The Effect of Agency Problems on Cost Stickiness in the Banking

Industry: The Role of the Board of Commissioners and the Audit

Committee Effectiveness

Ancella Anitawati Hermawan and Miranti Djoko

Universitas Indonesia, Indonesia

Keywords: Cost stickiness, agency problems, the effectiveness of the board of commissioners, the effectiveness of audit

committee

Abstract: This study aims to examine the effect of agency problems on cost stickiness on Banking in Indonesia.

Furthermore, this study will also examine how the effect of agency problems on cost stickiness on the different

effectiveness level of the board of commissioners and audit committees. The samples used are banks listed

on the Indonesia Stock Exchange 2012-2016 and regularly report their financial reports and annual reports.

This study found that cost stickiness on operational costs occurred in the Indonesian banking sector and

agency problems have a positive influence on the level of cost stickiness. The study also found that, the

positive effect of agency problem on cost stickiness will be lower in banking high level of effectiveness of

Board of Commissioners or Audit Committee.

1 INTRODUCTION

Study has found asymmetric cost behavior by

Anderson et al. in 2003, that the decline in sales did

not coincide with a decrease in selling costs.

Companies that have studied on average have a 0.55

percent increase in sales costs, general costs and

administrative costs when there is a one percent

increase in sales, but when a one percent decline in

sales, sales costs, general costs and costs just

decreased by 0.35 percent (Anderson et al., 2003).

This phenomenon is called Cost stickiness, ie where

a cost is said Sticky when the increase in cost is

greater than the decrease in activity changes with the

equivalent amount (Ratnawati and Nugrahanti, 2015).

Sticky costs can arise because of the first, unbalance

of resource adjustment (Vonna and David, 2016).

Second, managers tend to choose to retain unused

resources rather than reducing resources when

activity decreases (Windyastuti and Biyanto, 2005).

In Anderson's research (2003) there is a suspicion that

the Cost stickiness may be caused by agency costs,

but no significant empirical evidence has been found.

So this research is intended to fill the research gap.

The Agency Theory predicts that there is a difference

of interest between shareholders and corporate

managers, leading to agency problems, in which

managers engage in activities for their own benefit

rather than shareholder profits (Jensen and Meckling,

1976). This research will continue the research of

Chen et al. (2012), which examines the relationship

of agency problems with cost stickiness. But unlike

the research is the subject of the company that will be

used is a Banking company listed on the Indonesia

Stock Exchange (BEI) in 2012-2015. Because the

subject used by Banking then, Cost stickiness

researched at Operating Cost, because Operating Cost

is one of measuring tools Banking performance

(Windyastuti, 2014). Similar to Chen et al. (2012),

Agency problems are measured by FCF, since FCF is

the most common proxy for measuring agency

problems (Jensen 1986; Masulis et al., 2007;

Richardson 2006; Stulz 1990; Shleifer and Vishny

1997; Titman et al., 2004). This study will also look

at the role of corporate governance in moderating the

effects of agency problems on cost stickiness. Like

Fathoni and Hermawan (2013) research, the

implementation of corporate governance is produced

by the effectiveness of the board of commissioners

and audit committees, by measuring independence,

competence, size, and activity.

Anitawati Hermawan, A. and Djoko, M.

The Effect of Agency Problems on Cost Stickiness in the Banking Industry: The Role of the Board of Commissioners and the Audit Committee Effectiveness.

DOI: 10.5220/0008437000750084

In Proceedings of the 4th Sriwijaya Economics, Accounting, and Business Conference (SEABC 2018), pages 75-84

ISBN: 978-989-758-387-2

2 LITERATURE REVIEW

2.1 Cost Stickiness Concept

Costs are said to be sticky if the magnitude of the

increase in cost associated with increased volume is

greater than the decrease in cost associated with an

equivalent volume decrease (Cooper and Kaplan,

1998). Initially introducing the concept of sticky cost,

Malcol (1991), suggests that "many new costs tend to

have somewhat non-variable characters, which are

not comparable with activity changes." For example,

Operating costs. A bank wants to raise its revenue by

improving the company's performance. To improve

the performance of the company, the bank requires

additional employees. These additional employees

will increase Operating costs, and the company's

revenue is expected to rise as well. If the income rises,

then the Operating costs will automatically increase.

