The Effect of Financial Architecture, Cash Holding, and Goodwill on Stock Return with the Approach Five-Factor Models

International Journal of Research and Scientific Innovation (IJRSI) | Volume VII, Issue VIII, August 2020 | ISSN 2321–2705

The Effect of Financial Architecture, Cash Holding, and Goodwill on Stock Return with the Approach Five-Factor Models

Catur Wahyu Irjayanto¹, Zaenal Arifin^2
1,2Department of Business and Economics, Universitas Islam Indonesia

Abstract- This study examines the effect of financial architecture, cash holding and goodwill on stock returns using a 5-factor model approach. The financial architecture variables consist of corporate governance (Board of Commissioners, Board of Directors, and board process), capital structure, and ownership structures (managerial and institutional holdings). Testing was conducted using Weighted Least Square Method (WLS) in 25 companies from 2015-2018 selected in purposive sampling at the group of Compass 100 Index in Indonesia Stock Exchange. The calculation of the stock return in this study uses an abnormal return and as a comparison is also a test using models with expected return and actual return. The results of this study show the Board Process and the capital structure have a significant effect on stock return in the regression model with abnormal return. The results on the model with expected return show that managerial ownership has a significant effect and the model with actual return shows that only cash holding has a significant effect. In addition, the variables of the Board of Commissioners, the Board of Directors and institutional ownership in the comparison model show results that consistently do not have a significant effect on stock returns.

Keywords: Financial Architecture, Cash Holding, Goodwill, Stock Returns, Fama French 5-Factor Model

I. INTRODUCTION

Investments made in the capital markets have a high risk, so every investor is expecting a maximum return (expected return) should pay attention and estimate all important factors that can affect return from investing. The company’s performance is an internal factor of the company that has a big impact on stock returns. The company’s performance is defined as a full view of the company’s state over a period of time and is a result or achievement influenced by the company’s operational activities in utilizing its resources (Srimindarti, 2004). Performance of a company can be seen from two aspects namely financial performance (Fahmi, 2012) and the characteristics of the company (Harianto & Siswanto, 1998). Financial performance provides an overview of the level of efficiency and productivity of the company while the characteristics describe the characteristics inherent to the company and can increase the trust of investors.

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