjes Managing Editor Irish Jane P. Balios Executive Editor Kaye Hazel A. Aunzo Webmaster Lawrence S. Babanto Editorial Consultant Genaro V. Japos, Ph.D.

Aim and Scope The IAMURE International Journal of Business and Management aims to publish new discoveries in Business and Management which are contributed by member researchers from around the world. The IAMURE International Journal of Business and Management is an international peer reviewed journal that provides a venue for scholars to publish their research findings for advocacy and utilization.

IAMURE

International Journal of Business and Management Print ISSN 2244-1492 • Online ISSN 2244-1506

Volume 6 March 2013 © 2013 by IAMURE Multidisciplinary Research All rights reserved.

Table of Contents 1 Management of Credit Activities and their Effects on Commercial Banks’ Credit Risk in Indonesia Emanuel Kristijadi, Ubud Salim, Made Sudarma & Djumahir doi: 21 Sales Impacts of Customer Retention: A Strategic Assessment on Potential Retention of College Students Lindiawati doi: 31 Socio-Cultural Factors Affecting the Market Behavior of Coconut Farmers in Central Philippines Ernesto Go Yap doi: 45 Firm Size as Predictor of Compliance to International Financial Reporting Standards (IFRS) 8 William T. Sucuahi doi: 61 Organizational Crisis: The Incestuous Relationship Between Primary Values, Gaps, Disabled Functions, and Management Failures Sunia Fukofuka doi: 80 The Entrepreneurial University: The Building Block of the Innovation Economy Victorina H. Zosa doi: 93 The High Levels of Professionalism of the Philippine National Police Officers in Southern Mindanao, Philippines Carmelita B. Chavez doi:

105

The Credit Facilities of Moneylenders in a Community in Central Philippines: Experience in a Developing Asian Country Ernesto Go Yap doi:

119

Work Motivation Factors and Attitude towards Organizational Change Alex D. Confesor & Diomedes R. Pechora doi:

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Vol. 6 January 2013 Print ISSN 2244-1492 • Online ISSN 2244-1506 International Peer Reviewed Journal doi: This journal is produced by IAMURE Multidisciplinary Research, an ISO 9001:2008 certified by the AJA Registrars Inc.


Management of Credit Activities and their Effects on Commercial Banks’ Credit Risk in Indonesia EMANUEL KRISTIJADI ORCID No. 0000-0002-6953-8365 [email protected] Brawijaya University, Indonesia UBUD SALIM ORCID No. 0000-0001-6450-2403 [email protected] Brawijaya University, Indonesia MADE SUDARMA ORCID No. 0000-0002-4729-1242 [email protected] Brawijaya University, Indonesia DJUMAHIR ORCID No. 0000-0002-0935-8389 [email protected] Brawijaya University, Indonesia

ABSTRACT The financial institution in any nation has a potential role in the economy but it can also create the risks taken by the borrowers. This study seek to test the effect of policy and credit risk management strategies, quality of human resources, information technology intensity, and moral hazard of lending staff on the credit risk management process. This is positivist approach with qualitative information to 1


support quantitative analysis using 83 respondents of commercial banks (excluding foreign banks), collected by means of questionnaires related to respondents’ perceptions with Likert scale. The analysis was done by using Generalized Structured Component Analysis (GSCA). Results showed that credit risk management policies can improve credit risk management strategy formulation; credit risk management strategies improves credit risk management process quality; the intensity of high IT improves credit risk management process quality; the human resource quality can less improve credit risk management process quality; moral hazard less improves credit risk management process quality; and, the high quality of credit risk management processes can reduce credit risk. It can be concluded that credit risk management process has a significant effect on credit risk. The credit risk management policy and strategy, information technology, and moral hazard are needed to support such process. Keywords – Business and Management, credit risk, Generalized Structured Component Analysis (GSCA), Indonesia Commercial Banks, Indonesia INTRODUCTION The financial institutions have great importance in the economy of any nation. Their role can be paralleled with the blood circulation in the human body systems because their financial resources can encourage the growth of the economy especially for the depositors who need it (Bessis, 2002). Those who have excess fund (surplus unit) will deposit it in the financial institution which is then distributed to the people who need the funds (deficit unit) in the form of loans or credit. Thus, this financial institution has the role to bridge the two sides, in which this financial institution is finally often referred to as a financial intermediary. As such, the commercial banks, as the financial institutions, must be able to maintain public confidence that entrust their funds in savings distributed in the form of healthy credit or other productive assets . The ability to maintain confidence in the banking business is often referred to as an institution that can be trusted that is trust institution. The growth of commercial banks’ business activities in Indonesia increased nearly three-fold in 2011 compared with 2006. This increase was dominated by lending activities with the average of 62% of their total business activities. However, the failure of lending activity management may result in increased credit risk and lead to the failure of the banks themselves. Some research show the importance of managing credit activity and its impact on the potential losses occurring in the bank’s business (Kitua, 1996; Chijoriga, 1997; Brown Bridge, 1998; Leuang, 2001; Jimenez, 2003; 2


Jacobson, 2003; Fatemi A, 2006 , Al-Tamimi and Al-Mazrooei, 2007; Evelyn, etal. 2008). The above studies have also identified the determinants of successful credit management, particularly to avoid potential losses due to credit risk loss. The factors support the successful management of lending activities in terms of aspects presented by Evelyn, et al. (2008), such as the quality of staff and the use of computer technology, as well as the additional component of moral hazard as suggested by Derban (2005). Quality of human resources proposed by previous researchers consists of three factors: knowledge, skills and moral hazard. In this research, the researchers separated the moral hazard from the quality of human resources because this factor is an inhibitor of the credit risk management process, while the knowledge and skills of the staff actually improve the quality of the process. FRAMEWORK 1. Stakeholder Theory The process of credit risk management in commercial banks is actually related to agency theory. For example, Jensen and Meckling (1976) and Eisenhardt (1988) described that the agency relationship occurs when one or more of the owners of capital to ask another person (agent) to carry out activities that suit the owners of capital. In this case, the existence of public funds in the banking business requires management and banking staff consider the interests of stakeholders, thus not only the interests of shareholders. The definition of stakeholder has changed substantially over the last four decades. Shareholders were formerly deemed to be the only stakeholders of the company. This view is based on the arguments presented by Friedman (1984) stating that the company’s main goal is to maximize the prosperity of its owner. He criticizes this view and extends the definition of stakeholder by including some constituents such as groups that are considered unfavorable (adversarial group). These groups are those who have a particular interest and regulators. This criticism resulted in stakeholder theory which then generally deals with the ways that company uses to satisfy the interests of its stakeholders. At companies such as banks, the stakeholder theory has a role more than the agency theory; this is due to the dominant use of public funds in the banking business. This study aimed to examine the model of credit risk management that has been done in previous studies. Yet, this study included aspects of moral hazard as 3


contributing factor that has not been included by other previous researchers. This factor is treated as a contributing factor in the management of lending activities by considering that banking company is a business organization that is closely related to stakeholder theory. This is because of the fact that public funding is more dominant than the paid-up capital funds by the owner. 2. Hypothesis Development The conceptual framework of this study is based on research findings by Evelyn et al. (2008) stating that the implementation of credit risk management system must be preceded by the establishment of credit risk management policy by the regulator. Determining this policy can further affect the strategies applied to a bank’s credit risk management. In this condition, the clarity of credit risk management policies is expected to also clarify the credit risk management strategy in commercial banks. Hypothesis 1: The better regulation and credit risk management policy the more it can improve the quality of credit risk management strategy in commercial banks in Indonesia. Thus, credit risk management strategy affects the credit risk management process which consists of the activities of risk identification, risk measurement, risk assessment, risk monitoring and risk control. The existence of a clear strategy can improve the quality of credit risk management processes(Brown Bridge &Harvey, 1998; Evelyn, et al., 2008). Hypothesis 2: The quality increase of credit risk management strategy can improve the quality of credit risk management in commercial banks in Indonesia Evelyn et al. (2008) argued that the implementation of the good credit risk management process requires supporting factors such as the quality of the staff associated with lending activities, and the use of information technology credit. However, the factor which has not yet been considered by Evelyn et al. (2008) is moral hazard of human resources. In this study, it is included as a contributing factor in the credit risk management. This is due to the character of this factor which is beyond the quality of human resources and the nature of the banking business, as based on stakeholder theory. Therefore, this study is considered to have its novelty for the present findings.

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Hypothesis 3: The high quality of human resources factor can improve the quality of credit risk management processes in commercial banks in Indonesia. Hypothesis 4: The high intensity of information technology usage in credit activities can improve the quality of credit risk management in commercial banks in Indonesia. Hypothesis 5: The low staff moral hazard in credit activities can improve the quality of credit risk management in commercial banks in Indonesia.

Figure 1. Research Framework Concept So, credit risk management process is supported by the policies, strategies and the factors that facilitate the next process that will affect the credit risk (Evelyn et al., 2008; Jacobson & Roszbach, 2003; Brown Bridge & Harvey, 1998). Research by Jacobson and Roszbach (2003) proved that the credit risk management process through assessment by demographic factors and the amount of the loan can reduce credit risk, which is measured by Value at Risk (VaR). Evelyn et al. (2008) also concluded that the credit risk management process can reduce credit risk, as measured by loan losses.

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Hypothesis 6: The higher the quality of credit risk management processes, the higher it can reduce credit risk in commercial banks in Indonesia OBJECTIVES OF THE STUDY This study tries to provide empirical results concerning the effect of policies and strategies of credit risk management strategies, human resources, information technology usage credit, moral hazard and the staff on the credit risk management process and the potential losses due to credit risk in commercial banks in Indonesia. In relation to such attempts, the researcher seek to determine whether: 1) the credit risk management policies have a significant effect on credit risk management strategies in commercial banks in Indonesia; 2) the credit risk management strategies significantly affect the commercial bank credit management process in Indonesia; 3) the quality of human resources in the credit activities significantly affect on the process of credit risk management of commercial banks in Indonesia; 4) the use of information technology in the lending activities significantly affects the process of credit risk management of commercial banks in Indonesia; 5) the moral hazard staff of lending activities significantly affect the commercial bank credit management process in Indonesia; and 6) the credit risk management processes significantly also affect the credit risk in commercial banks in Indonesia? METHODOLOGY The research was conducted using a positivist approach because it is based on the philosophy of positivism that is the approach that has met the scientific principles. Scientific principles in this approach are empirical, objective, measurable, rational, and systematic. A confirmatory method is employed because this study aims to prove or confirm the management of credit activities and their effects on credit risk losses in commercial banks in Indonesia (Sugiyono, 2012). Based on data from the Indonesian Banking Statistics as of December 2011, there were 120 commercial banks in Indonesia (Bank Indonesia, 2012). First, these data were selected by excluding the commercial banks owned by the foreigners (foreign banks) so the sample can be regarded as saturated. Therefore, the foreign banks are excluded from the sample because there is different regulation on capital adequacy against risk between foreign banks and national banks. As such, the total number of sample taken is 110 commercial banks.