But when income goes down, managers cannot

reduce their employees directly. This is what makes

Operating costs difficult to decrease when revenue

goes down. This cost condition is called sticky cost.

With the recruitment of new permanent employees,

the administrative and general costs of the company

will increase. Yet when there is a decrease in activity

volume, companies can not directly dismiss new

employees or in other words retain resources

(Windyastuti, 2014). Thus the company will

experience a sticky cost and still pay the salaries of

employees even though the employee is not working

optimally. Cost adjusts to changes in resource volume

that managers have ordered, while resource volume is

affected by fluctuating demand. The cost adjustment

is done intentionally by the manager. Managers need

to be careful in planning resource orders, i.e. delaying

orders to get certainty of falling demand (Anderson et

al., 2003).

2.2 Corporate Governance of Bank

Governance of Bank was previously stipulated in

Bank Indonesia Regulation no. 8/4 / PBI / 2006, then

now governed by the Financial Services Authority

(POJK) Regulation No.55 / POJK.03 / 2016

supplemented by Circular Letter of the Financial

Services Authority No.13 / SEOJK.03 / 2017. The

regulation stipulates consideration in order to

improve bank performance, protect the interests of

the stakeholders, and improve compliance with laws

and regulations and ethical values that are generally

accepted in the banking industry. In addition,

improving the quality of governance implementation

is one of the efforts to strengthen the internal

condition of the national banking system. According

to POJK No.55 / POJK.03 / 2016, Good Governance

is a Bank management procedure that applies the

following principles:

1) Transparency (transparency) is openness in

disclosing material and relevant information and

openness in implementing decision-making process.

2) Accountability (accountability) is the clarity

of functions and implementation of the Bank's organ

liability so that its management runs effectively.

3) Responsibility (responsibility) is the

suitability of Bank management with legislation and

sound bank management principles.

4) Independence (independency) is the

professional management of the Bank without the

influence or pressure of any party.

5) Fairness which is justice and equality in

fulfilling the rights of Stakeholders arising based on

the agreement and the laws and regulations.

2.3 Duties and Responsibilities of The

Board Of Commissioners

Article 1 point (6) of Law Number 40 Year 2007

(Pasal 1 angka (6) Undang- Undang Nomor 40 Tahun

2007) regarding Limited Liability Company (UUPT)

stipulates that the definition of the Board of

Commissioners is an organ of the Company which is

in charge of general and / or special supervision in

accordance with the articles of association and

advises the Board of Directors. The duties and

functions of the board of commissioners are

stipulated in Article 108 UUPT, the commissioner is

in charge of supervising the management policy, the

general management of the company and the

company's business, and advising the directors.

Furthermore, in Article 114 UUPT affirms that the

commissioner is obliged in good faith and full

responsibility to perform its functions for the benefit

of the company.

The Board of Commissioners consists of

Independent Commissioners and Non-Independent

Commissioners. Independent Commissioners shall be

at least 50% (fifty percent) of the total members of the

Board of Commissioners. Independent

Commissioners are members of the Board of

Commissioners who have no financial, management,

share ownership and / or family relationships with

members of the Board of Directors, other BoC

members and / or controlling shareholder, or any

relationship with the Bank that may affect the

relevant ability to act independently.

In POJK No.55 / POJK.03 / 2016, the total

number of members of the Board of Commissioners

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is stipulated to be at least 3 (three) persons and at most

equal to the number of members of the Board of

Directors. According to Emirzon (2007), a company

should be at least 20% of the members of the board of

commissioners must come from outside the company,

this is useful to improve the effectiveness of the role

of oversight and transparency of consideration. This

commissioner role is expected to minimize agency

issues arising between the board of directors and

shareholders. According to Hermawan (2011), more

and more board of commissioners in an organization

will be able to facilitate the work because the work

can be divided into more people and easier to

specialize because it has a number of experts that

more and varied. Uadiale's research (2010) shows that

firms with large numbers of board of directors will be

more effective in monitoring, thus improving the

company's financial performance compared to firms

with fewer board of directors. However, according to

Muntoro (2006), the size of the board of

commissioners is too big will be able to make the

process of seeking agreement and decision making

process becomes difficult, long and long-winded.

