SHS Web of Conferences 34 , 12003 (2017) DOI: 10.

1051/ shsconf/20173412003

FourA 2016

The Effect of Financial Performance and

Environmental Performance on Firm Value with
Islamic Social Reporting (ISR) Disclosure as
Intervening Variable in Companies Listed at
Jakarta Islamic Index (JII)
Rahma Frida Ratri* and Murdiyati Dewi
Economics and Business Faculty, Airlangga University, Indonesia

Abstract. This study examined how far ISR disclosure as the intervening
variable could mediate the effect of financial performance and
environmental performance on the firm value. The subjects of this study
were the companies listed in Jakarta Islamic Index (JII) in 2012-2014. The
samples of the study were sixty companies chosen by purposive sampling
method, and the analytical technic used path analysis. The results of this
study proved that: (1) financial performance had positive effect to the firm
value, (2) environmental performance had no effect to the firm value, (3)
financial performance had positive effect to the ISR disclosure, (4)
environmental performance had positive effect to the ISR disclosure, (5)
ISR disclosure had positive effect to the firm value, (6) ISR disclosure
could mediate the effect of financial and environmental performances on
the firm value.

1. Introduction
Corporate Social Responsibility (CSR) is a commitment way for the companies to report
their social and environmental performances. CSR disclosure cannot be culture free and is
attributed primarily to government policy [10. This relationship is based on the companies’
role to the stakeholders and the legitimacy of the companies to the society. CSR disclosure
can be used as an intermediary to report the firm performance to the stakeholders [12]
The concept of CSR is not only for the conventional economics, but also for shariah
economics. The companies listed at shariah index should fulfill the shariah aspects in their
operating activity and information disclosure. Now there is Islamic Social Reporting (ISR)
concept which is based on Islamic Social Reporting Index (ISRI). This index is the
development of the CSR disclosure and match with the shariah principles. The concept of
ISR is getting better because of the prior studies on it which discussed the importance of
ISR for the Muslim decision makers [4]; [9]; [13] In ISR, the stress on social justice goes
beyond reporting the environment, minority interests and employees. It concerns with
issues related to the well-being of the society pertaining to interest and unfair trading

*
Corresponding author: rahmafridaratri@gmail.com

© The Authors, published by EDP Sciences. This is an open access article distributed under the terms of the
Creative Commons Attribution License 4.0 (http://creativecommons.org/licenses/by/4.0/).
SHS Web of Conferences 34 , 12003 (2017) DOI: 10.1051/ shsconf/20173412003

FourA 2016

practices such as income distribution or zakat (Othman et al. 2009). The objectives of ISR
are to demonstrate accountability to God and community, and to increase transparency of
business activities by providing relevant information in conformance to the spiritual needs
of Muslims decision makers ([9]The basic constructions of ISR are Tawhid (unity of God)
and Shari’a. Tawhid means accepting that God is the ultimate owner of everything on earth
and universe (Qur’an 57:5), and man has to be accountable to God (Qur’an 2:28). Shari’a is
concerned mainly in promoting social justice and realizing benefits for the people in this
world and in the hereafter (al-falah) by setting the basic foundations in every aspect of a
Muslim’s life including the ethical philosophy [9]

2. Literature review

2. 1. Stakeholder theory
Freeman (1983) changed the definition of shareholder became stakeholder by adding
more constituents except shareholders itself (including society and government). The main
objective of the stakeholder theory is to help the corporate management in creating the
value added from operational activity that they do and minimize the possible loss for
corporate stakeholders. Company is not an entity whose operational activity only for their
interest but also company has to give benefits for the stakeholders. Going concern of the
company depends on the support of the stakeholders so the activity of the company is to
look for the stakeholders’ support. CSR disclosure has been a successful media to make
negotiation to that relationship [8]).

2. 2. Legitimacy theory
Legitimacy theory focuses on interaction between company and the society. Information
disclosure policy depends on the perception of the society to decide the financial and
economic resources, so company tends to use the CSR disclosure to influence the
perception of the society about that company. Company obeys the norms and rules from the
society to get the acceptance from society so the firm value will be increasing. The base of
legitimacy theory is “social contract” between company and the society. If the society is not
satisfied with the attitude and legitimacy of the company, society can pull back that social
contract and threaten the continuity of the company’s operational activity (Deegan 2002).

