Corporate governance and investment efficiency in Indonesia: the moderating role of industry competition

Abstract

Purpose

This study aims to analyse the effect of corporate governance on investment efficiency and the moderating impact of industry competition on the relationship between corporate governance and investment efficiency.

Design/methodology/approach

The research sample includes a total of 36 publicly listed companies assessed by the Indonesian Institute for Corporate Directorship from 2012 to 2018. Testing is performed on full sample and overinvestment and underinvestment subsamples. Additional testing is further carried out using the generalized method of moments to address endogeneity problems and a robustness test is performed to assess the estimated investment efficiency.

Findings

Corporate governance can increase investment efficiency and the effectiveness of corporate governance is found to drop when the level of industry competition is higher.

Practical implications

The results of the present study corroborate the suggestion that companies need to implement corporate governance mechanisms. Furthermore, designing a corporate governance mechanism requires the scrutiny of the external environment, including industry competition.

Originality/value

The present study adds the profitability factor in the calculation of investment efficiency levels. This study also considers external factors that can influence the effectiveness of corporate governance in determining investment efficiency.

Citation

Bimo, I.D., Silalahi, E.E. and Kusumadewi, N.L.G.L. (2022), "Corporate governance and investment efficiency in Indonesia: the moderating role of industry competition", Journal of Financial Reporting and Accounting, Vol. 20 No. 2, pp. 371-384. https://doi.org/10.1108/JFRA-12-2020-0351