In order for the council to proceed effectively, the

existing board of commissioners within a company

must have sufficient competence. Although the board

of commissioners may utilize the services of experts

from outside the company, the ability of the board of

commissioners to detect problems early will be much

sharper if there are members of the commissioner

who are experts in the field related to the issue

(Muntoro, 2006). Competence can be seen from the

educational background and experience of the

members of the board of commissioners. To be able

to understand and oversee the process of presenting

the company's financial statements, specifically

expected board members have knowledge or

background in finance and accounting (Hermawan,

2011).

Activities and activities undertaken by the board

of commissioners within the company include the

submission of supervisory accountability reports on

the performance of directors, financial statements,

and business prospects of the company that has been

done by the board of directors. Furthermore, the

board of commissioners provides advice or

recommendations to the members of the board of

directors for review conducted by the audit

committee. In POJK No.55 / POJK.03 / 2016, the

Meeting of the Board of Commissioners shall be held

periodically at least 4 (four) times in 1 (one) year.

Anderson et al. (2003) and Xie et al. (2003) also states

that board activity as measured by meeting frequency

can also affect board effectiveness. Research

conducted by Brick and Chidambaran (2010) states

that board activity includes the frequency of the

number of meetings attended by the board and

changes in the structure of the board subcommittees,

as well as the activity of the board will determine the

quality level of supervision of the board. Frequency

of meetings has been used as a proxy to measure the

activities of the board of commissioners, the higher

the frequency of meetings will increase the

effectiveness of the board of commissioners. This is

because the higher the activity of the board, it will

increase the disclosure of information that will

ultimately reduce the level of information asymmetry.

2.4 Duties and Responsibilities of Audit

Committee

In order to support the effectiveness of the

implementation of duties and responsibilities, the

Board of Commissioners shall form one of the audit

committees. Understanding the audit committee

according to the National Committee on Governance

Policy (KNKG, 2006) in the General Guidelines of

Good Corporate Governance Indonesia is: "Audit

Committee is a group of people selected by a larger

group to do certain work or to perform specific tasks

or a number of members of the council the

commissioner of the client company responsible for

assisting the auditor in maintaining its independence

from management. "The audit committee is one of the

institutional elements in the concept of Good

Corporate Governance which is expected to

contribute highly in the application level. Its

existence is expected to improve the quality of

internal control of the company, as well as able to

optimize the mechanism of checks and balances,

which ultimately aimed at providing optimum

protection to shareholders and other stakeholders

(IKAI, 2010). According to KNKG (2006), the audit

committee is in charge of assisting the board of

commissioners to ensure that:

a. the financial statements are presented fairly

in accordance with generally accepted

accounting principles,

b. the company's internal control structure is

well implemented,

c. the implementation of internal and external

audits is conducted in accordance with

applicable audit standards, and;

d. follow-up findings of audit results carried

out by management.

In POJK No.55 / POJK.03 / 2016, Audit

Committee membership shall consist of at least 1

(one) Independent Commissioner who is also

The Effect of Agency Problems on Cost Stickiness in the Banking Industry: The Role of the Board of Commissioners and the Audit

Committee Effectiveness

chairman, 1 (one) Independent Party having expertise

in finance or accounting field, and 1 (one)

Independent Party having expertise in law or banking

field. Of course, with adequate competence of audit

committee members, it is expected that the existence

of audit committees will be effective in the context of

effective corporate governance.

In POJK No.55 / POJK.03 / 2016 , Committee

Meetings are held in accordance with the needs of the

Bank. Vafeas (1999) and Adams (2005) in his

research mentioned that the frequency of meetings

conducted by the board will increase the value of the

company, the higher the frequency of meetings

conducted, the supervisory activities by the board will

be higher. Research conducted by Byun (2007) also

states that the activities of the audit committee may

include activities in holding meetings with fellow

members of the committee as well as with the board.