3. Hypotheses
Previous studies have found that financial performance significantly effects the firm value.
The higher financial performance, the higher firm value [5];[7]. Previous studies also have
found that environmental performance significantly effects the firm value. The better
environmental performance will give better firm value [1]
H1: Financial performance has significant effect on firm value.
H2: Environmental performance has significant effect on firm value.
Previous studies have found that financial performance significantly effects the ISR
disclosure. The higher financial performance, the wider ISR disclosure [2[13]; [11].
Previous studies also have found that environmental performance significantly effects the
ISR disclosure. The better environmental performance will make the ISR disclosure
becomes wider [11].
H3: Financial performance has significant effect on ISR disclosure
H4: Environmental performance has significant effect on ISR disclosure.
Previous studies have found that ISR disclosure significantly effects the firm value. The
wider ISR disclosure, the higher firm value (Arshad et al. 2012). Previous studies also

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SHS Web of Conferences 34 , 12003 (2017) DOI: 10.1051/ shsconf/20173412003

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have found that ISR can be the intervening variable which can mediate the effect of
financial and environmental performances on firm [14].
H5: ISR disclosure has significant effect on firm value.
H6: ISR disclosure can mediate the effect of financial performance on firm value.
H7: ISR disclosure can mediate the effect of environmental performance on firm
value.

4. Methodology and results

4. 1. Sample selection and data collection

The data used in this research were quantitative data. Data collection procedure was using
documentation method. The annual reports of the companies for 3 years period (2012-2014)
were collected from the website of Bursa Efek Indonesia on December 15, 2015. The
PROPER ranks were collected from the website of Indonesia Ministry of Environment
(KLH) on March 6, 2016. The population and sample were the companies listed at Jakarta
Islamic Index (JII) in 2012-2014. The companies which are in JII are the selected
companies based on these criteria: their operating activities have fulfilled the Islamic
principles, have the biggest market capitalization, and have the best liquidity. The sample
selection used purposive sampling by setting the criteria. The data gathered were analyzed
using SPSS.
Table 1. Population and Sample Selection.
Criteria Years
2012 2013 2014
Companies listed at JII 33 32 33
Companies were not listed at PROPER ranks (11) (13) (14)
Total Companies per Year 22 19 19
Total Sample 60

4. 2. Data measurement

4.2.1. Islamic Social Reporting (ISR)

ISR disclosure is measured by Islamic Social Reporting Index (ISRI). The index used
based on the prior study by Othman et al. (2009). There are 43 items divided into 6 themes:
finance and investment, product and services, employees, environment, and corporate
governance. Each item will get score, if that item is disclosed then will get score 1, but if
that item is not disclosed then will get score 0. This is the formula for ISRI:

 

 

  =

 


4.2.2. Financial performance

The proxy used for financial performance is Return on Assets (ROA). This is the
formula for ROA:
 
  

  =  100%

 

4.2.3. Environmental performance

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SHS Web of Conferences 34 , 12003 (2017) DOI: 10.1051/ shsconf/20173412003

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The proxy used for environmental performance is PROPER ranks. PROPER is a

program from Indonesia Ministry of Environment to supervise and control the
environmental performance of the companies in Indonesia through information disclosure
instrument. The PROPER ranks consist of 5 colors:
Gold : Very very good
Green : Very good
Blue : Good
Red : Bad
Black : Very bad

4.2.4. Firm value

The proxy used for firm value is Tobin’s Q. If the point of Tobin’s Q is more than 1, it
means that company has big competitive advantage so the investment opportunity in that
company is also big. This is the formula for Tobin’s Q:
(  !) + (" + ) − 

   =  #

Where: Tobin’s Q = Firm Value; OS = Outstanding Shares; P = Stock Price; D =
Total Debt of Company; I = Total Inventory; CA = Current Assets; TA = Total
Assets

4. 3. Results
Table 2. The Effect of ROA and PROPER on Tobin’s Q.
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
(Constant) -0.404 1.167 -0.346 0.730
1 ROA 0.274 0.031 0.799 8.883 0.000
PROPER -0.150 0.354 -0.038 -0.424 0.673
Dependent Variable: TOBINS

Based on the results on Table 2, can be concluded that financial performance (ROA) has
significant influence on firm value (TOBINS). This can be seen from Sig. 0,000 <
significance rate 0,05 (5%). This shows that financial performance significantly influences
firm value so H1 is accepted. Based on the results on Table 2, can be concluded that
environmental performance (PROPER) has not significant influence on firm value
(TOBINS). This can be seen from Sig. 0,673 > significance rate 0,05 (5%). This shows that
environmental performance does not significantly influence firm value so H2 is rejected.