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Table 1. Questionnaire grids and validity – reliability tests Variables

Indicators

Credit Risk Management Policy

Limit of Bank tolerance towards credit risk

(X1)

Credit HR quality (X2)

Review of policy assumption on economy policy

Credit staff education Credit staff experience

IT Usage in Credit (X3)

Availability of IT for credit activities

Supports for Credit IT towards decision making Moral Hazard (X4) Staff behavior towards decision making process The appraiser attitude of credit risk towards interest disorder

No. of Item

Pearson Correlation

1

0,927

**)

2

0,880

**)

3

0,909

**)

5

0,923

**)

6

0,866

**)

8

0,868

**)

10

0,898

**)

12

0,912

**)

4

7 9 11

13

0,921

0,835

0,827

0,881

**)

**) **) **)

14

0,892

0,896

**)

15 16

0,915

0,909

**)

17

0,883

**)

19

0,838

**)

18

0,919

**) **) **)

Cronbach Alpha 0,882

0,883

0,620 0,649 0,830

0,772 0,751 0,763

7


Credit risk management Strategy of Risk Management (Y1)

Sound credit risk provision

Selection of credit-risk transaction

Analysis, agreement, and records

Risk management Risk Process (Y2)

**)

21

0,637

**)

22

0,733

**)

23

0,742

**)

25

0,913

**)

24

26

0,714

**)

27

0,886

0,827

**)

28

0,952

**)

29

0,892

**)

**)

30

0,824

31

0,842

**)

Credit risk identification

33

0,803

0,801

**)

34

0,919

**)

36

0,969

**)

Credit risk monitoring Credit risk control

Perception on NPL Perception on PPAP (side fund reserves from the capital)

**) Significant at α = 1%

8

0,813

Credit risk limit determination

Credit risk measurement

Credit risk loss (Y3)

20

32

35 37

38

0,959

0,995

**)

**) **) **)

39

0,903

0,959

**)

40

0,875

**)

41

42

0,853

0,909

**)

43

44

0,856

0,899

**)

45

0,850

**)

**)

**) **)

0,705

0,758

0,888

0,733

0,634 0,919 0,891 0,848

0,709 0,687


Secondly, questionnaires were distributed to all the respondents from September 2012 to December 2012 to the Heads of Credit Division or Head of Treasury Operations Division, Head of Risk Management Unit. Besides that, the questionnaires were improved before they were used as an instrument for data collection. The interview was done with supervisors of commercial banks (Central Bank). Interviewing using the draft of the questionnaire was done to avoid any misperception of the respondents, especially in perceiving the questionnaire items. The selected supervisor as reference at the Central Bank had given that almost all the questions in the questionnaire items using the referral in accordance with the regulations of the Central Bank on credit risk management. The next is the validity and reliability of the questionnaire which was measured on 30 commercial banks before the questionnaire was sent to all respondents. Lattice design questionnaires and their validity and reliability test results are listed in Table 1. Pearson = α correlation coefficients of the items is a significant statement on 1%, which means that there is a significant relationship between the score of the items with a total score of item indicators. Thus, it can be concluded that the research uses valid questionnaires. A Cronbach Alpha coefficient of each indicator in Table 1 also shows a number higher than 0.6, meaning that this research questionnaire is reliable (Sekaran, 2006). The fourth is the analysis technique for testing the hypothesis in which the researcher uses Structured Equation Model (SEM) based on components or variants. The SEM was accompanied by Generalized Structured Component Analysis (GSCA) because this method is related to predictive analytics (predictive models) and this can also be used to confirm the theoretical or empirical models with the data (Ghozali, 2008). Another consideration of the method GSCA is due to the small sample size and the presence of indicator variables to the formative and reflective indicator models (H. Hwang & Takane Y, 2004).

RESULTS AND DISCUSSION 1. Characteristics of Respondents The details of the respondents’ characteristics are presented in Table 2 which shows that there are 64 respondents (77.1%) are male while 22.9% are female. More male respondents are generally more willing to take risks than women. Their courage is needed to face this risk in the banking business in credit activities. This is expected that the bank can earn high incomes. 9


Table 2. Respondents description No

Demographic Factor

Characteristics

1

Sex

male

2

Age group (year)

30 s/d 35

female

36 s/d 40 41 s/d 45

Education

4

Jabatan

64

19 7

11

Percentage 77,1

22,9 8,4

13,3

10

12,0

31

37,3

46 s/d 50

13

55 s/d 60

11

13,3

Strata 1 (S1)/ Graduates

73

88,0

Head of Credit Risk Management

33

39,8

Head of Credit Division

11

13,3

10

12,0

51 s/d 55 3

No. of Respondents

Undergraduate

Strata 2 (S2) Master Degree

Head of Operation Division Head of Treasury Division Head of Branch

4 6

21 8

15,7

4,8 7,2

25,3 9,6

The youngest age of respondent is 33 years old and the oldest is 60 years old. The majority is from 51 to 55 which having a total of 31 people (37.3%) followed by age group in the range of 46 to 50 years that is 13 people (15.7%). Thus, it implies that age is the age at which a person has had a pretty good ability in decisionmaking. The organizational structure of risk analysis is usually based on a five-level organizational model, level 1 executive (chief risk officer), level 2 chief credit officer (CCO), level 3 head of department (HD), level 4 group leader (GL) and level 5 specialists. Such positions in organization generally are gained at the age between 45 and 55. (Oesterreichische National bank and Financial Market Authority, 2004). In the bank credit activities, in general, the ability to take the right decision and the right time is needed. For example, the decisions that could potentially pose a risk of credit failure. The respondents’ education level is dominated by graduate degree (S1) of 73 people (88.0%) followed by masters degree (S2) of six people (7.2%) and undergraduate of four people (4.8%). The distribution of education based mainly on 10


the undergraduate level was considered quite adequate for a person taking a decision related to commercial bank credit activities. Undergraduate level can be regarded capable of providing assistance to a person to take into account the potential risks in decision-making. In this case, there are five groups of respondents, namely; the Head office of the Risk Management Unit (SKMR), head of operation division, head of credit, branch manager and head of treasury. The respondents with the post of credit risk management office has the highest number that is 33 (39.8%) followed by the post of head of operation division that is 21 persons (25.3%). The dominant number of respondents is of the head of credit risk management division because the research questionnaire related to governance risks, particularly the risks associated with credit activities. It is understandable if the next commercial bank officials who are authorized to delegate to the head of credit risk management division for filling up the questionnaires. As based on the description of the respondents who completed a questionnaire, it can be concluded that the questionnaire has been completed by officials in accordance with the purposes of this study. Thus, the analysis generated from this study derived from the information in accordance with the official capacity of filling up the questionnaires. 2. Assumptions Evaluation GSCA The assumption for preparing the GSCA models is represented in a linear relationship between latent variables in structural models. In getting such a representative, it must be proved by Curve Fit with parsimony principle. For example when the linear model is proved to be significant, it indicates that there is a linear relationship among the latent variables. If the linear model is not significant, it is necessary to consider other models of non-linear, i.e. quadratic, cubic, inverse, logarithmic, power, compound, growth, and exponential. The linear relationship among the latent variables can be summed up significantly when the models are nonlinear and not significant (Solimun, 2012). Table 3.Linearity assumption test interrelationship among the latent variables Relationship among Variables

Credit RM Policy

Credit RM Strategy

Credit RM Strategy Credit RM Process

Test Results

Linear model significant, p < 0.05 Linear model significant, p < 0.05

Conclusion

Linear Linear

11


HR Quality

IT Usage

Credit RM Process Credit RM Process

Moral Hazard

Credit RM Process

Credit Risk Process

Credit Risk

The whole model not significant, p > 0.05

Linear

Linear model significant, p < 0.05

Linear


Linear


Linear

The relationship among the five latent variables has a significance level of p 5% for the whole models of the relationship. According Solimun (2012) this results indicate that the relationship among the latent variables in the structural model of this study is proved to meet the assumption of a linear relationship. 3. Measures of FIT The goodness of fit of the structural model is measured through the FIT. There are two sizes, namely (1) FIT which shows the total variance of all the variables that can be explained by the structural model. FIT values are in the range between 0 and 1, and the bigger value of the FIT value the greater the proportion of variables that can be explained by the model, (2) AFIT (Adjusted FIT) is used for model comparison. The biggest model of AFIT can be chosen as a better model. The FIT value of the structural model of this study is 0.399, which means that the model can explain all variants derived from the total latent variables of 0.399. The variability of the latent variables of credit risk management policies, credit risk management strategies, quality of human resources, information technology, moral hazard, credit risk management process, and credit risk can be explained by the model that is of 39.9%, while the remaining 60.1% explained by other variables. The ability to describe of 39.9% means that the model is good enough to explain the phenomenon in this study. The AFIT value indicates that the value that has been adjusted to the variables that affect credit risk losses is not merely one variable. If the terms of the variance AFIT total value of the latent variables of credit risk management policies, credit risk management strategies, quality of human resources, information technology, credit staff, moral hazard, credit risk management process, and credit risk can be explained 12


by the model with 38.7% , while the remaining 61.3% is explained by other variables. The ability to describe of 38.7% means that the model is good enough to explain the phenomenon in study. 4. Hypothesis Testing There are four steps to test the hypothesis using Component Analysis (Solimun, 2012; Ghozali, 2008):

Generalized Structured

I. Design the structural model (relationship between latent variables as described in theoretical framework) II. Construct the path diagram (see Figure 1) III. Convert the path diagram into Structured Equation Model (SEM) There are six relationships on model Figure 1, so there are six hypothesis tested on this research: (a) CRM Strategy = β11.CRM Policy + ε1 (b) CRM Process = β21.CRM Strategy + ε21 (c) CRM Process = β22.HR Quality + ε22 (d) CRM Process = β23.IT Usage + ε23 (e) CRM Process = β24.Moral Hazard + ε24 (f) Credit Risk = β31.CRM Process + ε31 IV. Measures of Fit Goodness of fit of structural model measured by FIT and AFIT (see explanation on Measures of FIT). Path coefficient estimate showed the causality relationship among the variables and these coefficient was significant if the probability value < 0,05. The test of causality relationship among the variables is based on the measures of fit in structural model based on the value of the parameter estimation if significance as in Table 4. Table 4. Coefficient of structural model path Structural Model Path

