The Role of Profitability Intervening Variables in Stock Return Model

This research aims to explore the impact of the Loan to Deposit Ratio (LDR) and Interest Rates (IR) on the profitability indicators, specifically Return on Assets (ROA) and Stock Return (SR). The motivation for this investigation arises from observed differences in various research findings and real-world events, prompting a reassessment by researchers. The study adopts a quantitative descriptive approach, employing panel data multiple regression analysis with 20 cross-sectional samples spanning a 6-year time series. The research formula is crafted to optimize Stock Return by including Return on Assets as an intervening variable, focusing particularly on companies within the banking sector listed on the Indonesia Stock Exchange. Two distinct research models are formulated and integrated into a unified model, subjected to rigorous model selection tests such as Chow Test, Hausman Test, and Lagrange Multiplier Test. The study's results suggest that LDR can only indirectly influence SR through the mediating role of ROA. Furthermore, IR has a direct impact on SR without the mediation of ROA. These findings are expected to offer valuable guidance for banking practitioners in Indonesia and market participants, aiding them in maximizing Stock Returns


INTRODUCTION
In relation to ROA, it functions as a measure to evaluate the effectiveness of management in generating profits with the assets at their disposal.The profitability of a bank is impacted by various factors, some within the direct control of management and others beyond their influence.Elements within management's control include the bank's policies and decisions, encompassing aspects like fundraising, capital and liquidity management, and cost control.Conversely, external factors beyond the reach of management comprise environmental elements and inherent characteristics of the bank.Environmental factors include the market structure, regulations, inflation, interest rates, and market growth.
As highlighted by Dendawijaya (2006), the interest rate is a conventional tool for managing inflation rates, and a substantial increase in inflation can adversely impact a company's profitability.Nominal interest rates, observable in market conditions, and real interest rates, calculated as nominal rates minus inflation, constitute two distinct meanings.The factors influencing interest rate determination encompass fund needs, time periods, profit targets, guarantee quality, government policies, company reputation, relations, and competitive product offerings.
Credit interest rates play a pivotal role in determining credit distribution from banks.An increase in credit interest rates tends to discourage borrowing, leading to reduced interest income and, consequently, decreased profitability in the banking sector.Additionally, rising credit interest rates may contribute to the occurrence of bad credit, creating difficulties for debt repayment.Saputra's (2012) research on Islamic banks found no significant impact of credit interest rates on profitability, while Wulandari's (2011) study on conventional banks indicated a negative effect of credit interest rates on profitability.
In this study, the intervening variable Return on Assets (ROA) is employed to explore issues related to stock returns.While there are numerous determinants that can account for ROA, one of them explored in this research is the Loan to Deposit Ratio.Research findings on the Loan to Deposit Ratio (LDR) in studies by Sari et al. (2016), Avrita andPangestuti (2016), andSarifudin (2005) indicate an insignificant impact of the Loan To Deposit Ratio (LDR) on profitability.In contrast, Almilia and Hedyningtyas (2005), Yogianta (2013), Kuncoro (2002), andBudi Ponco (2008) present different results, asserting a significant effect of the Loan To Deposit Ratio (LDR) on ROA with a positive correlation.
Additional research by Sambul S. H., et al. (2016) suggests that the Loan to Deposit Ratio (LDR) has a significant effect on stock returns.However, findings on the impact of the Loan To Deposit Ratio (LDR) on stock returns vary, as evidenced by Rahmi (2004) and Asna (2006), highlighting its influence, while Suardana (2009) and Risky (2009) argue that the Loan To Deposit Ratio has an insignificant effect on stock returns.
Profitability, synonymous with rentability, signifies a company's capacity to generate profits over a specific period.It reflects the relationship between profits and the assets or capital responsible for generating them.Assessing a company's success often involves examining its profitability, serving as an indicator of the company's effectiveness in profit generation.Management utilizes profitability as a performance metric in asset management, as depicted by the profits generated.Studies by Haryetti (2012), Sambul S.H., et al. (2016), Alfianti D. andAndarini S., (2018), Lia Rosalina, J. Kuleh, andMaryam Nadir (2013), Watung and Ilat (2016) find a significant impact of profitability on share prices.Conversely, Nadeak (2011) presents differing results, suggesting an insignificant effect of profitability on Stock Return.
Given the inconsistent research outcomes discussed in the preceding paragraphs, these disparities motivated researchers to undertake the present study.
: There is an influence of Loan to Deposit Ratio (LDR) on Return on Assets (ROA).
In the investigations carried out by Khotijah et al. ( 2020) and Kalengkongan G. ( 2013), it was noted that interest rates do not wield a substantial influence on profitability.However, divergent outcomes surfaced in the studies conducted by Suarmi et al. (2014), Widiantari et al. (2014), Pranata et al. (2016), Novitasari (2018), and Sumawati N. K. A. ( 2019), where interest rates were observed to exert a significant effect and exhibited a positive correlation with the profitability as measured by Return on Assets (ROA).
: There is an influence of interest rates on Return on Assets (ROA).
In the research carried out by Sambul S. H., et al. (2016), Rahmi (2004), and Asna (2006), it was established that the Loan To Deposit Ratio (LDR) has a notable impact on stock returns.However, these results differ from the research conclusions of Suardana (2009) and Risky (2009), suggesting that the Loan To Deposit Ratio has no significant effect on stock returns.
: There is an influence of the Loan To Deposit Ratio (LDR) on Stock Return.