3 RESEARCH METHOD

3.1 Data Collection and Sample

Selection

The population is the sum of the entire group of

individuals, events or objects that attract researchers

to investigate or investigate (Lind et al., 2012). The

population used in this study is a banking company

listed on the Indonesia Stock Exchange (BEI) from

2012 to 2016. Purposive Sampling is used as a

method of sampling. Purposive Sampling is a method

of sampling taking into account certain criteria so that

data obtained more representative and relevant.

Purposive sampling in this study was conducted by

considering the following criteria:

1. Companies belonging to the banking

industry listed on the Stock Exchange and

publish the complete consolidated financial

statements and coefficients that have been

audited as of December 31, from 2012-2016.

2. Companies selected as samples have the

completeness of financial report data used as

a variable in this study during the study

period that is 2011 - 2016.

3. The company does not have any negative

equity, revenue, operating expenses or 0

(zero) because it identifies the company in

an abnormal condition. In addition, the

operating cost does not exceed its revenue.

4. The company does not merge in 2012 - 2016.

The type of data used in this study is secondary

data obtained from Datastream Thomson Reuters at

the Library of the Faculty of Economics and Business

Universitas Indonesia and from the company's

official website. The data is in the form of complete

financial data of banking companies registered in

2012 - 2016.

3.2 Regression Models

The research model used is based on previous

studies of cost stickiness by Anderson et al. (2003),

Calleja et al. (2006), Chen et al. (2012), and

Windyastuti (2014). In addition the model of this

study is an adaptation of previous research models

coupled with other references. The research, in

essence, aims to determine the phenomenon of cost

behavior that is not symmetry (cost stickiness) in the

company and the factors that affect the level of cost

stickiness. This research is quantitative that will use

multiple regression model to analyze the influence of

independent variable and control variable to the

dependent variable. As stated from the framework,

the dependent variable in this study is Cost Stickiness

which will be proxied with Operating Cost Ratio with

Bank Revenue. This is described in the research

model as follows:

i,t

= β

+ β

SALESCHG

i,t

+ β

SALESCHG

i,t

* DECDUM

i,t

+ ε

i,t

(1)

In addition, another variable that is a factor that

affects the level of cost stickiness, namely FCF. The

control variables used in this study are employee

intensity, asset intensity and fixed assets to total asset

ratio. Thus the next model of research is as follows,

i,t

= β

+ β

SALESCHG

i,t

+ β

SALESCHG

i,t

* DECDUM

i,t

+ β

SALESCHG

i,t

* DECDUM

i,t

* FCF

i,t

+ β

FCF

i,t

+ β

i,t

+ β

i,t

+ β

FATA

i,t

+ ε

i,t

(2)

Where OE

i,t

is Rate of change of Operating Costs

on firm i in year t; SALESCHG

i,t

is Rate of change of

annual bank operating income; DECDUM

i,t

Interaction variable / dummy moderation, worth 1 if

revenue decreases and is worth 0 if else; FCF

i,t

is Free

Cash Flow company i in year t; AI

i,t

is Intensity of

Asset to Total Revenue of company i in year t; EI

i,t

Employee Intensity to Total Income of company i in

year t; FATA

i,t

is Fixed Asset Ratio to Total Asset of

company i in year t.

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3.3 Variables for Regression Analysis

The dependent variable tested in this research is

the rate of change of operating cost (OEi, t). This

variable is used in previous studies such as Anderson

et al. (2003), Calleja et al. (2006), Chen et al. (2012),

and Windyastuti (2014). According to previous

studies, the level of cost stickiness can be measured

by the logarithm of the ratio of sales, administrative

and general costs of the current year to the previous

year. Sales, administrative and general costs are used

as a proxy for cost stickiness because these costs have

the potential for distortion and behavioral costs that

are not symmetrical because management's

involvement in controlling these costs is considerable

(Sorros and Karagiorgos, 2013). But because this

research uses Banking as the subject of research, then

the ratio used is the operating cost.