Credit RM Policy ->Credit RM Strategy Credit RM Strategy ->Credit RM Process

Estimate

SE

CR

Significance

0,886

0,026

34,72*

Significant

0,474

0,215

2,21*

Significant

13


HR Quality ->Credit RM Process IT Usage ->Credit RM Process Moral Hazard ->Credit RM Process Credit RM Process ->Credit Risk

CR* = significant at .05 level

-0,090 0,438 -0,231 -0,530

0,072 0,158 0,099 0,087

1,26 2,78* 2,33* 6.10*

Not Significant Significant Significant Significant

The value of the parameter estimation of credit risk management policy influences the credit risk management strategy is 0.886 with a standard error of 0.026 so as to obtain Critical Ratio (CR) of 34.72. This CR value is significant at the 95% degree of confidence. Therefore, it can be stated that the credit risk management policy has a positive and significant effect on credit risk management strategy. Thus the first hypothesis (H1) is accepted. The value of the effect parameter estimation of credit risk management strategy towards credit risk management process is 0.474 with a standard error of 0.215 so as to obtain a CR of 2.21. This CR value is significant at the 95% degree of confidence. For that reason, it can be concluded that the credit risk management strategy has positive and significant effect on credit risk management process. This can be inferred that the second hypothesis (H2) is also accepted. The value of the effect parameter of the credit human resources quality towards management process of credit risk is -0.090 with a standard error of 0.072 so as to obtain a CR of 1.26. This CR value is not significant at the 95% degree of confidence. Therefore, it can be judged that the credit quality of human resources has a negative effect and not significant towards the credit risk management process. So, it can be concluded that the third hypothesis (H3) is rejected. The value of the effect parameters of the IT usage in credit activities towards the credit risk management process is 0.438 with a standard error of 0.158 so as to obtain a CR of 2.78. This CR value is significant at the 95% degree of confidence. Thus, it can be stated that the IT Usage in credit activities has positive and significant effect on credit risk management process. For that reason, it can be concluded that the fourth hypothesis (H4) is also accepted. The value of the effect parameter of staff moral hazard of credit activities on credit risk management process is -0.231 with a standard error of 0.099 thus it obtains CR by 2.33. This CR value is significant at the 95% degree of confidence, so it can be concluded that the staff moral hazard in credit activities has a significant and negative effect on the credit risk management process. Therefore, it can be concluded that the fifth hypothesis (H5) is accepted. The value of the effect parameter estimation of credit risk management process towards credit risk losses is -0.530 with a standard error of 0.087 so as to obtain a CR 14


of 6.10. This CR value is significant at the 95% degree of confidence. Thus, it can be judged that the credit risk management process has a significant and negative effect on credit risk. It can also be concluded that the sixth hypothesis (H6) is accepted. Tabel 5. R Squared Latent Variables Latent Variables

R2

Credit RM Strategy

0,785

Credit RM Process

0,728

Credit Risk

0,281

The R2 endogenous latent variable in the structural model of this study are credit risk management strategy variable (Y1), credit risk management process (Y2) and credit risk losses (Y3). Latent variable of credit risk management strategy is affected by credit risk management policy and parameter estimation shows significant results on the degree of confidence of 95% corresponding to the conclusions derived from testing the first hypothesis. The variability of credit risk management strategy can be explained by credit risk management policy of 78.5% while the remaining 11.5% is due to other variables. The latent variable of credit risk management process is influenced by the other four latent variables, namely; credit risk management strategies, credit human resources quality, IT usage, credit staff moral hazard, and credit. Parameter estimation for the variable of human resources quality shows significant results, whereas for the latent variables of credit risk management strategies, the IT usage, and the moral hazard of credit staff show significant results with the degree of confidence of 95% corresponding to the conclusions derived from testing the second hypothesis to fifth hypothesis. Credit risk management process variability can be explained by the four latent variables of 72.8% while the remaining 27.2% can be due to other variables. The latent variable of credit risk is influenced by the process of credit risk management and the parameter estimation shows significant results on the degree of confidence of 95% corresponding to conclusions derived from the sixth hypothesis testing. The variability of credit risk losses can be explained by credit risk management process that is at 28.1% while the remaining of 71.9% must be due to other variables.

15


5. Implications of Research Findings It can be stated that this study confirms the stakeholder theory in which it obligates the bank officials to have good morals that each party’s interests is accommodated and fulfillment of each party’s satisfaction is met as well. The policy and strategy of credit risk management can be viewed as a limitation that bridges the interests of the owners of capital and that of management. The policy and strategy that the parties have agreed should include risk limits that can be taken by the management. By doing so, when there is a loss in business activity, the loss is still within acceptable tolerance of limit by the owner or the owner’s equity funds. On the contrary, according to the agreed tolerance of the limits, management must also be able to provide a profit target which has been adjusted to limit the risks. Besides the above evidences, this study also proves the need for structured policy and credit risk management strategy for the benefit of management in carrying out banking business and the interests of commissioner to control the management. All banks have a credit risk management policy and have been translated in the form of credit risk management strategy. Yet, a review of the assumptions used in the preparation of policies and strategies still have to be increased more and more, especially the review of assumptions by paying attention to the change of international economic conditions. Although the banks are categorized non-foreign bank status, they do not conduct foreign transactions. In that case, they should consider the changes in the international economic situation. They are required to do so because they should consider its impact. Such foreign transaction, in international economy, has impact on the domestic one and the profile of their debtors. When their debtors do some activities with international business, such activities will affect these banks. Eventually, this can also make their credit problematic. Moral hazard becomes important factor for banking business because business funds are owned by the public rather than the owners’ equity. Therefore, the staff and the owners have obligation to manage this fund for the responsibility towards the public. Otherwise, the public will not trust on them; hence, the business will not become sustainable. For example, when there is a rush by the fund owners, it may also cause systemic risk. Thus, good morals from the credit staff are also more important than education level. In addition, the banks must have code of ethics for making their staff incapable of moral hazard. Credit risk management process should be implemented consistently in four stages, namely; the identification of credit risk, credit risk assessment, credit risk monitoring, and credit risk control because there are still weaknesses in the measurement and monitoring of credit risk. The implementation of credit risk management process in 16


accordance with the guidelines and criteria should be established to prevent the bank from the number of non-performing loans (non-performing loans -NPLs) and the high cost of the allowance reserve assets (PPAP). Thus, the credit risk losses can be kept as minimum as possible. The process of sound credit risk management affects the obligations of minimum capital (Capital Adequacy Ratio-CAR) which is not too high. It should be noted that the Central Bank of Indonesia has set the Regulation. 14/18/PBI/2012 dated 28 November 2012, in which the CAR regulation is met by commercial banks and it will be added according to the risk profile (Bank Indonesia, 2012 a). If a bank’s risk profile is under valued or in the rank of five, the bank does not need to provide additional CAR so that the ratio remains 8%. This bank with high risk profile, must be charged a CAR to 11% -14%. This study and the regulation stipulation provide contribution to the risk management of banks, so the banks can manage their business without additional CAR. Finally, considering the limitation of the research method, it can be asserted as the following. First of all, the measurement of moral hazard is limited to the respondents’ perceptions of the attitudes and behavior of the credit division’s staff. Yet it is not the result of observation. Besides that, such a condition has other consequences. For example, moral hazard assessment by respondents can be influenced by the quality of the relationship between the respondents and the subordinates. CONCLUSIONS The existence of credit risk management policy can be used to bridge the interests of capitalists and owners. Management of funds and policy improve the quality of credit risk management strategy. In addition, credit risk management strategy is the implementation of commercial bank credit activities that can improve the quality of credit risk management process, although there are still weaknesses in the aspects of assessment towards the debtors’ ability to pay. The quality of human resources in credit activities as reflected by education and experience is considered less supporting for the implementation of quality management processes of credit risk in commercial banks in Indonesia. However, moral hazard of credit staff is reflected through behavior and attitude of the staff when providing support to the credit quality of the credit risk management processes in commercial banks in Indonesia. The IT of credit activities should be implemented by the commercial banks in Indonesia to improve the quality of credit risk management processes. Management information system (MIS) integration into the credit risk as core banking system 17


better supports the implementation of credit risk management processes. Therefore, high quality of the implementation of credit risk management, which includes the stages of identification, measurement, monitoring and control of credit risk, can reduce credit risk. ACKNOWLEDGMENT The researcher would like to thank all the respondents who had been willing to complete the questionnaire and provide information about the management of the bank credit activities where they work. The researcher also thank the promoters for their guide and research ideas, and also to all who had indirectly helped the completion of this study. LITERATURE CITED Al-Tamimi, H.A. and Al-Mazrooei, F.H. 2007 Bank’s Risk Management : a comparison study of UAE national and foreign banks. The Journal of Risk Finance, Vol. 8, No. 4, pp. 394 – 409. Bank Indonesia 2012a Peraturan Bank Indonesia Nomer 14/18/PBI/2012 tentang Kewajiban Penyediaan Modal Minimum Bank Umum, Bank Indonesia. Bank Indonesia 2012b Statistik Perbankan Indonesia, Bank Indonesia, Vol. 10, No. 1, Pebruari 2012 Bessis, J. 2002 Risk Management in Banking, 2nd edition, John Willey & Sons, Ltd., West Sussex, England Brown Bridge and Harvey 1998 Financial Distress in local banks in Kenya, Uganda and Zambia : causes and implications for regulatory policy. Development Policy Journal, Vol. 16, No. 2, pp. 173 – 189.

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Chijoriga 1997 Application of credit scoring and financial distress prediction models to commercial banks lending : the case of Tanzania, PhD dissertation, Wirts Chaftsnnversitat Wien (WU), Vienna. Derban W.K., Binner J.M., and Mullineux 2005 Loan repayment performance in community development finance institutions in the UK, Small Business Economic, Vol. 25, pp. 319 – 332. Eisendhart K. 1988 Agency and institutional explanations of compensation in retail sales. Academy of Management Journal, Vol. 31, pp. 488 – 511 Evelyn, R, Chijoriga and Erasmus, K. 2008 Credit Risk Management System of a Commercial Bank in Tanzania, International Journal of Emerging Markets, Vol. 3, No. 3, pp. 323 – 332. Fatemi, A. and I. Fooladi 2006 Credit Risk Management : a survey of practices, Managerial Finance, Vol. 32, No. 3, pp. 227 – 233. Freeman, R. E. 1984 Strategic Management : A Stakeholder Approach, Pitman Publishing Inc., Boston. Ghozali, I. 2008 Generalized Structured Component Analysis (GSCA). Model Persamaan Struktural Berbasis Komponen.Semarang: Badan Penerbit Universitas Diponegoro Hwang H. and Takane Y. 2004 Generalized Structured Component Analysis. Psychometrika, Vol. 69, pp. 81 – 99. Jacobson, T. and Roszbach, K. 2003 Bank lending policy, credit scoring and value-at-risk, Journal of Banking & Finance, Vol. 27, pp. 615 – 633.

