The Role of Profitability in Moderating the Effect of Capital Structure and Capital Adequacy on Firm Value

Ni Nyoman Rahma Dewi; Abdul Kahar; Masruddin Masruddin; I Putu Edi Darmawan

doi:10.55980/ebasr.v5i2.420

Authors

Ni Nyoman Rahma Dewi Department of Accounting, Tadulako University, Palu, Indonesia
Abdul Kahar Department of Accounting, Tadulako University, Palu, Indonesia
Masruddin Masruddin Department of Accounting, Tadulako University, Palu, Indonesia
I Putu Edi Darmawan Department of Accounting, Tadulako University, Palu, Indonesia

DOI:

https://doi.org/10.55980/ebasr.v5i2.420

Keywords:

Capital Structure , Capital Adequacy, Firm Value , Profitability , Banking Sector

Abstract

Previous studies have reported inconsistent findings regarding the effects of capital structure and capital adequacy on firm value. Limited attention has been given to the contingent role of profitability, particularly in the banking sector. Addressing this gap, this study examines the influence of capital structure and capital adequacy on firm value, as well as the role of profitability as a moderating variable in banking companies. The study employs a quantitative research design using the annual financial statements of 12 banking companies listed on the Indonesia Stock Exchange during the 2020–2024 period. The findings reveal that capital structure does not have a significant effect on firm value, whereas capital adequacy positively and significantly enhances firm value. Furthermore, profitability significantly moderates the relationships between capital structure and firm value as well as between capital adequacy and firm value, indicating that the effectiveness of financing decisions and regulatory capital depends on banks' ability to generate sustainable profits. The study contributes to the corporate finance literature by providing updated evidence from the Indonesian banking sector during the post-pandemic period.

References

Abdullah, H., Isiksal, A. Z., & Rasul, R. (2025). Dividend policy and firm value: evidence of financial firms from Borsa Istanbul under the IFRS adoption. Journal of Financial Reporting and Accounting, 23(1), 350–370. https://doi.org/10.1108/JFRA-04-2022-0147

Abusharbeh, M. (2025). Determinants of bank capital adequacy: Empirical insights from Arab countries. Banks and Bank Systems, 20(1), 221–230. https://doi.org/10.21511/bbs.20(1).2025.18

Al-Omari, R., Oroud, Y., Makhlouf, M. H., Alshehadeh, A. R., & Al-Khawaja, H. A. (2024). The impact of profitability and asset management on firm value and the moderating role of dividend policy: Evidence from Jordan. Asian Economic and Financial Review, 14(1), 1–11. https://doi.org/10.55493/5002.v14i1.4937

Almomani, T. M., Obeidat, M. I. S., Almomani, M. A., & Darkal, N. M. A. M. Y. (2022). Capital Structure and Firm Value Relationship: The Moderating Role of Profitability and Firm Size Evidence from Amman Stock Exchange. WSEAS Transactions on Environment and Development, 18, 1073–1084. https://doi.org/10.37394/232015.2022.18.102

Ayash, B., & Rastad, M. (2021). Leveraged buyouts and financial distress. Finance Research Letters, 38. https://doi.org/10.1016/j.frl.2020.101452

Belkhir, M., Ben Naceur, S., Chami, R., & Semet, A. (2019). Bank Capital and the Cost of Equity. IMF Working Papers, 19(265). https://doi.org/10.5089/9781513519807.001

Bernard Azolibe, C. (2022). Banking Sector Intermediation Development and Economic Growth: Evidence from Nigeria. Journal of African Business, 23(3), 757–774. https://doi.org/10.1080/15228916.2021.1926857

Bui, C., Scheule, H., & Wu, E. (2017). The value of bank capital buffers in maintaining financial system resilience. Journal of Financial Stability, 33, 23–40. https://doi.org/10.1016/j.jfs.2017.10.006

Bui, T. N., Nguyen, X. H., & Pham, K. T. (2023). The Effect of Capital Structure on Firm Value: A Study of Companies Listed on the Vietnamese Stock Market. International Journal of Financial Studies, 11(3). https://doi.org/10.3390/ijfs11030100

Cardao-Pito, T. (2026). Financial economics is management thought: a narrative history of corporate finance theories advocating shareholder value constructions. Journal of Management History, 32(4), 648–669. https://doi.org/10.1108/JMH-07-2024-0106

Casciello, R., Maffei, M., & Ziebart, D. A. (2024). Regulatory and contextual factors influencing earnings and capital management decisions: evidence from the European banking sector. In Review of Quantitative Finance and Accounting (Vol. 63, Issue 1). Springer US. https://doi.org/10.1007/s11156-024-01253-9

Chandrasegaran, L. (2020). Capital Adequacy Requirements and Profitability: An Empirical Study on Banking Industry in Sri Lanka. Journal of Economics and Business, 3(2). https://doi.org/10.31014/aior.1992.03.02.223

Dyer, T. A. (2021). The demand for public information by local and nonlocal investors: Evidence from investor-level data. Journal of Accounting and Economics, 72(1), 101417. https://doi.org/10.1016/j.jacceco.2021.101417