The independent variable is a variable that is

modified or changed to measure its effect on the

dependent variable (Lind et al., 2012). The

independent variables in this study are changes in

operating income and agency issues proxied by Free

Cash Flow as in the research of Chen et al. (2012).

Changes in annual operating income are indicators

tested to determine the company's cost stickiness rate

(Windyastuti, 2014). In essence, changes in sales both

up and down will determine changes in operating cost

behavior. This variable can be measured logarithm of

operating income ratio of the current year with

operating income of the previous year. Free cash flow

is measured by operating cash flow minus capital

expenditure then the result is divided by total assets.

Moderate variables are variables that influence

(strengthen or weaken) the relationship between

independent variables with dependent variable

(Sugiono, 2014). In this study, moderation variables

are DECDUM and Corporate Governance (CG),

namely the effectiveness of the board of

commissioners and audit committee. In addition to

the SALESCHG variable, this study uses interaction

variables or dummy moderation related to sales

changes (DECDUM). This variable is worth 1 if the

firm's revenue on t is smaller than last year's

(decreased), and is 0 if the other. As Hermawan

(2011) studied the effectiveness of the board of

commissioners and audit committee using the scoring

method. Scores are obtained based on checklists,

which are based on characteristics that are considered

to enhance the effectiveness of the board of

commissioners and audit committees, namely

independence, activity, size, and competence. For

each question, the assessment will consist of two

possible answers, good and poor, or three possible

answers that are good, fair, and poor. For each good

value will be given a value of 3, fair will be given a

value of 2, and poor will be given a value of 1. For

questions that cannot be obtained from the company's

annual report, it will be given a poor value or 1.

The control variable is a variable related to the

dependent variable that is controlled or made constant

so that the influence of independent variable to the

dependent variable is not influenced by other factors

outside this research (Lind et al., 2012). In this study,

control variables used are Employee Intensity, Asset

Intensity, and Fixed Assets Ratio to Total Assets.

Calculation of Employee Intensity variable, that is by

comparing the number of employees with income and

Intensity of Assets that is by comparing total assets

with income.

4 RESULTS

4.1 Sample Description

Based on the sample criteria described above, the

total banking listed on the Indonesia Stock Exchange

(IDX) is 44 banks. In order for the data used to be

more stable then issued a sample of banking that

conducted an initial public offering (IPO) and merger

between the period of research that is as many as 15

banks. In other words overall the total sample used in

the study amounted to 29 banks. Because the study

period is five years, so the total observation becomes

145.

4.2 Descriptive Statistics Agency

Problems to Cost stickiness

Table 1 gives an overview of samples that have

been done treatment winsorization where descriptive

statistical results show that the average of the variable

level of changes in OE is 0.0791 and standard

deviation of 0.0682 which means the spread of data

from OE is not scattered or concentrated around the

value. Descriptive statistic after winsorization, the

biggest change of operating cost occurred at Bank

QNB Indonesia (BKSW) in 2014 of 0.2320. This is

due to the increased interest expense arising from

customer deposits increased 211.69% The increase in

the number of customers due to the acquisition of

both banks namely Qatar and Bank Kesawan. While

the lowest level of operating cost change after the

winsorization, the level of change in the lowest

operating costs of Bank MNC International (BABP)

in 2012 to amounted to 0.2320. The decrease in

operating expenses in BABP was due to a 25%

The Effect of Agency Problems on Cost Stickiness in the Banking Industry: The Role of the Board of Commissioners and the Audit

Committee Effectiveness

decrease in interest expense but the greatest decrease

came from a 76% decrease in impairment losses on

financial assets (securities and loans).

Variable rate of change in operating income

(SALESCHG) shows that the average rate of change

in operating income of 0.0678 and standard deviation

of 0.0589, the value indicates that the average value

is greater than the standard deviation value so that the

distribution of data for the rate of change of income

operations are not dispersed. The maximum value of

the SALESCHG variable after the winsorization is

0.2098. the scores achieved by BKSW 2014. Income

of BKSW which experienced a significant increase is

interest income of 141.12% and income provision and

commission of 83.69%. Increase in interest income is

influenced by the number of assets 2014 which

increased 88.63% compared to 2013. While the

minimum value on SALESCHG Variable after the

winsorization of -0.0312 is the value of Bank of India

(BSWD) in 2016. At BSWD, interest income

decreased by 36 % due to a significant decrease in the

amount of credit. Other operating income in 2016

decreased 152% caused mainly by the cut in deferred

fees, and commissions other than loans.