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Jensen, M.C. and Meckling, W.H. 1976 Theory of The Firm : Managerial Behavior, Agency Cost and Ownership Structure. Journal of Financial Economics, Vol. 3, No. 4, pp. 305 – 360. Jimenez, G and Saurina, J. 2003 Collateral, type of lender and relationship banking as determinants of credit risk, Journal of Banking & Finance, Vol. 28, pp. 2191 – 2212. Kitua. D.Y. 1996 Application of multiple discriminant analysis in developing coomercial banks loan classification model and assessment of significance of contributing variables : a case of National Bank of Commerce, MBA Thesis, UDSM, Dar es Salaam. Leuang, W.K. and Lai, K.K.. 2001 Improving the quality of the credit authorization process : A quantitative approach, International Journal of Services Industry Management, Vol. 12, No. 4, pp. 328 – 341. Oesterreichische Nationalbank (OeNB) and Financial Market Authority (FMA) 2004 Guidelines on Credit Risk Management : Credit Approval Process and Credit Risk Management, Oesterreichische Nationalbank, Vienna, Austria. Sekaran, U. 2006 Research Methods for Business : A Skill – Building Approach, John Wiley & Sons Inc, New York. Solimun 2012 Pemodelan Struktural : Generalized Structured Component Analysis GSCA. Program Studi Statistika Jurusan Matematika FMIPA Universitas Brawijaya Malang. Sugiyono 2012 Metode Penelitian Kombinasi (Mixed Methods), Penerbit Alfabeta, Bandung.

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Sales Impacts of Customer Retention: A Strategic Assessment on Potential Retention of College Students LINDIAWATI ORCID No. 0000-0003-4498-3208 [email protected] STIE Perbanas Surabaya, Indonesia ABSTRACT Assessing the potential retention of newly recruited students especially those of the private colleges is important since the students may decide to leave for other colleges or universities at the beginning semester. This study is to evaluate the potential retention of college students newly recruited by a college. This research surveyed 112 new students of STIE Perbanas Surabaya. The sampling was convenient sampling technique. The questionnaire was mostly filled up by the students from out of East Java especially out of Java Island. It was analyzed using descriptive statistic, Excel of Microsoft 2007. The results showed that a) 100% of students are willing to make positive word-of-mouth advertising; b) 96.1% showed that they often talked about positiveness of their college; c) 93.5% showed that they often heard from other students on the positiveness of their college; d) 93.1% students are willing to help in promotion activities; 83.7% showed that they were happy in studying in the college. This internal survey is a strategic business analysis since the result of the research is a substance that should strategically be analyzed for the top management consideration in issuing policies for the college sustainability. KEYWORDS Marketing Management, Customer retention, Sales Impacts, Customer Value Analysis, College Students Retention, strategic business, descriptive research, Surabaya, Indonesia 21


INTRODUCTION Sales is the most expected result of any business operation since it leads to a profit which is the end-purpose of that business. The sales impact results to the sustainability of a business. Since sales impact is very important for the business sustainability and growth, the factors leading to sales must be carefully built. One important main factor of sales is the existence of customer value. In customer value analysis (VCA), a business must be aware of customer’s loyalty, since customer’s loyalty in turn will improve the sales. So, if a business is able to assess its customer’s loyalty, it can help hold its business sustainability and growth. To assess the loyalty of the customers is by knowing their main actions of higher-volume-purchasing over time and their participating in positive word-of-mouth (WOM) advertising. In higher education institution (HEI), although it is not a profit-oriented organization, it refers to the same pattern as that referred in profit-oriented business. Since HEI’s external customers is its students, so the focus of the assessment is the students. Assessment to HEI students ideally must be done at the early part of the semester. If Indonesia, the system of recruitment of new HEI students welcome the condition that the students do not feel happy and confidence with the HEI they can take the second chance in the following year by registering to other HEI. This phenomenon is worrying the abandoned HEI. That’s why the HEI must assess its new students to know their loyalty or the student retention rate since if they show loyalty it means the sales impact for the HEI sustainability is good. HEI sustainability is measured by the potential supply of new intake of students. In STIE Perbanas Surabaya, Indonesia, where the research was done, the leaving rate of the students has been increasing for the last three years and the average rate of loss of the students at the first semester has been 2.4%. To assess the retention of the students, a survey was done by approaching the new students to know their willingness to pay more for another optional program and participating in word-ofmouth (WOM) advertising. FRAMEWORK This study is framed by the concepts of customer value in which it strongly argues that the logic of customer value is the fact that customer retention is much more profitable than continually targeting new customers. It is good to attract new customers, but holding the existing customers ismuch more important because new customers are bearing possibility of alienating the product they have bought while the existing customers are those that have already been within the company’s point of 22


the product function (Fleisher and Bensaussan, 2003:183). In the case that the customers are the students of an HEI, the college must hold them for the study until they graduate. The concept of making customer loyal is also accepted since the graduate can make positive word-of-mouth advertising and recommend the college to other people. These loyal customers also show that they are willing to purchase more volume of products. In this study, the more purchase made is that referring to the students’ more taking on the extra programs that they have to pay beside the one that has already been paid. Customer Value Customer value sources are from three sources namely the mass production, the uniqueness of the product and, the last one is the easy access or the product availability (Pearce, I. I. JA and Robinson, RB, 2003: 87). These three aspectsare wrapped with innovations. Innovation can go to the level of developing the existing product by adding some attributes on it (Cooper, Robert G,1993:11-14). From this aspect, it is beneficial that the company focus on the customer’s process that cover the company offering to the customers, addressing customers’ problems, and the outcome oriented indicator that the customers want to achieve after purchasing the company product (Werner and Wolfgang, 2008: 93).So, the company must trace back on what strengths it has in a business and what are the weaknesses of the business. That’s why a business tries to provide and offer its customer value to the customer. Value is in the form of good service, good prices, and the place. Then customer value refers to efforts to evaluate customers, competitors and market. It is used to build customer loyalty to maximize customer retention (Bensaussan, 2010:180-182). The key to build loyal customers is to create and offer superior customer value and satisfaction. Satisfied customers are more likely to be loyal and lead to the profitable share to the company (Armstrong and Kotler, 2011:41). Customer value analysis is used to build customer loyalty to maximize customer retention and to pursue profitable growth (Fleisher and Bensaussan, 2003:184) Customer Loyalty Customer loyalty is formed by the company’s efforts to delight its customers. In turn, delighted customers remain loyal and talk favorably to others about the company and its products (Armstrong and Kotler, 2011:48), although the loyalty of the customers varied (Armstrong and Kotler, 2010: 193). In the context of this study, customers’ loyalty is the students’ loyalty that is also the students’ retention. In HEI, 23


the normal duration of study is four years or eight semesters. When the students finish their study, these graduates are not the customers of the college anymore, but in wide concept of customers, customers are any party having to do with the company’s business. The contribution of these graduates are even more valuable compared to those who are still studying with the college, because they have finalized the study so they are considered to have had full experience with the college services. If this group of customers experience favorable points, they even will continue showing favorable points by spreading positive comments on the college to other people or recommending other people to come. Loyal customers increase sales through word-of-mouth advertising, often to individuals that share similar profiles so this can make the company profitability growing (Lamb et al, 2009: 415). Loyal customers tend to produce positive word of mouth advertising. Another favorable point is that the students tend to purchase higher volume of products. When students take or join non-obligatory programs this shows that they do more than the obligatory ones. Sales Impact Sales impact strongly refers to the concept of loyalty since loyal customers tend to purchase higher volume over time. This means that when they purchase more product volume, they increase the sales. Loyal customers also tend to increase sales through word-of-mouth advertising (Fleisher and Bensaussan, 2003:184). So, purchasing more volume of products and word-of-mouth advertising are two main triggers for the good sales for the company (Solomon, 2012: 380). In the context of this study, sales impact can be seen from the fee of the students and their joining other extra programs in which they have to pay. In fact, the main impact is on the positive word-of-mouth advertising and recommendation for the new coming students, because students have their own normal study time or duration, theydo not possibly stay long with the college like other customers buying goods and services. OBJECTIVES OF THE STUDY The objectives of the study may fall into two aspects, namely:a) to assess the new students’ retention; and b) to predict the potential picture of the sales impact of this retention for the sustainability of the college.

24


METHODOLOGY Research Design The framework for conducting the research shows the procedures for obtaining the information needed to solve the research problems. This research is a descriptive research since it describes a certain characteristics of loyal customers (students) in a business and banking college. By descriptive research, it is expected to get the estimation of the loyal students (retention rate) and the estimation of the sales impact. The method of data collection is using survey by surveying the new students of the first semester of the college using a questionnaire (Malhotra, 2010: 102-106). Subjects of Study Sample was taken among the population of all new students using judgmental sampling technique which is the group of the new students coming from out of Java. The respondents are the new students because they are in the orientation period or in an adaptation socially and academically. They should be assessed whether they can adapt, they have higher expectation in line with their study, and whether they are willing in participating in positive word-of-mouth advertising. If those points show good score then it is predicted that the sales impact of the college is good since they will stay.This may result to high retention rate, more optional program with the college, and promoting the college. This research also used 112 sample respondents that were mostly the students from out of Java because it is assumed that normally the students from out of Java by bearing different cultures need to take heavier adaptation compared to those from Java. If they show that they are happy and able to adapt, they feel confident, they can keep up with the academic activities. It means that they potentially will stay with the college until they finish their study successfully. The Instrument of Analysis Retention rate is measured by two main aspects which are purchasing higher volume over time as their confidence in the college grows and to make positive wordof-mouth advertising. Measuring the purchase of higher volume in this case was done by asking the respondents on the possibility of them to join optional programs offered by the college in which they have to pay, namely joining internship program, joining auditing student program, and taking certification-based courses. In measuring the students’ loyalty the indicators are whether the students are willing to help promote 25


the college, willing to make positive word-of-mouth advertising, talking positive things about the college, hearing that other students talk about positive things on the college, having been recommended by others to register to the college. Table 1. The Framework of the Research Instrument Loyalty

