Determinants of the Price Earning Ratio and Corporate Governance in the Indonesian Banking Industry

Abstract

The objective of this study is to examine the determinants of the price earning ratio (PER) and corporate governance in the indonesian banking industry. This paper employs the quantitative methodological paradigm with descriptive research design that seeks to describe the situation of the research subject. Panel data were used for this research. The data consist of both cross-section and time series data obtained from annual reports, financial statements, governance report, and official database of the Indonesia Stock Exchange (IDX) and Financial Services Authority (FSA). Purposive sampling technique was employed for sample selection based on research criteria, yielding 44 banking firms as samples with total of 220 observations. Data analysis was conducted based on descriptive statistics and trends on some variables, such as Return on Assets (ROA), Return on Equity (ROE), Earnings per Share (EPS), Debt to Equity Ratio (DER), Capital Adequacy Ratio (CAR), Good Corporate Governance (GCG), and Price Earning Ratio (PER). The data analysis shows that there is an improvement in fundamental strength of the banking industry in Indonesia after the pandemic years in 2020-2024. Moreover, the capital adequacy ratio of the banks also remained relatively healthy, having levels of CAR that were higher than the required level, while DER had features indicative of the nature of the banking industry. There was also an improvement in the implementation of GCG, as indicated by the mean value of the GCG composite score. Nevertheless, the correlation between profitability and PER was not completely linear since market value also depends on the perceptions of investors concerning the growth and innovation of the business, and its strategic plans. This research proves that the valuation of banks depends on the interaction between all the above factors.