The agency problem variable (FCF) shows that

the average agency problem is 0.0162 with standard

deviation of 0.0307. This value indicates that the

standard deviation value is greater than the mean

value, so the distribution of data for agency problems

is scattered and varied. After the winsorization, the

maximum value of the FCF variable to 0.0824 is

Bank Mega (MEGA) in 2013. The high FCF in

MEGA, due to the result of the 2012 fiscal year is the

receipt of the sale and purchase of the traded asset.

Then the minimum value of FCF variable after the

winsorization of -0.0468 is the value of MEGA in

2012. This is because it is predominantly used to

make payments on the sale and purchase of traded

assets.

Variable AI, EI, and FATA include the control

variables of the study. The asset intensity variable

(AI) shows that the average of AI variable is 10.1465

and the standard deviation is 1.8932. These results

indicate that the average value is greater than the

standard deviation value so that the distribution of

data for the level of changes in operating income is

not scattered. After winsorization, the maximum and

minimum values of AI variables are 13.8762 and

6.1672. The value is owned by Bank QNB Indonesia

(BKSW) in 2013 and Bank Tabungan Pensiunan

Nasional (BTPN) in 2014. Employee intensity

variable (EI) indicates that the average variable EI is

0.00000111 and standard deviation is 0,000000636.

These results indicate that the average value is greater

than the standard deviation value so that the

distribution of data for the level of changes in

operating income is not scattered. After the

winsorization is done, the maximum and minimum

values of the EI variable are 0.00000263 and

0.000000419. The value is owned by Bank Bumi Arta

(BNBA) in 2012 and Bank Permata (BNLI) in 2015.

The fixed asset ratio variable to total assets (FATA)

indicates that the average FATA variable is 0.0166

and the standard deviation is 0.0113. These results

indicate that the average value is greater than the

standard deviation value so that the distribution of

data for the level of changes in operating income is

not scattered. After winsorization, the maximum and

minimum values of the FATA variable are 0.04256

and 0.0036. The value is owned by Bank Bumi Artha

(BNBA) in 2015 and Bank MNC International

(BABP) in 2014.

4.3 Descriptive Statistics Checklist of

the Effectiveness of the Board of

Commissioners and the Audit

Committee

This study also examines the role of governance

in moderating the effect of agency problems on cost

stickiness. The governance measured in this study is

the effectiveness of the board of commissioners and

audit committee. The data were obtained from

Hermawan's (2011) research checklist that was

adjusted for the purpose of this study. Table 2 and 4

describe the descriptive statistics of each question that

comprises the independence component of the board

of commissioners and the Audit Committee. Value

distribution of each question is described in tables 3

and 5.

4.4 Correlation Analysis

Pearson correlation test on this model

summarized in the table 6 shows the relationship of

each variable to each other. In general it can be

concluded that each variable does not have a very

strong correlation with each other because no one has

a value greater than 0.80. Based on table 6 can be

interpreted for variables that have a positive

correlation with OE is SALESCHG of 0.78, AI of

0.25 and FATA of -0.14. So it can be interpreted that

the income and operating costs move in the same

direction. In addition to SALESCHG, the OE variable

also had significant positive correlation (α = 5%) with

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the AI variable and significant negative correlation (α

= 10%) with the FATA variable.

4.5 Hypothesis Testing Results

This study will use Pooled Least Squared (PLS)

with the exception of Strong BOC group that is more

appropriate using Random Effect (RE). This can be

very common given that the sample in this study

operates in the banking sector (industry) which has

the same characteristics. Cost stickiness is an

adjustment to higher cost increases as revenue

increases, but the cost adjustment is smaller when

income decreases. Table 7 shows the result of t test of

SALESCHG variable having coefficient of 0,9850

and p-value equal to 0,0000. The p-value below the α

= 1% level suggests rejecting the null hypothesis. In

other words there is a significant positive effect of

SALESCHG on OE. These findings are consistent

with the concept of cost behavior in which operating

costs will increase as operating income increases.