Indicators Intention to join Internship program Purchasing higher Intention to auditing student program volume Taking certification-based courses Intention to help promote the college Intention to make positive WOM advertising Intention to talk positive things about the college WOM advertising Intention to recommend the college to others Hearing other students talk positive thing about the college Has been recommended by others to register at the college Data Analysis (The Procedure) RESULTS AND DISCUSSION Purchasing Higher Volume Achieving good response of customers is not that easy, never mind getting their loyalty. Schneider and Hall (2011: 21) stressed their statement that even leading firms are not easy to take and maintain market response and loyalty. Numerous factors can cause the failure of product especially the new ones, most of them is the lack of preparation to market them. Based on this research, the aspect of purchasing higher volume does not support the student loyalty. The mean score of the three questions do not show good or achieving score 4, as well as that the percentage of the student contributing in answering the high score are not many, it is about 15%. Intention to join internship program, auditing student program, and taking certificate-based courses should be re-packaged by the institution to encourage the students’ proud and further become positive word-of-mouth promotion. Although one of the indicators namely the willingness to take certification-based courses showed a very good result, namely 91% of them would like to take additional program in the college, namely taking certification-based courses. This score is extremely higher than the other two is considered logical since this certification 26


closely related to the academic competence, while the other two are less academic. So although only one indicator is showing high score but still it can be assumed that the students have a very good intention to get more programs to support their academic performance and achievement. This effort to make the students as the customers satisfied and have dependency on the school is very important since is very much strategic of having key customer dependency that according to Olson et all (2008: 51) that 6% of the key customer dependency is within the 70% of strategic action. So the implication of this result of this research is that maintaining students as the customers must be strategically considered and sustainably prepared, so they will have high dependency to the institusion. Table 2. The aspects of retention Aspects of Retention

Score

Purchasing Higher Volume

Percentage of Respondents’ Contribution

Intention to join internship program

3.85

15%

Intention to join take certification program

3.96

91%

Intention to join auditing student program

3.90

14%

Average score

3.90

WOM Advertising:

Intention to help promote

5.00

93%

Hear positive WOM from other students

4.22

93.5%

Intention to talk something positive on the college

4.44

100%

Having been recommended

4.00

91%

Will recommend

4.00

92%

Average score

4.33

Word-of-mouth (WOM) advertising The result of the analysis referring to the word-of-mouth advertising is good (4.33). All mean scores showed scores that are 4 and above 4. This means that the students are supporting the word-of-mouth advertising, even indicator number two on the positive WOM from other students showed the score of 4.22. The indicator of the possibility of the student to help promote the college and that they have been talking something good about the college to other people or 27


other students showed the mean of 5.00 and 4.44, respectively. This assumes that the student have been satisfied with the college they experience during the first semester. If they are happy and satisfied with the process and condition in the college, they will potentially be loyal or staying with the college until they finish their study. Referring to the indicator of the students “have been recommended by others” that can be their family, relatives, teachers and friends, (4.00). This means that the people giving recommendation to the respondent or the students to register to the college have a positive attitude, experience, and findings about the college. So they shared their positive experience and attitude to the students. This is like a past situation that is explored to the now situation. The last indicator referring to the intention of the students to recommend the college to other people that can be their family, relatives, neighbor, and friends showed that the future prospect of the college is good in term of the sustainability of the new students going to the college. CONLUSIONS The study concludes that: 1. Purchasing higher volume based on the point of view of the score is good, but if it is received from the percentage of the students who have intention to join the program, then the result is not good. 2. The students have positive word-of-mouth advertising. In this case, the new students showed that they will potentially be loyal to the college so this leads to the high student retention. ACKNOWLEDGMENT This study is conducted to analyze the sales impact of the new students of STIE Perbanas Surabaya. So I would like to thank the team of STIE Perbanas Public Relations that helped a lot in doing data collection. My gratitude is also to Dr. Djuwari who has led the way to ICHER research community as well as the Cooperation department and the Research Center of STIE Perbanas Surabaya for their support in managing the research and cooperation with industry.

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LITERATURE CITED Cooper, R. G. 1993 Winning at new products: Accelerating the Process from Idea to Launch (2nd ed.). Massachusetts: Addison Wesley. Fleisher, C. S., and B. E. Bensoussan 2003 Strategic and Competitive Analysis: Methods and Techniques for Analysing Business Competition. New Jersey, USA: Prentice Hall. Garry, A. and P. Kotler 2000 Marketing: An Introduction. New Jersey: Prentice Hall. Garry, A., and P. Kotler 2011 Marketing: An Introduction. Tokyo: Pearson. Lamb, C. W., Hair Jr, J. F., and C. D. McDaniel 2009 Essentials of Marketing. Mason: South-Western Cengage Learning. Malhotra, N. 2010 Marketing Research (6thed.).New Jersey: Pearson. Olson, Matthew S, Bever, Derek Van & Verry, Seth 2008 “When Growth Stall”. Harvard Business Review, March (p.50-61).Boston, Massachusetts: Harvard Business School Publ. Corp. Pearce, I. I. J.A., and R.B. Robinson 2003 Strategic Management: Formulation, Implementation, and Control(8thed.). Boston: McGraw Hill. Reinartz, W., and W. Ulaga 2008 ”How to sell services more profitably”. Harvard business review, 86(5), 90.Boston, Massachusetts: Harvard Business School Publ. Corp. Schneider, Joan and J. Hall 2011 “Why Most Product Launchs Fail”. Harvard Business Review, April (p.2123).Boston, Massachusetts: Harvard Business School Publ. Corp.

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Solomon, M. R., Marshall, G. W. and E. W. Stuart 2012 Marketing: Real People, Real Choice. Tokyo: Pearson.

Pursuant to the international character of our publications, IAMURE journals are indexed by the following agencies: (1) Thomson Reuters Journal Masterlist Zoological Record, (2) Public Knowledge Project, a consortium of Simon Fraser University Library, the School of Education of Stanford University, and the British Columbia University, Canada; (3) Philippine E-Journals; (4) Google Scholar; (5) Scholastica; (6) Index Copernicus; (7) Proquest; (8) Researchgate. 30



Socio-Cultural Factors Affecting the Market Behavior of Coconut Farmers in Central Philippines ERNESTO GO YAP ORCID No. 0000-0002-6826-194x [email protected] University of the Philippines – Cebu ABSTRACT In a competitive market, both suppliers and buyers behave with the aim of obtaining the most concession from the other. There are situations wherein one party benefits more than the other, resulting in unfavorable outcomes for the latter. The study explored the socio-cultural factors that affect the market behavior of coconut farmers, in an attempt to rationalize why coconut farmers are poor. This study is conducted in the Municipality of Bacong, Negros Oriental in the central part of the Philippines. Themes in the study included decision-making, division of labor, urban migration, and relations with other stakeholders as well as the impact to the local ecology. This study was conducted using qualitative research techniques that included key informant interview, participant observation, and focus group discussion. The findings show that the productive capacity of coconut farmers are limited, if not decreasing and are more influenced by the socio-cultural factors that govern the farmers’ life situations, than by the market prices of coconut meat. The farmers are price takers of the coconut meat they produce and sold. Productivity and income of small coconut farmers are expected to deteriorate together with vast agricultural lands becoming idle and barren, unless government interventions are enhanced, and young professionals are encouraged to return to the farms. KEYWORDS Socio-cultural factors, market behavior, decision-making, coconut farmers, descriptive design, Philippines 31


INTRODUCTION The Philippines which produced more than fifteen million tons of coconut in 2009 is second only to Indonesia (21 million tons) in the world. The production of dried coconut meat, or locally termed as copra, is one of the Philippine’s dominant industries. Dried coconut meat is processed into coconut oil. In 2009, the country ranked as the foremost producer of coconut oil (1.69 million metric tons), with Indonesia ranking the second (UNCTAD). In 2009-2010, there were about 341 million coconut trees in the Philippines with an annual average produce of 15.54 billion nuts. Areas planted with coconut trees comprise about 26% of the total agricultural land in the country. About 24 million Filipinos directly or indirectly benefit from the coconut industry, and there are about 1.5 million coconut farmers (Philippine Coconut Authority). The current average production is about 700 kilograms to 800 kilograms of copra per year per hectare. If the price of copra is P20 (USD 0.46) per kg, the annual income of the Filipino copra farmers is only between P14,000 (USD 3265.60) to 16,000 (USD 372.00) per hectare assuming that the land they are farming is theirs. This leads to the fact that the coconut industry has a high incidence of poverty among coconut farm families. It is claimed that about 90% of coconut farmers live below the poverty line. This low productivity can be attributed to the following: (1) senility of coconut trees, (2) widespread use of poor or low-yielding coconut varieties due to lack of quality coconut seedlings, (3) poor agronomic or farm management practices, (4) unabated cutting of coconut trees in view of the good market for coco lumber, (5) poor soil nutrition, (6) incidence of pests and diseases, (7) natural calamities, (8) land conversion of coconut lands, and (9) lack of sustained and adequate resources for infrastructure support, research and extension services especially in the continuing value formation, technical skills, and entrepreneurial skills development of small coconut farmers (Aragon, 2000: 31-32). Furthermore, the majority of the producers are small-scale coconut farmers. Their average landholding is between 1.5 to 3 hectares. These farmers do not have adequate capital to invest in modern coconut varieties and cannot afford to wait for the seven years maturation of coconut trees that replanting requires (Aragon, 2000: 33). Numerous interventions, in both technical and financial schemes, had been provided by the government to enhance farmers’ knowledge and skills to enable them to achieve higher income levels. One such program, the Maunlad Na Niyugan Tugon sa Kahirapan Program, was launched in 2000. The stated objective was to increase coconut farmers’ income from P10,000 to P50,000 per year, through an efficient integrated coconut-based farming system. The components of this program 32


included: (1) identification, selection and establishment of model coconut farms, (2) training and socio-institutional development services, (3) technology and farm development assistance, (4) livestock, poultry and fingerlings dispersal, (5) credit support, (6) irrigation and infrastructure support, (7) market assistance, (8) information support, (9) institutional networking and linkage, (10) planning, policy and project development support, (11) program monitoring and evaluation, and (12) research and development support (Department of Agriculture, 2000). Undeniably, however, and as state above, most farmers in the Philippines remained poor. According to a member of the House of Representatives (Romero, 2010), the average income of a coconut farmer is only P3,000 per month, assuming he owns 2.4 hectares of coconut farm land. He also claimed that the highest incidence of poverty in the country is situated in many coconut producing provinces and regions. Various technical and economic approaches have been employed to increase farmers’ income, but these have not produced a significant impact on the lives of farmers and/or the sustainability dimension has not been addressed. This study intends to show that copra farmers are poor not because they do not know how to produce more copra in times of high prices but because their production of coconut meat is predominantly limited by the socio-cultural factors that govern their daily life - as argued by Karl Polanyi (2001: 46). FRAMEWORK As early as in 1940, Herskovits (1940: 488-89) wrote that economic elements in a society can never present significant if adequate explanations to human problems. This was in contrast to the predominant claim during those times – that behavior in the market place is influenced by economic forces, and specifically the incentive or motivation to produce more or to produce less lies in the price of the product. Herskovits also argued that the value of an economic transaction is only seen in relation to the body of traditions that govern the people in the society (p.237). In The Great Transformation, Polanyi (1886-1964) gave the most powerful critique against market liberalism – the belief that both national societies and the global economy should be organized through self-regulating markets (Block 2001: xviii). Polanyi maintained that the study of the economic aspects of any society should stress the role of its culture, its institutions and its history. The essence of his work argued that: The outstanding discovery of recent historical and anthropological research is that man’s economy as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interest in the possession of material goods; he acts so as 33