Table 3. The Effect of ROA and PROPER on ISR Disclosure.

Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
2 (Constant) 0.620 0.033 18.643 0.000
ROA 0.004 0.001 0.457 4.080 0.000
PROPER 0.026 0.010 0.292 2.610 0.012
Dependent Variable: ISR

Based on the results on Table 3, can be concluded that financial performance (ROA) has
significant influence on ISR disclosure (ISR). This can be seen from Sig. 0,000 <
significance rate 0,05 (5%). This shows that financial performance significantly influences

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SHS Web of Conferences 34 , 12003 (2017) DOI: 10.1051/ shsconf/20173412003

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ISR disclosure so H3 is accepted. Based on the results on Table 3, can be concluded that
environmental performance (PROPER) has significant influence on ISR disclosure (ISR).
This can be seen from Sig. 0,012 < significance rate 0,05 (5%). This shows that
environmental performance significantly influences ISR disclosure so H4 is accepted.

Table 4. The Effect of ISR Disclosure on Tobin’s Q.

Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
3 (Constant) -14.498 3.745 -3.871 0.000
ISR 22.677 4.906 0.519 4.622 0.000
Dependent Variable: TOBINS

Based on the results on Table 4, can be concluded ISR disclosure (ISR) has significant
influence on firm value (TOBINS). This can be seen from Sig. 0,000 < significance rate
0,05 (5%). This shows that ISR disclosure significantly influences firm value so H5 is
accepted.

Table 5. The Mediating Effect.

Path Beta (Indirect Effect) Beta (Direct Effect) Total Effect
X1 Æ Z Æ Y 0,237 0,799 1,036
X2 Æ Z Æ Y 0,152 -0,038 0,114
Based on the results on Table 5, can be concluded that ISR disclosure can mediate the
effect of financial performance on firm value. This can be seen from Sig. 0,000 <
significance rate 0,05 (5%) and Beta of the indirect effect 0,237. This shows that ISR
disclosure can be used as an intervening variable for the effect of financial performances on
firm value so H6 is accepted. Based on the results on Table 5, can be concluded that ISR
disclosure can mediate the effect of environmental performance on firm value. This can be
seen from Sig. 0,012 < significance rate 0,05 (5%) and Beta of the indirect effect 0,152.
This shows that ISR disclosure can be used as an intervening variable for the effect of
environmental performance on firm value so H7 is accepted.

5. Conclusion
Based on the results, can be concluded that financial performance has significant influence
on firm value. This finding supports the prior studies by [5] and [7]. This indicates that the
increasing ROA can increase the value added for the firm. It is also can be concluded that
environmental performance does not significantly influence firm value. This finding is
consistent with prior study by [14] but inconsistent with prior study by [1]). This indicates
that the information about corporate environmental performance in the form of PROPER
ranks which is issued by Indonesia Ministry of Environment (KLH) does not significantly
influence the value added of the firm.
Based on the results, can be concluded that financial performance has significant
influence on ISR disclosure. This finding supports the prior studies by [2], [13], and [11]
This indicates that the higher profitability, the wider ISR disclosure. It is also can be
concluded that environmental performance has significant influence on ISR disclosure. This
finding is consistent with prior study by [11]. This indicates that company who has good
environmental performance will tend to disclose it in their ISR disclosure.
Based on the results, can be concluded that ISR disclosure has significant influence on
firm value. This finding is consistent with prior studies by [2] and [30] This indicates that
the wider ISR disclosure, will increase the trust of the Muslim stakeholders. It is also can be
concluded that ISR disclosure can be an intervening variable which can mediate the

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SHS Web of Conferences 34 , 12003 (2017) DOI: 10.1051/ shsconf/20173412003

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influence of financial performance and environmental performance on firm value. This

indicates that ISR disclosure has the important role to mediate the influence of financial
performance and environmental performance on firm value.

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