The effects of Tier-1 capital, risk management, and profitability on performance of Indonesian Commercial Banks

Abstract

Purpose

This research aims to examine the effect of Tier-1 capital, risk management, and profitability on performance of Indonesia commercial banks.

Design/methodology/approach

The research population consisted of all commercial banks listed in the Indonesia Stock Exchange periods of 2010 to 2014 with a total of 42 companies. The statistical analysis for testing the hypothesis using structural equation modeling (SEM) covariance based using WarpPLS.

Findings

Research result shows that Tier-1 capital has a positive effect on capital on risk management; risk management has a positive effect on performance, but risk management does not have an effect to profitability; profitability has a positive effect on performance; and Tier-1 capital has a negative effect on profitability. On the other hand, profitability has a negative effect on Tier-1 capital and performance has a positive effect on Tier-1 capital, whereas Tier-1 capital does not have an effect on performance.

Originality/value

The originality of this research can be seen from the causal relationship between the effects of Tier-1 capital, risk management and profitability on performance of commercial banks in the context of stock performance among Indonesia commercial banks. In addition, previous research findings remain inconsistent between one another. By conducting this research, it is expected that more consistent research findings than the previous ones can be generated. Sluggish global economic conditions which result in declined bank performance are an interesting topic to investigate.

Citation

Sari, E., , S., Rahayu, S.M. and , S. (2018), "The effects of Tier-1 capital, risk management, and profitability on performance of Indonesian Commercial Banks", International Journal of Law and Management, Vol. 60 No. 5, pp. 1074-1086. https://doi.org/10.1108/IJLMA-05-2017-0109