to safeguard his social standing, his social claims, and social assets. He values material goods only in so far as they serve this end (Polanyi 2001: 46). Polanyi focused his works on how human beings organized themselves to deal with material aspects in life. He studied how markets, trade and economic institutions affect the lives of human beings (Fernandez & WJunisKi 2010: 422). Economists might regard the economy as being embedded in the social relations. But for Polanyi, social relations are embedded in the economic system (Fernandez & Wjuniski 2010: 424). It implies that the economy is not autonomous as it must be in economic theory, but subordinated to politics, religion and social relations (Block 2001: xxiv). It is argued that markets and the economy should be an accessory to social relations, a means to help the exchange of goods and services, but they should never replace the social relations. On closer observation, one can also argue that sociocultural factors present the hidden motives, if not the reasons as to why economic transactions are consummated the way they are. Polanyi argued that the development of the modern state went side by side with the development of the self-regulating markets. The most significant of Polanyi’s work in current times is seen in his advocate for social justice and substantial state intervention, and even control of the economy in order to achieve the ultimate goals of social justice and freedom (Knowles & Owen 2008: 181). It is argued that if one has to take into consideration the work of Polanyi, successful and sustainable interventions that aim to alleviate the income copra farmers should go beyond the form of technical and economic aspects. How an individual farmer makes decisions can be very complicated. He may be, as the head of the household, an authoritarian, or a liberal. He may possess values towards preserving of the family as a united or whole entity, or he may not. It is also very important to examine the degree of conflicting preferences as well as the degree of income pooling. (Sutti Ortiz, 2005: 63). On the other hand, the Standard Theory of Choice “allows many foolish decisions to be called rational” (Kahneman & Taversky, 2000: 772) It should also be considered that many farmers are not lone decision makers. They cannot solve their problems simply by evaluating costs, risks and preferences, but they can expand their production by borrowing, renting or sharecropping land. They are often forced to interact with others in order to increase their production (Sutti Ortiz, 2005: 68). Farmers also consider the limitations set forth by the household they belong to, and are bound to make decisions that do not optimize their income from coconuts, but maximizing income for the entire household. Labor migration will tend to erode the amount of labor available to farming even as it adds to the work of those who are left behind. Gary Becker (Becker and 34


Murphy, 2001), a social economist, showed that production decisions are related to the ability or desire of household members to participate in the labor market. He argued that the decision to work outside of the household is a product of prices of home-made goods against outside-purchased goods, foregone wages of stay home and available technology. The underlying principle guiding the household decision is the desire to maximize utility at the household level. Thus to understand production decisions and predict the welfare of household members, it is important to evaluate all household activities and the pooling and distribution of food and cash (Sutti Ortiz, 2005: 60). Consequently, one can argue that the farmer head of the family has practically no control over his one significant factor of production that is labor. One can argue though that the decision to migrate to the urban areas was at least partially made in consideration of the total income that can be generated by all persons in the household, regardless of where they are. For indeed one significant reason why migrants remit money back home is to reduce precautionary savings of the family as well as providing them insurance in anticipation in negative economic shocks. Another reason is to enhance the status and living standard of the family (Stark, 2009: 27-28). The first reason is more economic in nature, as the second is social. It is therefore not surprising for a household to encourage migration. One might argue that the government is a common stakeholder of the plight of coconut farmers as it is supposed to be for all citizens. The land owner is also one of two significant stakeholders for the coconut farmer if the land to which he is farming is not owned by him. Under such situation, there will be pre-agreed terms and conditions to his use of the land, which can certainly influence his production capacity. Consequently, the tenant is a stakeholder to the landowner, by virtue of the landowner and tenant relationship. The third stakeholder is of course the coconut meat or copra buyer. It is noted that the buyer has vested interest on the productive capacity of the coconut farmer for the simple reason that the farmer is the supplier of his business and income. In reality, the buyer is often in conflict, between maximizing his income by purchasing from the farmer at the minimum price which he probably can set at certain risk, and selling such produce at the given price set by his customer. On top of these, there might be other factors that influence the transactions between the farmer and the coconut meat buyer, such as, but not limited to cash advances as requested by the farmer, and the distance and ease of transport of the copra to the urban buyer. The standing relationship between the buyer and the farmer is also important. The presence of other buyers might also influence his 35


transactions with the farmer. This study explored questions like: what kind of relationship has the coconut farmer developed with the landowner and the copra buyer? How will these relationships be seen in the business transactions between all parties? And, as the relationship transcends business and become more personal, how then is pricing of the goods influenced? OBJECTIVES OF THE STUDY The study attempted to explore the market behavior of coconut meat-producing farmers in the Municipality of Bacong, Negros Oriental, how they make decisions related to production and sale of coconut meat, and how such decisions are affected by socio-cultural factors. Specifically, the study aimed to address the following concerns: 1) To explore the life situations of coconut meat-producing farmers, 2) To examine how decision-making related to production and sale of coconut meat is affected by the following, and vice versa: division of labor, urban migration, and relations with other stakeholders (farmer and trader, farmer and community) in the community. METHODOLOGY The study is descriptive and qualitative in nature. Key informant interview was done involving informants who possessed a thorough knowledge of the community (or, the organization/Cooperative) and who can provide the needed information. There were fifteen key informants, consisting of officers and staff of the cooperative, government officials and farmers to whom this researcher visited the farms. The second qualitative research technique used was the participant observation. This technique was also employed to verify and establish consistency of data generated from the one-one-one in-depth interviews, and to understand better the behavior of farmers. Focus groups were also employed to verify the information, to supplement/ substantiate the data obtained from other methods/ techniques, and/or obtain impressions from participants regarding certain issues. The group consisted of officers of the cooperated who had specific functions or designations, in different geographic areas of the cooperative. Lastly, documents reviews were also done (e.g. records of the Cooperative) to substantiate and/or verify claims of informants, and to have a more comprehensive understanding of the coconut meat production capacity in the study area.

36


RESULTS AND DISCUSSION Decision-Making As per Sutti Ortiz, this study has found that decision-making among farmerlandowners is often done in a collaborative manner. Husbands and wives consult each other before decisions are made concerning the farm activities. They also discuss matters that are pending. These matters include possible expansion of their farm works due to programs pursued by the national and local government, including but limited to contracts on commercial tree planting, and cow dispersals. For those who are active in and as officers of people organizations, they discuss the organization’s programs and projects. This key informant (husband-farmer) explained (as translated): “We wake up at 4 before dawn and pray. After praying we prepare our breakfast. While having breakfast, we talk about our tasks and plans for the day. When we come back at night, we also pray before we go to sleep.” The decision on what to plant (aside from tending to the coconut trees) often follows the usual practices. They plant crops they are familiar and having the knowledge with, or that what they had planted before. It is the mere fact that corn can be stored, and farmers feel the security that they would have something to eat daily. As one farmer said: Decision-making (on what to plant) is also limited by their perceived accessibility to markets for such alternatives. Seldom seen are pineapples (takes too long to mature), jackfruits, and even cacao intercropped with the coconut trees. One farmerlandowner expressed it this way (as translated): “What is that dragon fruit? Is it easy to plant? Who are the buyers? I also do not know about cacao. No one brings seedlings here. We only see the PCA representative who comes here to help us plant coconuts.” One of the decision criteria for determining what crops to plant is the time needed to harvest. Longer harvest time discourages planting, as the expected cash inflow is infrequent, giving more risk to the farmers in meeting their daily sustenance requirements. The potential income (price) of a crop is of secondary or negligible consideration, especially when no ready market is available. Farmers are not entrepreneurs and cannot see the opportunities or potentials of new products or markets and are unwilling to take the risk to plant. 37


There is minimal decision-making on the part of tenant farmers. As per previous discussions, tenant farmers take care of the coconut trees of the farmer landowner. They cultivate the existing trees, harvest them and get a pre-agreed share for their efforts. Division of Labor and Urban Migration It was observed that teamwork exists among the husbands and wives (land owner farmers) as they tend to their farms. The problem is that they are usually all of the family members involved in the farm that they have. There are only very few farmers who have children who spend full time in support of them and tending to the farms. Children are normally in the urban areas, and with their own families. According to Sutti Ortiz, this may be in conflict with the farmer’s interest to have more labor in his farm, but such should be considered in the bigger picture, as to what the children can contribute to the entire household. Indeed, they the children give support by communicating with their parents from time to time, asking them of the farm situation, and sending them additional money for home improvement. One farmer couple said when on way to their farm (as translated): “We are the only two here. We are the ones tending to the farm. Our children are in the city, working. We do not think they will come back here to live. They call me using cell phone and send us money. This is why we are expanding the house.” Also in support of the claims of Becker and Murphy, and Stark, this study showed that the lack of family labor is actually a result of decisions made by the farmer parents themselves. In their desire to allow their children to escape from the hardship of toiling the land under the heat of the sun, with income subject to great uncertainty, farmer parents sent their children to urban areas to have a better education and consequently, to seek employment there. All believed that the income of the children can then be higher if they pursue employment and live in urban areas, or even migrate to other countries. Yet, sending children to universities entail much sacrifices and risks, as oftentimes, their lands had to be mortgaged to meet the needed expenditures of supporting their children’s educational needs. When asked, most farmers concede that the future of their land seems uncertain, as when they are too old to work, there is no son or daughter who will continue after them.