Ghorbani, A., & Salehi, M. (2020). Earnings management and the informational and disciplining role of debt: evidence from Iran. Journal of Asia Business Studies, 15(1), 72–87. https://doi.org/10.1108/JABS-11-2019-0336

Goel, T., Lewrick, U., & Tarashev, N. (2020). Bank capital allocation under multiple constraints. Journal of Financial Intermediation, 44(August 2019), 100844. https://doi.org/10.1016/j.jfi.2019.100844

Hamyat, H., Sarita, B., Hasbudin, H., & Sujono, S. (2017). The Effect of Firm size and Diversification on Capital Structure and FirmValue (Study in Manufacturing Sector in Indonesia Stock Exchange). The International Journal of Engineering and Science, 06(06), 50–61. https://doi.org/10.9790/1813-0606025061

Heitzman, S., & Huang, M. (2019). Internal Information Quality and the Sensitivity of Investment to Market Prices and Accounting Profits. Contemporary Accounting Research, 36(3), 1699–1723. https://doi.org/10.1111/1911-3846.12468

Hong, S., Kim, S. H., & Son, J. (2020). Bounded rationality, blame avoidance, and political accountability: how performance information influences management quality. Public Management Review, 22(8), 1240–1263. https://doi.org/10.1080/14719037.2019.1630138

Hossain, M. Z., Khan, M. A. R., & Sadique, M. S. (2018). Basel III and perceived resilience of banks in the BRICS economies. Applied Economics, 50(19), 2133–2146. https://doi.org/10.1080/00036846.2017.1391999

Huang, Q., Jiang, F., & Wu, S.-Y. (Jennifer). (2018). Does short-maturity debt discipline managers? Evidence from cash-rich firms’ acquisition decisions. Journal of Corporate Finance, 53, 133–154. https://doi.org/10.1016/j.jcorpfin.2018.10.001

Hugonnier, J., & Morellec, E. (2017). Bank capital, liquid reserves, and insolvency risk. Journal of Financial Economics, 125(2), 266–285. https://doi.org/10.1016/j.jfineco.2017.05.006

Issa, S., Bizel, G., Jagannathan, S. K., & Gollapalli, S. S. C. (2024). A Comprehensive Approach to Bankruptcy Risk Evaluation in the Financial Industry. Journal of Risk and Financial Management, 17(1). https://doi.org/10.3390/jrfm17010041

Kartikasari, D., Ahyani, F., & Zulfikar, Z. (2022). Influence of Capital on Firm Value Through Enterprise Risk Management in Banking. Journal of Economics and Business, 5(2). https://doi.org/10.31014/aior.1992.05.02.429

Kong, L., Akbar, M., & Poulova, P. (2023). The Role of Environment, Social, and Governance Performance in Shaping Corporate Current and Future Value: The Case of Global Tech Leaders. Sustainability (Switzerland), 15(17). https://doi.org/10.3390/su151713114

Kunjeda, C. B. (2024). Impact of Capital Adequacy on Profitability of Commercial Banks in Nepal. SP Swag: Sudur Pashchim Wisdom of Academic Gentry Journal, 1(1), 57–72. https://doi.org/10.69476/sdpr.2024.v01i01.006

Kweh, Q. L., Lu, W. M., Tone, K., & Liu, H. M. (2024). Evaluating the resource management and profitability efficiencies of US commercial banks from a dynamic network perspective. Financial Innovation, 10(1). https://doi.org/10.1186/s40854-023-00531-0

Lepetit, L., Meslier, C., Strobel, F., & Wardhana, L. (2018). Bank dividends, agency costs and shareholder and creditor rights. International Review of Financial Analysis, 56, 93–111. https://doi.org/10.1016/j.irfa.2017.12.007

Lin, L., Pun, N. T., & Sun, P. W. (2024). Impact of investor trust on public firms’ stock price efficiency and cost of capital: Insights from a firm-level measure for investor trust. Economic Modelling, 138(October 2023), 106786. https://doi.org/10.1016/j.econmod.2024.106786

Linawati, N., Moeljadi, Djumahir, & Aisjah, S. (2022). The effect of profitability and bank size on firm value sustainability: The mediating role of capital structure. Investment Management and Financial Innovations, 19(2), 331–343. https://doi.org/10.21511/imfi.19(2).2022.29

Lovallo, D., Brown, A. L., Teece, D. J., & Bardolet, D. (2020). Resource re‐allocation capabilities in internal capital markets: The value of overcoming inertia. Strategic Management Journal, 41(8), 1365–1380. https://doi.org/10.1002/smj.3157

Møen, J., Schindler, D., Schjelderup, G., & Tropina Bakke, J. (2019). International Debt Shifting: The Value-Maximizing Mix of Internal and External Debt. International Journal of the Economics of Business, 26(3), 431–465. https://doi.org/10.1080/13571516.2019.1599189

Naamati-Schneider, L. (2021). Intraorganization conflicts of interest in hospitals adapting to a changing ecosystem. Journal of Health Organization and Management. https://doi.org/10.1108/JHOM-09-2021-0325

