Page 70 - FREN-C2021 PROCEEDINGS

Literature Review
Many studies have been conducted in different countries to investigate the determinants of efficiency
in all firms. To remain consistent with the previous studies, measures of the dependent variable and
specific determinants of efficiency were taken from the previous studies. The following sub-sections
are the explanation of the variables included and analysed in this paper.

Dependent Variable: Efficiency
The efficiency ratio is typically used to analyse how well a company uses its assets and liabilities
internally. An efficiency ratio can calculate cash turnover (CTO), inventory turnover (ITO), working
capital turnover (WCTO), fixed asset turnover (FATO), and total asset turnover (TATO). The
dependent variable means the main problem that was identified by the researcher to help the
researcher to measure the dependent variable and other independent variables that influenced the
variable. As a result, for this study fixed asset turnover will be used to represent the efficiency of a
firm. Fixed asset turnover is a measurement of how effectively the firm uses its plant and equipment.
Higher of this ratio numbers means that the company manage their assets to generate revenue so
higher profit can be earned by the company. FATO is calculated by dividing the net sales and net fixed
assets. Higher this ratio means the company can manage their fixed asset to generate revenue, so
higher profit can be earned by the company (Sunjoko & Arilyn, 2016).
FATO = (Net sales / Net fixed asset)

Independent Variable:

Board Composition:
Board composition is a significant mechanism to ensure board effectiveness. The board's
independence could help to reduce information asymmetry and improve financial reporting
transparency (Allini et al., 2016). An independent board is composed of professionals who do not
involve in management affairs and do not have an ownership interest in the company. They have the
integrity to protect their reputation. The Green Book of the transformation policy emphasises that a
board must have a balance of directors to ensure that no individual or small group of directors dominates
the board. The higher of two directors, or one-third of the board, must be independent. According to
previous research found that Board independence was found to have a positive relationship with firm
efficiency, implying that the presence of independent directors contributes significantly to evaluating
the strategies affecting efficiency (Smriti & Das, 2021). Board size is the second mechanism that paid
the attention of researchers. Previous research found a positive impact of board size on firm
performance. A larger board of directors has more expert knowledge and can thus make more
effective strategic decisions, allowing the company to maximise its profits (Rahman & Saima, 2018).

Profitability:
Profitability is the company’s ability to earn profits through all of its resources and capabilities
(Purnama & Nurdiniah, 2019). Profitability provides important information to third parties because if
profitability is high, it can be determined that the company's performance is good, and vice versa, if
profitability is low, a company's performance can be considered poor. The profitability of any firm can
be measured by using different ratios such as gross profit margin (GPM), operating profit margin
(OPM), net profit margin (NPM), return on assets (ROA) and return on equity (ROE). Following the
previous researchers by (Isola et al., 2020) Firms' financial performance will be measured using return
on equity. The findings show that there is a significant and positive relationship between ROE and
efficiency. In essence, the Return on Equity ratio calculates the rate of return that a company's
common stock owners earn on their shareholdings. Rising ROE indicates that a company is good at
generating shareholder value because it knows how to wisely reinvest its earnings to boost
productivity and profits. A declining ROE, on the other hand, indicates that management makes bad
decisions about reinvesting capital in inefficient assets. Specifically in this research, return on equity
is calculated by dividing the firm’s net income and the average total equity of the firm. Net margin

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