Do Managerial Ability Impact Indonesian Firm Risk-Taking Behavior?

Abstract

This study aims to examine the role of managerial in firm decisions. This study recognizes that managerial plays an important role in corporate decision making. Decisions carried out by the company are not only influenced by the manager's explicit mandate to maximize firm value, but also by the manager's ability to manage the company. In previous research it was found that high-ability and low-ability managers have opposite effects on firm behavior and firm value. High-ability managers accept risk-taking whereas low-ability managers refrain from taking risks. Managerial Ability in this study was measured using DEA (Data Envelopment Analysis) while for firm risk-taking behavior using the return on assets (ROA), return on equity (ROE), and research and development costs to total assets (R&D). The model used in this study is a causality model or the relationship of influence between research variables. The proposed model is analyzed using the Structural Equation Model (SEM) causality technique. This research was conducted on manufacturing companies listed on IDX (Indonesian Stock Exchange) in 2013-2017. However, unlike previous studies, the results of this study indicate that highly capable managers play a role in minimizing corporate risk taking. This research contributes as a reference for Indonesian corporate investors and also regulators as a reflection of the effectiveness of regulations made in Indonesia.

Managerial Ability as a Mechanism for Creating Firm Value through Risk Management

“…in the form of talent, quality, ability, and management reputation that can influence every management action and company decision-making (Wati et al, 2020). The ability possessed by a manager becomes a resource in the form of intangible assets owned by the company to carry out risk management effectively.…”

“…(2016), Yung and Chen (2018), and Wati et al (2020) states that managerial ability is essential because capable managers are more likely to be able to carry out risk management optimally.…”

“…24 , No.3 , 2021 of the firm's future stable earnings at a minimum level of manageable risk (Yung and Chen, 2018). Risk management in the company is managed directly by a manager as the manager of the company's operational activities (Wati et al, 2020). Therefore, the managerial ability is needed in implementing risk management properly.…”

“…Managerial ability is an essential factor in risk management. A company's progress depends on how managers manage the company; therefore, companies need capable managers (Wati et al, 2020). A capable manager is considered to have high ability and integrity as well as experience so that managers can make the right decisions for the betterment of the company.…”

“…A capable manager is considered to have high ability and integrity as well as experience so that managers can make the right decisions for the betterment of the company. The research of Andreou et al (2016), Yung and Chen (2018), Wati et al (2020) found that capable managers are more likely to be able to carry out risk management optimally.…”