The Effect of Capital Adequacy, Credit Risk, and Liquidity Risk on Bank Financial Performance: The Intervening Role of Profitability

Abstract

This study examines the effect of capital adequacy, credit risk, and liquidity risk on bank financial performance through profitability, using 43 conventional banks listed on the Indonesia Stock Exchange, 2015-2024 (430 bank-year observations). CAR, NPL, and LDR are the independent variables; PBV proxies market-based bank performance, with ROA tested as an intervening variable. Structural Model I (CAR/NPL/LDR-to-ROA) is estimated with Random Effects and Model II (to PBV) with Fixed Effects, per the Hausman test. CAR, NPL, and LDR do not affect ROA, individually or jointly (F=1.236; p=0.296). CAR positively, and NPL negatively, affect PBV; LDR and ROA do not. An explicit Sobel test confirms ROA does not mediate any of the three paths. Winsorized and cluster-robust checks confirm these results. Capital adequacy and credit quality appear to affect firm value directly rather than through profitability.