Panel Data Multiple Regression Estimation
When conducting multiple regression analysis on panel data, it is imperative to ensure a blend of time series and cross-sectional data.The methods employed for analyzing the relationship between time series and cross-sectional data include: 1.This analysis utilises F-statistics to choose between the Common Effect Model (CEM) and the Fixed Effect Model (FEM).The determination of whether to accept or reject the hypothesis depends on a significance level of α = 5% for both the null hypothesis ( ) and the alternative hypothesis ( ).In technical terms, the choice between these two models relies on the probability level of the test results.If the probability level is >5%, the null hypothesis ( ) is accepted, and conversely, the alternative hypothesis ( ) is rejected.This implies that the appropriate model to adopt is the Common Effect Model (CEM).Conversely, if the test result has a probability level of <5%, the null hypothesis ( ) is rejected, and the alternative hypothesis ( ) is accepted.This suggests that the suitable model to utilise is the Fixed Effect Model (FEM).Test Criteria: Probability level test results >5% = be accepted (CEM) Probability level test results <5% = rejected (FEM) Hausman Test Hausman testing serves the crucial purpose of determining the preferable model between the Fixed Effect Model (FEM) and the Random Effect Model (REM).This statistical examination involves applying the Chi-Square distribution with degrees of freedom denoted as 'k,' which corresponds to the number of exogenous variables in the model.Alternatively, the test can utilize a significance level based on α = 5%.This process enables researchers to make an informed choice regarding the model that best captures the underlying dynamics of the data.By considering both the statistical significance and the number of exogenous variables, the Hausman test adds a nuanced layer to the decision-making process, contributing to a more refined and accurate selection of the most appropriate econometric model.
In conducting the hypothesis test using the Hausman test, accepting the null hypothesis ( ) and rejecting the alternative hypothesis ( )

DISCUSSION
The extensive credit distribution by the banking sector was expected to enhance profitability levels.However, contrary to expectations, the research findings reveal the opposite effect.Increasing banking credit distribution is associated with a decline in Return on Assets (ROA) profitability.This decrease in profitability can be attributed to the elevated risk in the credit distribution's quality, leading to higher levels of Non-Performing Loans.Consequently, a high Loanto-Deposit Ratio (LDR) does not automatically translate into profits and, as a result, contributes to a reduction in ROA profitability.
Additionally, the research indicates that while high ROA profitability should elicit a positive response from capital market players, the actual market response is negative.This aligns with the earlier explanation, emphasizing the heightened risk associated with the substantial distribution of banking credit, overshadowing the attained profitability.
Furthermore, the research sheds light on interest rates, suggesting that they indirectly fail to explain Stock Returns through profitability.This indirect relationship is attributed to the impact of credit distribution's high-risk nature, indicating that banking management prioritizes quantity over quality.Notably, the research results also demonstrate that interest rates can directly explain their effect on Stock Returns.This finding is consistent with the established theory linking the capital market and prevailing money market theory, indicating that high market interest rates negatively impact the capital market.

CONCLUSION
This research determines that the Loan-to-Deposit Ratio (LDR) is capable of explaining its impact on Stock Returns (SR) only through an indirect pathway and lacks the ability to provide a direct explanation.Conversely, Interest Rate (IR) is found to directly elucidate its influence on SR, but it doesn't contribute to an indirect explanation.Consequently, Return on Assets (ROA) emerges as the dominant variable with the highest level of sensitivity.This underscores a noteworthy implication for future researchers and, particularly, banking practitioners, emphasizing the pivotal role of ROA as a key variable.

Return on Assets and Stock Return as Endogenous Variables in Testing the Suitability of Research Models
Squares statistic, the null hypothesis ( ) is rejected, and the alternative hypothesis ( ) is accepted.This outcome indicates that the fitting estimate aligns with the Random Effect Model.Conversely, if the LM statistical value is lower than the critical value of the Chi-Squares statistic, the null hypothesis ( ) is accepted, and the alternative hypothesis ( ) is rejected.In this scenario, the use of the Common Effect Model is deemed more suitable.The significance level for this test is based on a probability level α = 5%.
B : ROA Regression Coefficient on SR : Std.LDR error against ROA : Std.ROA error against SR • At the level of α = 5%, the Intervening Variable ROA cannot function to mediate the effect of Interest Rate (IR) on Stock Return (SR) (0.54477739 > 0.05).(Table 9) Figure 3. Indirect Effect of IR on SR Where: A : IR Regression Coefficient on ROA B : ROA Regression Coefficient on SR : Std.IR error against ROA : Std.ROA error against SR 1.The Loan to Deposit Ratio (LDR) demonstrates a noteworthy impact and a negative correlation with Return On Assets (ROA) (table-6).negative correlation with Stock Return (SR) (table-7).5.Return on Assets (ROA) indicates a significant and negative correlation with Stock Return (SR) (table-7).6.Return On Assets (ROA) functions as an intervening variable, mediating the indirect influence between LDR and SR (table-8), but not between IR and SR (table-9).