The Cash Flows and Capital Adequacy Ratio of Indonesian Commercial Banks



Abstract Views
322

Downloads
235

Citations

Share

##plugins.themes.bootstrap3.article.sidebar##

Submitted Aug 9, 2023
Published Dec 2, 2023
10.24018/ejbmr.2023.8.6.2143

Abstract viewed = 322 times

Table of Contents

##plugins.themes.bootstrap3.article.main##

This article examines the impact of partial Cash Flows from Operating Activities (CFO), Cash Flow from Investing Activities (CFI), and Cash Flow from Financing Activities (CFF) on the Capital Adequacy Ratio (CAR) of Indonesian commercial banks. The tests are conducted over a purposive population, sample, and unit of analysis of data from five years from 2009 to 2013 of the Big-Five commercial banks in the country. The period selection considered the banks’ response post-financial crisis in 2008. The classic assumption tests assumed that all data are valid for the simple regression to test each independent variable's correlation and effect on the dependent variable using EViewS econometric software. The test results show that all CF elements correlated negatively with CAR. The CFI shows a significant impact, while the CFO and CFF have insignificant implications on CAR. The conclusions imply that the parties should pay special attention to CFI, which significantly influences the CAR. This conclusion supports the CFI's central position as the source of long-term profit funded by the CFF. The finding indicated that post-crisis 2008, the Indonesian commercial banks improved their investment in long-term assets. The new long-term investment has not resulted in an additional cash flow and even depressed the net cash flow from investing activities. Given the necessity of banks to avoid idle funds, this study recommends future studies concerning the trade-off between CF decrease and the banks' profitability.

Keywords: Cash flow financing activities investing activities operating activities

Downloads

Download data is not yet available.