38


But the bigger irony lies in the current situation. All farmer parents who are themselves land owners admitted that there can be higher incomes to be realized in the farms compared to finding employment in the urban areas. With much of the lands not fully utilized, much income is lost in terms of opportunities. The farmer landowners admit though that the modern farmer needs to be multidisciplinary in skills and knowledge, which disqualify the farmers themselves to meet the challenges of modern farming. New skills and knowledge are needed to improve productivity of old crops, as well as to plant new crops. Management skill is crucial as farming has few and long cash inflows compared with daily cash outflows required for sustenance of farmer families. Monetary capital is needed to source new farm equipment and modes of transportation to markets. Many migrated and are permanently settling in their new homelands, with no thoughts of returning to their homes until probably their old age. These sons and daughters also have minimum experiences in farming, having been sent to the pursue higher education in urban areas when young. And it is seldom that universities in the urban areas offer programs related to agriculture. A number of the farmers admitted that there is no clear succession in their families as to who will tend to the farms when they are no longer around. The farmers’ decision to provide a better life for their children, by sending them to universities in the cities reflects down to the uncertainty of who will tend to the farms when they are gone from this world. Certainly, this will affect the total output of farm produce in the country in the years to come. Relations with other Stakeholders Farmer land owners expressed the difficulty of finding tenant farmers that can be trustworthy. And it is for this reason that many lands of the farmer landowners are left uncultivated. Farmer landowners have to contend with other stakeholders. This, in many ways limits their decision on maximizing their income. Tenant farmers are not easy to have, and farmer landowners are now very cautious in entering into a working relationship with any. Harvested coconuts must immediately be processed of their meats, sold to accommodate the need for cash of tenant labor. This is without regard to the current market prices of the meat. Lastly, both farmer landowners and tenant farmers still want to preserve their relationships with coconut meat traders for the simple fact that the latter’s services may come in handy at times. This is regardless of the lower buying prices farmers can get from the traders, and also regardless of the presence of a local cooperative and the more favorable buying prices it offers to the farmer members. 39


It is noted that the methodologies (key informant interviews, participant observation and focus group discussion) used in the research were appropriate to unearth the hidden causes of why small coconut farmers remain poor. Such (sociocultural) causes which were imbedded in the daily life of farmers were taken for granted and thus never directly addressed in government interventions. Past government interventions were mostly on technical / agricultural and economic dimensions and had relied more on quantitative measures of the current status of farmers. This research has found that small coconut farmers go to the marketplace after being influenced by many social and cultural factors that adversely affected their productive capacity. The social and cultural factors are imbedded and constitute a crucial part of their daily life decisions, and do not necessary constitute ill or negativity. This verifies the assertion of Karl Polanyi that man acts not so to enhance his own interest for materials but more to enhance his social standing and assets. CONCLUSIONS Philippine population is now close to 100 million. Yet it is a wonder that the country is still not yet self-sufficient in food production. And specifically, the income of coconut farmers remains wanting. First of all, Philippine coconut farmers are price takers of coconut meat production. Small coconut farmers are with no influence over the prices of their products. Their income can only increase when they produce more in terms of quantity. The social factor of not having enough, or a continuing education for coconut farmers to pursue a more productive work, results in their own minimum income and the society’s limited output. By their own (cultural) belief that children can have a better future when they go to urban areas for education, employment and even migration, farmers finds themselves with a shortage of family labor and succession. Yet, this belief is borne out of a (cultural) value that parents want a better life for their children, even as children can then contribute to the enhancement of wealth for the entire household through the money they earned remitted back. Furthermore, in the rural areas, stakeholders are more tolerant of one another, realizing that they need one another. This, in many ways limits the farmers’ decision on maximizing their income. Preserving relationships is more important than sharing less (and profiting more) or taking advantage of other stakeholders in the production chain. Karl Polanyi was proven correct by this study. There is more to be considered in a simple economic transaction. Even as the farmers would like to produce more and thereby earn more, and to uplift their economic status, they find themselves 40


very limited if not unable. The different socio-cultural factors stated “disallow” the achievement of their economic goals. Such social and cultural factors are very inherent in their personal lives. They live with them and the factors govern their behavior in the marketplace of their produce. RECOMMENDATIONS As borne-out by this study, the farmers themselves are aware that a good income can be derived from the proper utilization of farm lands; an income that can be much higher than being employed in urban areas. On the basis of the results, the following recommendations are set forth: 1) Promote farm entrepreneurship among young professionals; promote courses in agriculture. One of the most appropriate targets for intervention responses is the young, particularly the sons or daughters of the farmers themselves. The young professionals who have migrated to the cities should be encouraged to take advantage of the income opportunities from agriculture work. Governments of developing countries can encourage such in many ways, including but not limited to economic and fiscal incentives. 2) The educational system of all developing countries must therefore put special emphasis on the value and/or income opportunities of agriculture. Hence, courses in agriculture and farming systems must be promoted, with the respective state of art technology a country possesses. It would also be ideal if a country’s experts can share their know-how with their counterparts in other countries. 3) Strengthen support and technical assistance to farmers. The governments of developing countries must endeavor to take the initiative to strengthen and sustain support to farmers with technical and economic assistances, programs/projects (e.g. seedling dispersal, farm development). And when they do so, government personnel must take into consideration the unique social and cultural factors that are imbedded in the lives of their beneficiary farmers.

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ACKNOWLEDGMENT This researcher would like to thank Professor Fiscalina Amadora-Nolasco, PhD, for her invaluable guidance in the research and writing of this study. LITERATURE CITED Aragon, C. T. 2000 Coconut Program Area Research Planning and Prioritization (No. DP 200031). Philippine Institute for Development Studies. Retrieved on October 3, 2012, from http://goo.gl/6KTMFj Becker, Gary and Murphy, Kevin 2001 Social Economics: Market Behavior in a Social Environment, Harvard University Press, 2001 Block, F. 2003 Karl Polanyi and the writing of The Great Transformation. Theory & Society, 32 (3), 275-306. Retrieved on October 12, 2013 from http://link. springer.com/article/10.1023/A:1024420102334#page-1 Bureau of Agricultural Statistic 2012 Coconut Statistics. Accessed September 05, 2012. http://www.bas.gov.ph Department of Agriculture 2012 Coconut Statistics. Accessed January 24, 2012. http://www.pca.da.gov.ph/ cocostat.php Department of Agriculture Executive Order No. 210 2000 Adopting the “Maunlad na Niyugan Tugon Sa Kahirapan” Program and Establishing Mechanisms for its Implementation. Accessed January 25, 2012. http://www.da.gov.ph/images/PDFFiles/LawsIssuances/EO/EO210. pdf Herskovits, M. 1940 The economic life of primitive peoples. New York, Knopf. Retrieved on October 10, 2012 from http://goo.gl/lEIA5C

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Knowles, R. and J. R. Owen 2008 Karl Polanyi for Historians: An Alternative Economic Narrative. European Legacy, 13(2), 175-191. Retrieved on October 8, 2012 from http://www. tandfonline.com/doi/abs/10.1080/10848770801913131 Ortiz, S. 2005 Decisons and Choices: the rationality of economic actors in Handbook of Economic Anthropology, ed by Garner, James, UK: Edward Elgar Publishing. Retrieved on October 5, 2012, from http://goo.gl/wQ4Dy8 Ortiz, S. 1973 Uncertainties in peasant farming: a Columbian case. London: Athlone. Retrieved on October 7, 2012, from http://www.getcited.org/ pub/101458710 Polanyi, K. 2001 The great transformation: the politics and economics order of our time. 2nd ed. Boston: Beacon Press. Available at http://www.openisbn.com/ isbn/080705643X/ Romero, P. 2010 “Coconut Industry May Collapse – Lawmaker.” The Philippine Star, December 19, 2012. Stark, O. 2009 Reasons for Remitting. World Economics, 10(3), 147-157. Retrieved October 15, 2012, from http://goo.gl/ERjhSG Tversky, A., and D. Kahneman 2000 Choices, values, and frames. Cambridge University Press. Retrieved on October 10, 2012, from http://goo.gl/eg9pxM United Nations Conference on Trade and Development 2012 Commodity Profile – Coconut. Accessed September 05, 2013. http:// www.unctad.info/en/Infocomm/AACP-Products/COMMODITYPROFILE---Coconut2/ Wjuniski, B. S. & Fernandez, R. G. 2010 Karl Polanyi, Athens and us: The Contemporary significance of Polanyi’s 43


thought. Brazilian Journal of Political Economy / Revista de Economia Política, 30(3), 420-437. Retrieved on October 18, 2012, from http:// goo.gl/vEztvH ________ 2011 Bacong Small Coconut Farmers Multi-Purpose Cooperative Annual Report.

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Firm Size as Predictor of Compliance to International Financial Reporting Standards (IFRS) 8 WILLIAM T. SUCUAHI ORCID No. 0000-0003-3878-239 [email protected] University of Mindanao Davao City, Philippines ABSTRACT Globalization and diversification are the trends of business nowadays. Companies’ diversification will lead to complexity of financial information and investment decision. The objective of this study is to determine the level of compliance with International Financial Reporting Standard (IFRS) 8 and to determine other related segment information to formulate investment strategies. The subjects of the research were the 100 diversified publicly-listed holding companies in the Philippines with 2010-2011 annual financial reports. Segment Disclosure Index (SDI) was developed to determine the level of compliance with IFRS 8. The study used firm size, company age, audit quality, profitability, leverage, growth and industry as predictors of the level of compliance. The result shows high overall level of compliance with IFRS 8 – Operating segment. Using multiple regression analysis, it was found out that only firm size predicts the level of compliance with IFRS 8. Large companies mostly comply with disclosure requirement stated in IFRS 8 compared to smaller companies. Most of the companies are engaged in real estate development and leasing business. KEYWORDS Business and Management, accounting, IFRS 8, disclosure, segment reporting, descriptive design, Philippines2

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INTRODUCTION Research on diversified companies had been conducted for the past decades. One of the common studies is relating corporate diversification to the firm performance (Ou-Yang, 2012) and firm value (He, X., 2012; Houston and Naranjo, 2003) which aimed to help company management to formulate clearer strategic decisions. This study presents another perspective on diversified companies through operating segment reporting as stated in International Financial Reporting Standard (IFRS) 8 – Operating Segments. The core principle of IFRS 8 is that an entity should disclose information to enable financial statement users to evaluate the nature and financial effects of the types of business activities in which it engages and the economic environments in which it operates (IASB, 2006). In Kuwait, Alfaraih and Alanezi (2011) explained that disclosing segment information varies from one company to another. The variation can be explained by various firm characteristics such as firm size, profitability and audit quality. However, their study used the International Accounting Standard (IAS) 14 which was already superseded by IFRS 8. Various researches were also conducted globally on the segment reporting practices. In Jordan, Mardini, Crawford and Power (2012) found an increasing number of companies who are practicing segment reporting. However, Benjamin, Muthaiyah, Marathamutu and Muruguiah, 2010 highlighted evidence that some of the Malaysian companies do not provide any segment reports. In United State, Li (2013) found insignificant differences between reporting segments under IFRS 8 and under IAS 14. However, none of these studies show what influences the company to disclose segment information in accordance with IFRS 8.Hence, this study investigated factors that influence diversified firms on their level of compliance with International Financial Reporting Standard (IFRS) 8 and to determine the other related segment information to formulate investment strategies. FRAMEWORK Diversified firms play an important role in many emerging markets (Kim, Hoskisson, Tihanya and Hong, 2004). Thus, acquiring a segment or segments of another company rather than the entire enterprise is the right decision to do (Schiff and Schiff, 2006).These firms are operating in different products and services as well as in different geographical areas.

