The purpose of this study is to examine how profitability affects the value of businesses in the banking industry that are listed on the Indonesia Stock Exchange (IDX) between 2022-2024, using dividend policy as an intervening variable. The background of this research is based on increasing investor attention to company value amid the dynamics of post-pandemic economic recovery and monetary policy fluctuations. Return on Assets (ROA), Dividend Payout Ratio (DPR) for dividend policy, and Tobin's Q for firm valuation were used to gauge profitability. Using the Structural Equation Modeling (SEM) method based on Partial Least Squares (PLS) and SmartPLS software, this study employed a quantitative methodology. The yearly financial statements of banking firms that were listed on the IDX during the study period served as the secondary data source. The study's findings demonstrate that a company's worth is positively impacted by profitability. However, dividend policy is negatively impacted by profitability, and company value is negatively impacted by dividend policy. Although their indirect impact is minimal, dividend policies have been demonstrated to moderate the relationship between profitability and firm value. These results are consistent with residual dividend theory and signaling theory, which explain why profitable businesses typically retain earnings for internal purposes in order to sustain long-term growth. In order to boost the firm's value in a sustainable way, this research has significance for investors and company management when deciding on dividend policies and profit management tactics.
In recent years, attention to the issue of corporate value has increased, especially in line with the development of the Indonesian capital market and changes in the dynamics in the banking sector.
Changes in monetary policy, interest rates, and global economic uncertainty have prompted investors to be more selective in assessing the financial performance of companies, especially profitability and dividend policies taken by banking companies.
Profitability has a beneficial impact on firm value, according to a national study by Utami and Prasetyo (2021) published in the journal Accounting and Finance Indonesia (sinta 4). However, the relationship can be increased by using dividend policy as an intervening variable.
However, there is currently a dearth of research in Indonesia that addresses the connection between profitability, dividend policy, and firm value, particularly in the banking sector. The majority of earlier studies have concentrated on the real estate and manufacturing industries rather than the financial sector, which differs in terms of capital, liquidity, and regulation.
According to the banking industry profile report (OJK, 2024), the average Return on Assets (ROA) of the conventional banking sector will increase from 1.80% in 2022 to 2.10% in 2024. Meanwhile, the dividend payout ratio (DPR) has fluctuated, where several large banks such as BBCA, BBRI and BMRI have consistently distributed dividends, while mid-sized banks tend to hold back profits to strengthen capital.
This condition shows that there is a discrepancy between increased profitability and dividend distribution, which can ultimately affect investors' perception of the company's value.
Although various previous studies have addressed this topic, most of them have focused on profitability as an independent variable, while the role of dividend policy as a mediating variable has not been widely researched in the context of the banking sector on the IDX. This opens up further research opportunities to understand how profitability affects a company's value, both directly and through dividend policies.
This research is expected to contribute to the development of financial theory, especially signaling theory and agency theory, which explain how management uses dividend policies to provide positive signals to the market. From a practical perspective, the results of this research are expected to be considered for bank management in determining optimal dividend distribution policies to increase company value and provide practical implications for investors, regulators, and policymakers.
Thus, this research has a high urgency to be conducted, considering the importance of profitability and dividend policy as the main factors in increasing the value of companies in the conventional banking sector, especially in the 2022-2024 period which is marked by post-pandemic economic recovery and stabilization of national financial policies.
Based on the theories that have been described, this research is based on Signal Theory, Corporate Value Theory, and Bird in the Hand Theory as well as Agency Theory as a complementary conceptual foundation.
The three theories explain the causal relationship between profitability (X), dividend policy (Z) as an intervening variable, and company value (Y) in the context of banking in Indonesia.
Previous research indicates that dividend policy serves as an intervening variable that closes the gap between profitability and firm value. However, the results of the study vary depending on the sector and observation period, so there is still a research gap, especially in the context of the banking sector for the 2022-2024 period which faces post-pandemic conditions and interest rate fluctuations.
According to Sugiyono (2017), this study employs an associative quantitative method to examine the link between variables (profitability, dividend policy, and firm valuation).
This approach aims to test the direct and indirect influence between research variables through a mediation model.
Descriptive Statistical Analysis: The data features of each research variable-profitability (ROA), dividend policy (DPR), and company value (Tobin's Q)-are described using descriptive statistics.
Classical Assumption Test (SEM-PLS Model Feasibility): SEM analysis based on Partial Least Squares does not require normality and heteroscedasticity tests. However, the feasibility of the model was tested through multicollinearity (VIF) and correlation between constructs. According to the SmartPLS output, there is no multicollinearity and the model is appropriate for additional analysis because the correlation between constructs is less than 0.90.
Test of Validity and Reliability of Measurement Model (Outer Model): Convergent Validity: The outer loading values of each indicator (LONG, DPR, Tobin's Q) are 1.000, meaning all indicators are declared valid. Construct Reliability: Cronbach's Alpha and Composite Reliability values < 0.70 and AVE < 0.50, so that all reliable constructs are declared valid.
