The Effect of Liquidity, Leverage, and Profitability on Financial Distress in Banks Listed on the Indonesia Stock Exchange 2021–2024
Keywords:
Profitability, Leverage, Liquidity, Financial DistressAbstract
Research aims:
This study aims to examine and analyze the effects of liquidity, leverage, and profitability on banking financial distress, measured using a multi-ratio indicator approach, among banks listed on the Indonesia Stock Exchange during the 2021–2024 period.
Design/Methodology/Approach:
This research employs a quantitative associative approach using multiple linear regression analysis. The sample consists of banks selected through purposive sampling, namely those that consistently published complete annual financial reports during the observation period. The final dataset comprises 28 panel-year observations. Financial distress is proxied using a composite indicator reflecting liquidity, leverage, and profitability conditions.
Research findings:
The empirical results indicate that liquidity has a positive and statistically significant effect on financial distress, suggesting that excessive liquidity may increase inefficiencies and stress. Leverage shows a negative and significant effect, implying that an optimal capital structure can mitigate distress risk. Profitability, however, does not exhibit a significant effect on financial distress. Simultaneously, liquidity, leverage, and profitability significantly affect financial distress, as indicated by an F-statistic significance value of 0.023. The model demonstrates strong explanatory power with an R² value of 0.675.
Theoretical Contribution/Originality:
This study contributes to the banking and financial distress literature by reinforcing the relevance of a multi-ratio framework rather than relying on single indicators. It provides empirical evidence from the Indonesian banking sector during the interest-rate normalization period, highlighting how the interaction among liquidity, leverage, and profitability better captures bank vulnerability.
Practical/Policy/Social Implications:
From a managerial perspective, the findings suggest that bank management should carefully balance liquidity buffers to comply with regulatory standards such as LCR and NSFR without maintaining excessive idle funds. Strengthening asset–liability management and optimizing funding and capitalization structures are essential to sustaining bank stability and profitability.
Research Limitations/Implications:
This study is limited by its relatively small sample size and observation period, which may restrict generalizability.
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