The Relationship Analysis between Profitability Ratio and the Firm Size to the Banking Stock Return after the Implementation of PBI No. 14/26/PBI/2012

Abstract

In 2012, Bank Indonesia as the banking regulator in Republic of Indonesia has released the regulation No. 14/26 / PBI / 2012 for Banks which are operating in Indonesia. The Regulation has designed to regulate the type of product or services which are allowed to be provided by the company, an investment to be made to all subsidiaries and network expansion are based on the firm size which are measured by its core capital or common equity tier 1. The regulation classifies banking companies into four groups called BUKU. The substance of this rule is that the smaller company size, the lesser type of service can be provided and vice versa. Thus, it might affects to the profitability of the company. Like many other type of companies, many of banks are listed in stock exchange. In the stock markets, beside the company profitability, some believes that there is a "size effect" will be influencing the stock returns. The purpose of this study is was to see the relationship between the profitability, company maturity level and the firm size to its stock returns based on the categorization in the PBI No. 14/26/PBI/2012, the company profitability (which represented by ROA, ROE & NPM), and the company maturity level which represented by the year of IPO variable to the stock return.  The result showed that for banking industries sector in Indonesia Stock Exchange, the size effect, the year of IPO, ROA and ROE have a significant relationship with the stock return in all period, while the NPM only has significant effect for group BUKU 3 & BUKU 4. The result also explained that the size effect shown by the difference models of each BUKU. Additionally, in the period of after the regulation applied, the NPM also found a significant relationship in the BUKU 1 & 2 groups. Also, during this period BUKU 2 attained a positive impact from the size effect.

Keywords: Profitability Ratio, ROA, ROE, NPM, Size Effect, Firm Size, Stock Returns

JEL Classification: G18, G21, L25