46


However, the downside of companies’ diversification is it creates more complex information among business enterprises. Investors have sought more value-relevant information in order to make informed investment decisions. Diversified firms must provide information about different type of products, services and its geographical areas operation to understand the whole enterprise (Saravanan and Ayyalusamy, 2011). The information will help investors and analysts understand how the various components of a diversified firm behave economically (Alfaraih and Alanezi, 2011). The performance of these firms economically is a result of performance of each segment. Segment reporting is fundamentally indispensable to the investment analysis process (Benjamin, et al. 2010) and it results to significant downward shift in risk involved in stock investments (Voltas, 2002). Previous researches suggested that implementation of segment reporting resulted in more segments being disclosed (Herrmann and Thomas, 2000), more information revealed as segment being disclosed (Herrmann & Thomas, 2000), which would lead to greater precision in analysts’ forecasts (Berger &Hann, 2003), and greater ability of investors to predict earnings (Ettredge, Kwon, Smith, &Zarowin, 2005). However, Prather-Kinsey and Meek (2004) claimed that while firms respond to a segment-reporting disclosure, they do not wholly embrace it, which resulted in substantial noncompliance. Birt, Kend, & Xian (2007) stated that the corporate failures in various countries that captured the world’s attention in the early twenty-first century highlighted the vital role of disclosure and compliance. Moreover, Hope, Thomas &Winterbotham, (2006) pointed out that poor disclosure reduces earnings predictability that could therefore negatively affect the value of the firm through reduced investor following, increased estimation risk, and increased information asymmetry; each of which increases the firm’s cost of capital. OBJECTIVES OF THE STUDY The study finds the determinants of the level of compliance with International Financial Reporting Standards (IFRS) 8 and to determine other related segment information. METHODOLOGY Data The data were obtained from the diversified publicly-listed companies in the Philippines with 2010-2011 annual financial reports. These companies were 47


organized according to their economic sector or industry. There were a total of 100 firms chosen for this study. The annual reports of the selected firms were downloaded for the period 2010 – 2011. It employed purposive sampling because the respondent of the research were limited to the diversified listed companies in Philippines. Research Instrument Segment Disclosure Index (SDI) was developed using the disclosure requirement stated in IFRS 8. Other researcher also used index to measure the companies’ financial disclosure level (Galani, Alexandrids & Stavropoulos, 2011; Alfaraih, 2011; Rahahleh, 2010). In this study, the SDI was based on the financial disclosure checklist developed by the KPMG 2011 IFRS disclosure checklist. Item with conditional statement was not included in the checklist. It composed of 26 declarative disclosure statements taken from the standard. Since the data were analyzed by the SPSS (a statistical software package), the item information was assigned a numerical value of “1” comply and “0” if did not comply. However, if the item was not applicable it was treated as missing values. Research Design The study used regression analysis to evaluate the segment reporting compliance of publicly-listed holding companies in the Philippines. Procedure Notes to financial statements particularly on segment reporting were coded using the item number in the checklist. Discussions on the firm specific characteristics and compliance with the standard were also presented. After defining what aspects of the content to investigate, the researcher determined the log of firms’ total asset, age, profitability, audit quality, leverage and industry. Firm size refers to the total asset of the firm. Larger firms have a richer information environment that can increase transparency about the firm and lower information asymmetry among market participants (Roulstone 2003). Company age refer to the number of years the company operates. Bukh et al. (2005) explained that company age has often been used in previous studies asa proxy for risk and it might be expected that younger companies are more reliant upon nonfinancial disclosures. 48


Previous studies measured profitability by getting the return on asset (Alfaraih & Alanezi 2011; and Joshi and Gao, 2009). Empirical evidence found that profitability is important variable in voluntary disclosure of information related to social and environmental activities (Joshi and Gao, 2009). Uyar (2009) found a positive relationship between company disclosure and profitability. Leverage refers to the ratio of total liabilities and total equity. Principe (2004) stated that as the rate of financial leverage increases, companies are more motivated to disclose segment information in order to reduce the information asymmetry with creditors. Growth measured in this study as percentage in sales increased from previous year. Chavent et al. (2006) found that growing firms are more likely to conceal sensitive information, because full disclosure may jeopardize their competitive positions. Similarly, Prencipe (2004) argued that the potential competitive costs arising from disclosing segment information tend to be particularly high for growing firms, as competitors could use this information to the detriment of growing firms. Industry refers to the business sector of which the company belongs. Al-Mutawaa and Hewaidy (2010) claimed that business sector in which the company is operating may affect management willingness to disclose information in the annual financial reports. They also found out from the previous researches that there were significant association between type of industry and the level of disclosure. The financial disclosure compliance of each firm was tallied. The firm name was coded by letters for confidentiality purpose. To determine the level of compliance with IFRS 8, disclosure rate was developed based on the SDI score. The disclosure rate was determined by the following formula: DR = DS / (n – NA) x 100 Where, DR = Disclosure Rate, DS = Disclosure Score, n = Number of items in SDI and NA is the number of not applicable items A three-point Likert-type scale was used to interpret the level of compliance with IFRS 8 – Operating Segment. Using the scaling used by Rahahleh (2010) the data were analyzed using High (71 – 100), Moderate (51 – 70) and Low (0-50). The data were tabulated carefully into spreadsheet to ensure the accuracy of the data. The results were treated statistically and then analyzed. This study used mean to describe the characteristics of the firm in terms of size, age, profitability, leverage, growth. Frequency to describe the characteristics of the firm in terms of audit quality and segment reporting practices based on SDI. Multi49


ple Regressions to test the hypotheses developed in this study. The estimated multiple linear regression models was employed to test if the specific related variables influence the level of disclosure as presented below: Y = β0 + β1 (Company size) + β2 (Company age) + β3 (Profitability) + β4 (Leverage) + β5 (Growth) + β6 (Industry) + ε Where Y = DR; β0 = intercept; β1 to n = parameters of the model. The study also captured the frequency of operating segments of each firm and the average revenue of each operating segments. RESULTS AND DISCUSSION Firms’ Characteristics Table 1 presents the diversified firms’ characteristics. The firm size of the companies has a mean value of USD1,672,192,832.34 of total assets with a standard deviation of USD4,082,235,572.96. The largest firm had a total asset of USD1,672,192,832.34 and the smallest firm had of USD734, 374.98 total assets. Table 1 Firm Characteristics Independent Mean Variable Firm Size 1,672,192,832.34 (in millions) Log of Total Asset 8.36 Company Age 39.59 Profitability 0.08 Leverage 1.63 Growth 0.51 Industry Service 14 Financial and In31 vestment Others 55

Min

Max

StdDev

734,374.98 25,030,770,986.40

5.87 2 0.00 0.01 0.00

10.40 160 0.57 29.92 23.89

4,082,235,572.96

0.95 26.84 0.11 3.62 2.49

14% 31% 55%

Meanwhile, because of this non-normality of firm size, it was transformed using the logarithm of total asset as shown in variable LSIZE. The log of total asset has a mean of 9.99 with a maximum value of 12.04 and minimum value of 7.51. In addition, the youngest company is 13 years old and the oldest is 160 years old with a 50


mean of 36.71 years. The profitability of the firms ranges from 0 to 0.57, with a mean of 0.08. The 0 profitability indicated that the firm incurred loss. On the other hand, the company leverage varied significantly with a minimum value of 0.01 and a maximum value of 29.92 and a mean of 3.62 which means that most of the firm was funded by its creditors more than its investor. Moreover, the growth of the companies was found to be on average at 0.53 or 53% with a standard deviation of 2.49, the maximum growth was 23.89 and some companies did even not grow. Lastly, 14% of the listed companies belong to the service industry while 31% belong to the financial and investment companies which includes banks, financial institution and holding companies and 55% belong to the companies other than the two mentioned such as properties and mining. Diversified firm shows significant degree of variation in the firm sizes. The same observation was found in the study of Alfaraih and Alanezi (2011) among listed firms in Kuwait. In addition, the firm age shows a big gap between the oldest company and the youngest company. But most of the firm age is near 40 years old. On the other hand, firms’ profitability post 0.08 which means that for every USD 2.33 of investment USD 1.86 returns to the company. The results also show that most of the companies are funded from outside source. Majority of the company improved their revenue compared to the prior year operation. Level of Compliance with IFRS 8 Table 2 shows the level of compliance of publicly-listed holding companies. The publicly-listed companies’ compliance with IFRS-8 was manifested all the time indicating majority of the companies were in compliance with the IFRS 8. Having a closer look, 78 companies have a high level of compliance with IFRS low level of compliance of 72.2 and the highest is 100. It showed that the majority of the companies complied with the standards with a great extent. It was also noted that seven (7) of these companies had complied in full with the disclosure requirements stated in IFRS 8. Table 2 Level of Compliance with IFRS 8 No. of Companies

Disclosure Rate

Level

17

51.00 – 70.99

Moderate

78

71.00 – 100

High

51


5

Total 100

50.99 – below

Low

79.93

Moderate

Meanwhile, 17 companies have a moderate level of compliance with IFRS 8. The lowest level among this group is 54.17 and the highest is 70.83. This showed that some companies were complying with the standards but not that strict. However, five (5) companies got low level of compliance. The results revealed that there are companies in full compliance with operating segment disclosures, doing it through piecemeal compliance and even their companies which do not comply with the mandatory disclosure requirement stated in IFRS 8. But the good thing was the result also showed that listed companies are now practicing segment reporting in compliance with IFRS 8. Multiple Regression Result Table 3 shows parameter estimate of the models using the ordinary least squares estimate in doing regression analysis. The result suggested three models to determine what could predict the level of compliance. Among the three, the model 3 is considered the best fit model with the highest R2 and adjusted R2, and with the lowest standard error of estimate. Presented below is the regression model that could best predict the level of compliance with IFRS 8. DR = (20.502) + LSize (7.770) + Leverage (-0.487) + Growth (0.507) + Industry (-2.079) Table 3 Multiple Regression Analysis Result (Simulated Models) Variable Constant

Model 1 22.986 15.723

LSize

7.437*** 1.701

Company Age

-0.015 0.062

Profitability

52

2.405

Model 2

Mode3

24.234

20.502

15.185

15.540

7.378***

7.770***

1.684

-0.029 0.060

1.716


17.198 Leverage

-0.448

Growth

0.432

-0.487

0.474 0.757 Industry

R2 Adjusted R2 Std. Error of Est.

-2.027 2.225

0.448 0.522 0.635

0.509 0.628

-2.123

-2.080

2.154

2.142

0.19

0.19

0.20

0.15

0.16

0.17

15.48

15.41

15.33

Italized = Std. Error Value, *** =