Nazir, A., Azam, M., & Khalid, M. U. (2021). Debt financing and firm performance: empirical evidence from the Pakistan Stock Exchange. Asian Journal of Accounting Research, 6(3), 324–334. https://doi.org/10.1108/AJAR-03-2019-0019

Ning, J., Zhang, L., Mi, B., Yang, J. H., & Tao, L. (2025). Signalling through managerial tone and analysts’ response. Accounting Forum, 49(4), 803–829. https://doi.org/10.1080/01559982.2024.2339911

Niţoi, M., Clichici, D., & Moagăr-Poladian, S. (2019). The effects of prudential policies on bank leverage and insolvency risk in Central and Eastern Europe. Economic Modelling, 81(January), 148–160. https://doi.org/10.1016/j.econmod.2018.12.016

Nurdin, E., Awaluddin, I., Abdullah, M., Asni, N., & Sari, I. M. (2025). Capital structure as a determinant of firm value: A moderation analysis of firm size. Edelweiss Applied Science and Technology, 9(5), 3240–3248. https://doi.org/10.55214/25768484.v9i5.7675

Nurhayati, I., Sudiyatno, B., Puspitasari, E., & Basiya, R. (2021). Moderating Effect of Firm Performance on Firm value: Evidence from Indonesia. Problems and Perspectives in Management, 19(3), 85–94. https://doi.org/10.21511/ppm.19(3).2021.08

Obadire, A. M., Moyo, V., & Munzhelele, N. F. (2023). An Empirical Analysis of the Dynamics Influencing Bank Capital Structure in Africa. International Journal of Financial Studies, 11(4). https://doi.org/10.3390/ijfs11040127

Orbaningsih, D. (2022). Effect of Business Risk and Profitability on Capital Structure with Likuiditas As Moderation. Economics, Business, Accounting & Society Review, 1(3), 122–131. https://doi.org/10.55980/ebasr.v1i3.39

Otoritas Jasa Keuangan. (2021). Strategi Nasional Literasi Keuangan Indonesia (SNLKI) 2021 - 2025. Ojk.Go.Id, 1–130.

Panda, B., & Leepsa, N. M. (2017). Agency theory: Review of Theory and Evidence on Problems and Perspectives. Indian Journal of Corporate Governance, 10(1), 74–95. https://doi.org/10.1177/0974686217701467

Pangestuti, D. C., Muktiyanto, A., Geraldina, I., & Darmawan. (2022). Role of Profitability, Business Risk, and Intellectual Capital in Increasing Firm Value. Journal of Indonesian Economy and Business, 37(3), 311–338. https://doi.org/10.22146/jieb.v37i3.3564

Perdana, M. R., Sudiro, A., Ratnawati, K., & Rofiaty, R. (2023). Does Sustainable Finance Work on Banking Sector in ASEAN?: The Effect of Sustainable Finance and Capital on Firm Value with Institutional Ownership as a Moderating Variable. Journal of Risk and Financial Management, 16(10), 1–19. https://doi.org/10.3390/jrfm16100449

Pratt, W. R., Barboza, G. A., & Brigida, M. (2023). Leverage and firm value. Economic Notes, 52(2). https://doi.org/10.1111/ecno.12218

Rahayu, S. M., Suhadak, S., & Saifi, M. (2019). The reciprocal relationship between profitability and capital structure and its impacts on the corporate values of manufacturing companies in Indonesia. International Journal of Productivity and Performance Management, 69(2), 236–251. https://doi.org/10.1108/IJPPM-05-2018-0196

Rahmah, T. A., & Akbar, F. S. (2025). Can Bigger Be Safer? Firm Size and Financial Ratios in Distress Prediction. Economics, Business, Accounting & Society Review, 4(2), 265–281. https://doi.org/10.55980/ebasr.v4i2.201

Sambo, E. M., Sufiati, S., & Pura, R. (2023). Determinants of Company Value: Study on Pharmaceutical Companies on the Indonesia Stock Exchange. Economics, Business, Accounting & Society Review, 2(3), 193–202. https://doi.org/10.55980/ebasr.v2i3.94

Sang, N. M. (2021). Capital adequacy ratio and a bank’s financial stability in Vietnam. Banks and Bank Systems, 16(4), 61–71. https://doi.org/10.21511/bbs.16(4).2021.06

Serwadda, I. (2019). The effects of capital structure on banks’ performance, the Ugandan perspective. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 67(3), 853–868. https://doi.org/10.11118/actaun201967030853

Sugiyono, P. D. (2013). METODE PENELITIAN KUANTITATIF, KUALITATIF DAN R & D.

Zhang Guoxing, Aftab Hussain Tabasam, Muhammad Nadeem Khan, Anam Ashiq. (2023). Indirect Effect of Earnings Quality in the Linkage between Managerial Ability and Firm Performance: Evidence from an Emerging Economy. Tuijin Jishu/Journal of Propulsion Technology, 44(2), 335–350. https://doi.org/10.52783/tjjpt.v44.i2.177