Each 1% increase in operating income, operating

expenses will increase by 0.985%.

SALESCHG * DECDUM moderation variable

has coefficient of -1,1157 and p-value is 0,019. This

p-value value indicates that the SALESCHG *

DECDUM variable has a significant negative effect

(in α = 5%) against the OE variable. Operating costs

will increase by 0.1307% if there is a decrease in

income by 1%. These results are consistent with the

research of He et. al. (2010) stating that the decrease

in operating income is not permanent so that the

unemployed resources are not adjusted for the

decline.

4.5.1. The Effect of Agency problem to Cost

Stickiness

Table 7 shows Moderate variables SALESCHG *

DECDUM * FCF has coefficient of -32.1172 and p-

value of 0.005. This p-value value indicates that the

SALESCHG * DECDUM * FCF variable has a

significant negative effect (in α = 1%) against the OE

variable. The smaller (negative) variable coefficients

SALESCHG * DECDUM * FCF indicate a greater

level of cost stickiness. This finding is consistent with

the first hypothesis and is consistent with the research

of Chen et al. (2012) stating that when free cash flow

generated by operational activities is high and at the

same time decreasing revenue, the cost stickiness

level of operating cost is higher. That is, managers

have an incentive to use the company's free cash flow

to invest in additional company resources. In these

circumstances, managers expect that the decline in

income in the year is not permanent (more than two

consecutive years). In addition, managers are also

optimistic that in the future the market conditions will

increase, so managers increase costs rather than

reduce them.

4.5.2. The Effect of Agency problem to Cost

Stickiness at the Effectiveness Level of

the Board of Commissioners

This research separates the research sample into

two groups based on the effectiveness score of the

board of commissioners. The first group was a group

with effectiveness scores below the median of all

samples. This group contains 59 observations or 41%

of the total sample. The second group is the group

with effectiveness score above the median of all

samples, there are 86 observations or 59% of the total

sample. Table 8 shows the regression result of both

groups of effectiveness scores of the board of

commissioners. It can be seen that the SALESCHG *

DECDUM * FCF variable coefficient is -280.1581 in

samples with low effectiveness score and -36,0016 in

samples with high effectiveness score. Both

coefficient values SALESCHG * DECDUM * FCF in

each group are significant in α = 5%. It is found that

the effect of agency problem on the level of cost

stickiness of operating cost of banking is higher in the

sample group which has low effectiveness of the

board of commissioner. This is in line with the first

hypothesis that the effectiveness of the board of

commissioners weakens the positive influence of

agency problems with cost stickiness. Under the

effective board conditions, operating costs continue

to increase but only by 36.11%. Although indicated

there is earnings management, but in this condition

the board of commissioners carry out its obligation

that is to supervise especially on the board of

directors. With more supervision, earnings

management can be minimized.

4.5.3. The Effect of Agency problem to Cost

Stickiness at the Effectiveness Level of

the Audit Committee

In addition to the effectiveness of the board of

commissioners, this study also separates the research

sample into two groups based on the effectiveness of

the audit committee. The first group was the group

with effectiveness scores below the median of all

samples, The group contained 61 observations or

The Effect of Agency Problems on Cost Stickiness in the Banking Industry: The Role of the Board of Commissioners and the Audit

Committee Effectiveness

42% of the total sample. The second group is a group

with effectiveness score above the median of all

samples, there are 84 observations or 58% of the total

sample. Table 9 is a regression result of two groups

of audit committee effectiveness scores. Whereas in

the group of samples with a score higher effectiveness

of the audit committee, the variable SALESCHG *

DECDUM * FCF has -29.7095 and significant

coefficient in the level of α = 5%. These results show

that, the effect of agency problem on the cost

stickiness level of operating cost is higher in the

sample group which has low audit committee

effectiveness score compared with the high sample

group. This is in line with the third hypothesis that the

effectiveness of audit committees weakens the

positive influence of agency problems with cost

stickiness. This means that the effectiveness of the

audit committee can mitigate the actions of managers

in restraining the adjustment of operating costs when

operating income decreases. Basically managers

know more information about the company they

manage. Therefore, an effective audit committee is

required in order to mitigate agency problems at the

company.