Structural Model Test (Inner Model): ROA is able to explain 1.7% of the variation in the DPR, and ROA and DPR were able to explain 29.7% of Tobin's Q variations.
Hypothesis Testing: All influence paths (H1: ROA - Tobin's Q; H2: ROA - DPR; H3: DPR - Tobin's Q) had a T-statistic value more than 1.96 and a P-value of less than 0.05, indicating that all of the study's hypotheses were accepted.
Analysis of the Research Findings: Profitability (ROA) positively affects company value (Tobin's Q), consistent with signaling theory. ROA has a negative effect on dividend policy (DPR), supporting residual dividend theory. DPR has a negative effect on company value, and dividend policy mediates the relationship between profitability and firm value.
| Variable | Indicator | Outer Loading |
|---|---|---|
| LONG | LONG | 1.000 |
| DPR | DPR | 1.000 |
| Tobin's Q | Tobin's Q | 1.000 |
| Variable | Cronbach's Alpha | Composite Reliability | AVE |
|---|---|---|---|
| LONG | 1.000 | 1.000 | 1.000 |
| DPR | 1.000 | 1.000 | 1.000 |
| Tobin's Q | 1.000 | 1.000 | 1.000 |
| Endogenous Variable | R-Square |
|---|---|
| DPR | 0.017 |
| Tobin's Q | 0.297 |
| Hypothesis | Relationships | Path Coefficients | T-Statistic | P-Value | Verdict |
|---|---|---|---|---|---|
| H1 | ROA → Tobin's Q | 0.4978 | >1.96 | <0.05 | Accepted |
| H2 | ROA → DPR | -0.1303 | >1.96 | <0.05 | Accepted |
| H3 | DPR → Tobin's Q | -0.2205 | >1.96 | <0.05 | Accepted |
| CODE | YEAR | X1-LENGTH | Y1-Tobin's Q | Z1-DPR |
|---|---|---|---|---|
| BBRI | 2022 | 0.02 | 4.01 | 1.03 |
| BBRI | 2023 | 0.03 | 4.41 | 3.18 |
| BBRI | 2024 | 0.03 | 3.10 | 5.09 |
| BBCA | 2022 | 0.03 | 7.68 | 4.16 |
| BBCA | 2023 | 0.03 | 8.55 | 2.64 |
| BBCA | 2024 | 0.03 | 8.77 | 1.64 |
| BBNI | 2022 | 0.01 | 1.67 | 2.77 |
| BBNI | 2023 | 0.01 | 1.84 | 1.30 |
| BBNI | 2024 | 0.01 | 1.83 | 1.81 |
| BBMRI | 2022 | 0.02 | 2.32 | 4.08 |
| BBMRI | 2023 | 0.02 | 2.59 | 4.48 |
| BBMRI | 2024 | 0.02 | 2.19 | 5.92 |
| BDMN | 2022 | 0.01 | 4.04 | 6.64 |
| BDMN | 2023 | 0.01 | 3.38 | 0.00 |
| BDMN | 2024 | 0.01 | 2.60 | 0.00 |
| NISP | 2022 | 0.01 | 7.16 | 1.51 |
| NISP | 2023 | 0.01 | 1.08 | 3.25 |
| NISP | 2024 | 0.01 | 1.07 | 3.39 |
| BNLI | 2022 | 0.00 | 1.43 | 5.49 |
| BNLI | 2023 | 0.01 | 1.29 | 7.64 |
| BNLI | 2024 | 0.01 | 1.31 | 9.13 |
| PNBN | 2022 | 0.01 | 1.72 | 3.81 |
| PNBN | 2023 | 0.01 | 1.31 | 1.83 |
| PNBN | 2024 | 0.01 | 1.83 | 8.89 |
| BNII | 2022 | 0.00 | 1.02 | 3.14 |
| BNII | 2023 | 0.01 | 1.07 | 3.52 |
| BNII | 2024 | 0.00 | 8.03 | 5.35 |
| BRIS | 2022 | 0.01 | 1.94 | 9.00 |
| BRIS | 2023 | 0.01 | 2.26 | 6.91 |
| BRIS | 2024 | 0.01 | 3.08 | 1.49 |
| Indirect Pathway | Coefficients |
|---|---|
| ROA → DPR → Tobin's Q | 0.0287 |
Profitability (Return on Assets / ROA) has a positive effect on the company's value (Tobin's Q). This shows that the higher the company's ability to generate profits from its assets, the higher the company's value in the eyes of investors.
Profitability (ROA) has a negative effect on dividend policy (Dividend Payout Ratio / DPR). These results indicate that companies with high levels of profitability tend to hold profits for internal needs such as expansion and capital strengthening, rather than distributing them in the form of dividends.
The value of the corporation is negatively impacted by the dividend policy (DPR). These findings suggest that dividend distributions that are too high can reduce the company's internal funds, potentially lowering the company's value.
Dividend policies have proven to be able to mediate the relationship between profitability and company value. Dividend policy continues to function as an intervening variable that bridges the gap between profitability and firm value, notwithstanding the very limited indirect influence.