Track: Business Management

Abstract

This research aims to investigate how capital structure of banks relates to levels of profitability, taking into account firm size and effect of Covid-19 pandemic. We present the analysis within the context of Indonesia whereby banking regulations are different to other countries. Extant literature studies the association of leverage, firm size and profitability during normal economic conditions, or influence of Covid-19 pandemic on profitability independently. This research examines all the antecedents altogether. We examine whether increased capital (debt) provided by the Indonesian government affects banks profitability, giving novel consideration to the heightened credit risks emanated by the pandemic. Fixed effect regression is employed to study the effect of leverage, firm size, and Covid-19 pandemic on banks profitability. We find that leverage positively affects banks profitability, while firm size negatively affects leverage and profitability. High debt levels pressures management to meet the required return of shareholders. Larger banks prefer zero-risk government bonds over lending creditors primarily during economic uncertainties. Covid-19 pandemic has no effect on banks profitability. We expect that banks in Indonesia administer risk-averse investments, ensuring sustainability in the long run.  This research aims to investigate how capital structure of banks relates to levels of profitability, taking into account firm size and effect of Covid-19 pandemic. We present the analysis within the context of Indonesia whereby banking regulations are different to other countries. Extant literature studies the association of leverage, firm size and profitability during normal economic conditions, or influence of Covid-19 pandemic on profitability independently. This research examines all the antecedents altogether. We examine whether increased capital (debt) provided by the Indonesian government affects banks profitability, giving novel consideration to the heightened credit risks emanated by the pandemic. Fixed effect regression is employed to study the effect of leverage, firm size, and Covid-19 pandemic on banks profitability. We find that leverage positively affects banks profitability, while firm size negatively affects leverage and profitability. High debt levels pressures management to meet the required return of shareholders. Larger banks prefer zero-risk government bonds over lending creditors primarily during economic uncertainties. Covid-19 pandemic has no effect on banks profitability. We expect that banks in Indonesia administer risk-averse investments, ensuring sustainability in the long run.