5 CONCLUSION

Based on hypothesis testing, the conclusion

obtained is the operating cost of banking is the cost

stickiness. That is, the change in the rate of increase

in cost at the time of sale rises higher than the rate of

change in the decrease in cost when the sale falls. In

this research found the existence of cost stickiness on

operating cost is indicated by the increase of 0.985%

for every 1% increase in sales, but for every 1%

decrease in sales still increased the cost of 0.13%.

This can happen because managers expect that the

decline in income in the year is not permanent (more

than two years). In addition, managers are also

optimistic that in the future market conditions will

increase so that managers continue to increase costs.

From the operational side, there are several properties

of costs in the operating cost that are better

maintained than reduced, because if reduced will

sacrifice higher costs. For example layoffs, the

company must pay severance pay.

Based on hypothesis testing, the agency problem

proxied with free cash flow (FCF) has a significant

positive influence on the level of cost stickiness. By

moderating FCF to the level of income decline, it can

be concluded that FCF has a positive effect on cost

stickiness. This is evidenced by statistical test results,

which concludes an increase in operating costs of

32.25% per 1% decrease in income. This can happen

because of conflict of interest and moral hazard,

managers will pursue the highest possible

compensation but when income decreases they will

object if the compensation is lowered. When FCF is

higher, managers have a greater opportunity to invest

more in operating costs when demand increases, and

delay the decrease in operating costs when demand

decreases. Next result, the high effectiveness of the

board can weaken the positive relationship between

the agency problem and the cost stickiness.

Evidenced in statistical tests, on banks that have the

effectiveness of the board of commissioners is low

every 1% decrease in income increased operating

costs by 274.72%. Whereas in banks that have high

effectiveness of boards of commissioners, every 1%

decrease in income occurs an increase in operating

cost of only 31.84%. From the results of statistical

tests and hypotheses can be concluded, that banks that

have weak effectiveness of the board of

commissioners strengthen the positive relationship

agency problems with cost stickiness, in other words

the weaker the effectiveness of the board of

commissioners then the higher the agency problem

affect the cost stickiness. On the contrary, banks with

strong commissioner effectiveness, the less the

agency problem affects cost stickiness. This can

happen because an effective supervisory board

activity is able to mitigate earnings management

practices at the company. In addition to the

effectiveness of the board of commissioners,

corporate governance is also proxied with the

effectiveness of the audit committee with the scoring

method. As a result, the effectiveness of high audit

committees can weaken the positive relationship

between agency issues and cost stickiness. Evidenced

in statistical tests, banks that have the effectiveness of

low audit committees every 1% decrease in income

increased operating costs by 49.72%. Whereas in

banks with high audit committee effectiveness, every

1% decrease in income occurs an increase in

operating cost of 29.86% only. From the results of

statistical tests and hypotheses can be concluded, that

banks that have the effectiveness of weak audit

committees to strengthen the positive relationship

agency problems with cost stickiness, in other words

the weaker the effectiveness of the audit committee,

the higher the agency problem affect the cost

stickiness. And conversely, banks that have strong

audit committee effectiveness, the less the agency

problem affects cost stickiness. This can happen

because the audit committee can mitigate agency

issues against cost stickiness by conducting

independent financial audits to the company.

SEABC 2018 - 4th Sriwijaya Economics, Accounting, and Business Conference

Further research is expected to be done in all

industries of the company with the number and period

of more research to see sticky properties on other

costs, such as Cost of production or salary burden on

the company, to use more than one proxy agency

problem that is Leverage, CEO Period, CEO Salary,

and CEO Turnover. It is hoped that subsequent

research will use samples outside Indonesia as a

comparison also expected to examine similar issues

with different proxies, such as internal control.

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