Corporate Governance and Financial Management: Computational Optimisation Modelling and Accounting Perspectives

391 Pages·2015·5.223 MB·English

by  Siti Nuryanah, Sardar M. N. Islam (auth.)

Corporate Governance and Financial Management
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Corporate Governance and
Financial Management
Computational Optimisation Modelling
and Accounting Perspectives
Siti Nuryanah
Department of Accounting, Faculty of Economics, University of Indonesia, Indonesia
Sardar M. N. Islam
VISES, College of Business, Victoria University, Australia
© Siti Nuryanah and Sardar M. N. Islam 2015
Foreword © Bruce Rasmussen 2015
Softcover reprint of the hardcover 1st edition 2015 978-1-137-43560-6
All rights reserved. No reproduction, copy or transmission of this
publication may be made without written permission.
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Copyright, Designs and Patents Act 1988, or under the terms of any licence
permitting limited copying issued by the Copyright Licensing Agency,
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Any person who does any unauthorized act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The authors have asserted their rights to be identified as the authors of this work
in accordance with the Copyright, Designs and Patents Act 1988.
First published 2015 by
PALGRAVE MACMILLAN
Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills, Basingstoke,
Hampshire RG21 6XS.
Palgrave Macmillan in the US is a division of St Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN 978-1-349-49322-7 ISBN 978-1-137-43561-3 (eBook)
DOI 10.1057/9781137435613
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources. Logging, pulping and manufacturing
processes are expected to conform to the environmental regulations of the
country of origin.
A catalogue record for this book is available from the British Library.
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Contents
List of Figures vi
List of Tables viii
Foreword ix
Preface xi
Acknowledgements xv
List of Abbreviations and Definitions xvii
1 Sound Financial Management Strategies for Achieving Good
Corporate Governance Practices 1
2 The Foundations for Formulating Sound Financial
Management Strategies Using an Integrated Financial
Optimisation Model: A Critical Literature Review 13
3 Conceptual Framework and Research Methodology 63
4 An Integrated Financial Optimisation Model for
Formulating Sound Financial Management Strategies 103
5 The Context of the Case Study 145
6 The Numerical Model, Results and Analysis 157
7 Implications of The Results for Sound Financial
Management Strategies, Corporate Governance, and
Managerial and Financial Accounting Perspectives 217
8 Conclusion and Recommendations for Future Research 237
Appendix 1: Financial Data of the Company 246
Appendix 2: Beta Calculation 275
Appendix 3: The Results of the Initial Model 279
Appendix 4: The Final Model 1 291
Appendix 5: The Final Validated Model 1 – Without Perpetuity 299
Appendix 6: The Present Value of the Perpetuity of the
Final Validated Model 1 319
Appendix 7: The Final Validated Model 2 – Without Perpetuity 325
Appendix 8: The Present Value of the Perpetuity of the
Final Validated Model 2 349
Notes 354
References 356
Index 369
v
List of Figures
1.1 Research design and plan 11
2.1 Structure of Chapter 2 14
2.2 Capital market as an external governance instrument 19
2.3 An example of capital market structure 20
2.4 Enron stock price movement before collapse 21
2.5 Reid Murray Holding Ltd stock price movement
before collapse 21
2.6 The structure of corporate governance 23
2.7 The static trade-off theory of capital structure 31
2.8 Balance sheet 41
2.9 Business valuation models 43
2.10 Income statement 47
2.11 Statements of stockholders’ equity 48
2.12 Statement of cash flow and enterprise value 49
2.13 An integrated relationship between corporate governance,
corporate financial management and accounting 51
3.1 Conceptual framework for formulating sound financial
management strategies that achieve GCG practices using
an integrated financial optimisation model 65
3.2 The decision-making process in optimisation approach 70
3.3 Classification of optimisation problems 70
3.4 Example: Solver – infeasible solution 72
3.5 Conceptual framework of financial statements 80
3.6 Matrix of dynamic linear programming 87
3.7 Components of WACC 92
3.8 A classification of linear program’s solutions for modelling
validation process 96
3.9 Solver tab in Microsoft Excel 2010 98
3.10 Solver parameters in Excel 2010 99
3.11 Solver options in Excel 2010 99
3.12 Example: answer report 100
3.13 Solver results in Excel 2010 100
3.14 Example: sensitivity report 101
3.15 Example: limits report 102
4.1 Cash flows, FCFF and FCFE 114
vi
List of Figures vii
4.2 The relationship between cash flow and business stage 121
4.3 Z-score 129
5.1 I ndonesia capital market structure 147
5.2 D evelopment of composite stock index (IHSG) during
2005–2012 148
5.3 D evelopment of stock price index in some of the world stock
exchanges in 2009 149
5.4 T he main indicators of the Indonesia Stock Exchange,
2005–2009 149
5.5 UNVR and its regulatory environments 156
6.1 Timeline of present value 158
6.2 Solver analysis in Excel 2010 197
6.3 Premium Solver Platform task pane 197
6.4 Model section of Premium Solver 197
6.5 Platform section of Premium Solver 198
6.6 Solver engines of Premium Solver 199
6.7 Output section of Premium Solver 200
7.1 A n Integrated Framework for Achieving GCG Practices
Based on Managerial and Financial Accounting Perspectives 234
List of Tables
2.1 Frameworks for DCF-based valuation 44
4.1 Example of an income statement 105
4.2 Example of a cash flows statement (direct method) 106
4.3 Example of a cash flows statement (indirect method) 106
4.4 Example of a balance sheet 107
4.5 Accounting equations 108
4.6 T he underlying GCG principles and objective
function of the model 112
4.7 Summary of how the model accommodates GCG principles 134
6.1 Calculation of the cost of capital using CAPM 160
6.2 Book value of FCFE based on data of financial statements 214
7.1 C omparison between book value of cash flows shown in
financial statements and proposed amount of cash flows
based on output of the model 227
viii
Foreword
As there is a need for more large-scale real-life computational optimisation
studies in accounting, Corporate Governance and Financial Management:
Computational Optimisation Modelling and Accounting Perspectives has
made a valuable contribution to the literature by performing a study
on computational optimisation modelling of corporate finance based
on the integrated framework and foundations of accounting theories,
financial engineering, risk management, and corporate governance
principles and issues.
For more than a decade, corporate governance has been an expanding
topic discussed by academics and practitioners as corporate failures and
the global financial crisis demonstrates the importance of complying
with good corporate governance (GCG) best practices.
This book provides a comprehensive study of this issue integrating
corporate governance, corporate finance and accounting in the formu-
lation of sound financial management strategies. It also offers practical
steps for managers on how to formulate sound financial management
strategies using an integrated optimisation financial model for achieving
GCG practices, which lead to lower risks and higher firm value.
Offering an integrated solution for achieving GCG practices, this book
adopts value-based management (shareholder value maximisation) and
stakeholder approaches. Moreover, the model shown in the book applies
a free cash flow (FCF) valuation and financial ratio analysis, incorporates
external governance mechanisms and examines how internal govern-
ance instruments discipline managers in the process of shareholder
value maximisation.
This book makes a significant contribution to the literature by
providing an integrated framework based on managerial and financial
accounting perspectives for achieving the benefits of GCG practices.
The framework incorporates risk-management practices, accommodates
external regulatory environments and addresses the importance of cost
of capital. From practitioners’ point of view, this unique study gives new
insight into an application of the optimisation approach as a method-
ology for corporate governance study and provides an understanding for
integrating the accounting concept in the linear optimisation model.
ix