References

  1. Adesina, K. S., & Mwamba, J. M. (2016). Do Basel III higher common equity capital requirements matter for bank risk-taking behavior? Lessons from South Africa. African Development Review, 28(3), 319-331. https://doi.org/10.1111/1467-8268.12208.
     Google Scholar
  2. Afza, T., & Mirza, H. H. (2010). Ownership structure and cash flows as determinants of corporate dividend policy in Pakistan. International Business Research, 3(3), 210. https://doi.org/10.5539/ibr.v3n3p210.
     Google Scholar
  3. Al-Khouri, R. (2012). Bank characteristics and liquidity transformation: The case of GCC Banks. International Journal of Economics and Finance, 4(12). https://doi.org/10.5539/ijef.v4n12p114.
     Google Scholar
  4. Bakke, T.-E., & Whited, T. M. (2010). Which firms follow the market? An Analysis of corporate investment decisions. Review of Financial Studies, 23(5), 1941-1980. https://doi.org/10.1093/rfs/hhp115.
     Google Scholar
  5. Belém, V. C., & Gartner, I. R. (2016). Empirical analysis of Brazilian banks' capital buffers during the period 2001-2011. Revista Contabilidade & Finanças, 27(70), 113-124. https://doi.org/10.1590/1808-057x201612300.
     Google Scholar
  6. Bell, S., & Hindmoor, A. (2017). Structural power and the politics of bank capital regulation in the United Kingdom. Political Studies, 65(1), 103-121. https://doi.org/10.1177/0032321716629479.
     Google Scholar
  7. Bellouma, M. (2010). Effects of capital investment on working capital management: Evidence on Tunisian export SMEs. The International Journal of Finance, 22(3), 6497-6509.
     Google Scholar
  8. Brew, J. (2011). A capital idea: How to meet the regulators’ expectations of a capital plan. ICBA Independent Banker, 2011, 76-77.
     Google Scholar
  9. Calomiris, C. W., Mason, J. R., Weidenmier, M., & Bobroff, K. (2013). The effects of reconstruction finance corporation assistance on Michigan's banks' survival in the 1930s. Explorations in Economic History, 50(4), 526-547. https://doi.org/10.1016/j.eeh.2013.07.006.
     Google Scholar
  10. Choudhry, M. (2011). An introduction to banking-liquidity risk and asset-liability management. West Sussex, UK: John Wiley & Sons.
     Google Scholar
  11. Dasgupta, S., Noe, T. H., & Wang, Z. (2011). Where did all the dollars go? The effect of cash flows on capital and asset structure. Journal of Financial and Quantitative Analysis, 46(5), 1259-1294. https://doi.org/10.1017/s0022109011000512.
     Google Scholar
  12. Davies, P. (2015). The fall and rise of debt: Bank capital regulation after the crisis. European Business Organization Law Review, 16(3), 491-512. https://doi.org/10.1007/s40804-015-0017-8.
     Google Scholar
  13. DeBoeuf, D. A. (2010). Owners' excess cash flow (OECF): A common-sense alternative to free cash flow. International Journal of Business, Accounting and Finance, 4(2), 45-53.
     Google Scholar
  14. Dhanda, N., & Rani, S. (2010). Basel I and Basel II norms: Some empirical evidence for the banks in India. IUP Journal of Bank Management, 9(4), 21-35.
     Google Scholar
  15. Elliott, B., & Elliott, J. (2017). Financial accounting and reporting (18th ed.). Harlow, UK: Pearson Education.
     Google Scholar
  16. Eun, C. S., & Resnick, B. G. (2014). International finance (7th ed.). Berkshire: McGraw-Hill Education.
     Google Scholar
  17. Farag, M., Harland, D., & Nixon, D. (2013). Bank capital and liquidity. Bank of England Quarterly Bulletin, 53(3), 201-215.
     Google Scholar
  18. Gibson, C. H. (2011). Financial statement analysis (12th ed.) Canada: South-Western Cengage Learning.
     Google Scholar
  19. Harrison, W. T. Jr, Horngren, C. T., Thomas, C. W. (2013). Financial accounting (9th ed.) Upper Saddle River, NJ: Pearson Education.
     Google Scholar
  20. Hazar, A., Babuşçu, S., Tekindal, M. A., & Köksal, M. O. (2018). The risk analysis which specify the capital adequacy ratio in banking sector. International Journal of Economic & Administrative Studies, 20, 135-150.
     Google Scholar
  21. Huang, Y., & Zhang, G. (2012). An examination of the incremental usefulness of balance-sheet information beyond earnings in explaining stock returns. Journal of Accounting, Auditing & Finance, 27(2), 267-293. https://doi.org/10.1177/0148558x11409153.
     Google Scholar
  22. Hubbard, R. G., & O'Brien, A. P. (2012). Money, banking, and the financial system (1st ed.). Upper Saddle River, NJ: Pearson Education.
     Google Scholar
  23. Jeppson, N. H., Ruddy, J. A., & Salerno, D. F. (2016). The statement of cash flows and the direct method of presentation. Management Accounting Quarterly, 17(3), 1-9.
     Google Scholar
  24. John, K., Shangguan, J. Z., & Mateti, R. S. (2015). Financing activities after accounting restatements: an examination of SEOs and PIPEs. Eurasian Economic Review, 5(1), 139-160. https://doi.org/10.1007/s40822-015-0019-4
     Google Scholar
  25. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate accounting (4th ed.) New York: John Wiley & Sons.
     Google Scholar
  26. Kishore, K. (2017). Preference shares and capital adequacy ratio: A study of Indian banks. Journal of Academic Research in Economics (JARE), 9(2), 202-213.
     Google Scholar
  27. Kuprina, N., & Chernenko, I. (2018). Current assets of the enterprise: Theoretical and practical aspects. Food Industry Economics, 10(1), 28-37. https://doi.org/10.15673/fie.v10i1.863.
     Google Scholar
  28. Laiola, R. (2015). Tier 1 capital ratios: The regulation of risk behavior continues. Academy of Accounting and Financial Studies Journal, 19(3), 165-187.
     Google Scholar
  29. Lessambo, F. I. (2020). Banks’ capital adequacy. In F. I. Lessambo (Ed.), The U.S. banking system (pp. 185-207). Cham: Palgrave Macmillan. https://doi.org/10.1007/978-3-030-34792-5_13.
     Google Scholar
  30. Maurin, L., & Toivanen, M. (2015). Risk, capital buffers and bank lending: The adjustment of euro area banks. Journal of Banking and Financial Economics, 1(3), 113-129.
     Google Scholar
  31. Mishkin, F. S., & Eakins, S. G. (2023). Financial markets and institutions (10th ed.). New Jersey: Pearson Education.
     Google Scholar
  32. Molnár, J. (2018). What does financial intermediation theory tell us about fintechs? Vezetéstudomány / Budapest Management Review, 49(5), 38-46. https://doi.org/10.14267/veztud.2018.05.04
     Google Scholar
  33. Ostergaard, C., Sasson, A., & Sørensen, B. E. (2010). Real and financial tradeoffs in non-listed firms: Cash flow sensitivities and how they change with shocks to firms' main-bank (No. 2010/27 Working Paper). Oslo: Norges Bank.
     Google Scholar
  34. Park, D. J. (2018). Remembering financial crises: The risk implications of the rise of institutional investors in project finance. Michigan Law Review, 117(2), 383-414. https://doi.org/10.36644/mlr.117.2.remembering.
     Google Scholar
  35. Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed.) Hoboken, NJ: John Wiley & Sons.
     Google Scholar
  36. Pervin, R., & Nowreen, R. (2018). Determinants of capital structure of commercial banks in Bangladesh listed in the Dhaka Stock Exchange Limited. ASA University Review, 12(1), 85-97.
     Google Scholar
  37. Petruska, K. A. (2011). The informativeness of cash flow forecasts and the regulation FD environment. Journal of Business & Economics Research (JBER), 9(6), 29. https://doi.org/10.19030/jber.v9i6.4377.
     Google Scholar
  38. Qin, X., & Dickson, P. (2012). Commercial banks profitability position: The case of Tanzania. International Journal of Business and Management, 7(13), 136-144. https://doi.org/10.5539/ijbm.v7n13p136.
     Google Scholar
  39. Rahman, M. H., & Younus, S. (2017). Profit maximizing behavior of banks in Bangladesh. The Journal of Developing Areas, 51(3), 123-138. https://doi.org/10.1353/jda.2017.0064.
     Google Scholar
  40. Ramona, T. (2013). Basel I, II, III: Challenges to the bank’s capital adequacy. Annals of the University of Oradea, Economic Science Series, 22(2), 463-471.
     Google Scholar
  41. Rasoolpur, G. S. (2014). Impact of cash flow coverage, debt service & current ratio on capital structure decisions: Empirical evidence from the Indian corporate sector. Journal of Research in Marketing, 3(1), 232. https://doi.org/10.17722/jorm.v3i1.78.
     Google Scholar
  42. Regehr, K., & Sengupta, R. (2016). Has the relationship between bank size and profitability changed?. Economic Review, 101(2), 49-72.
     Google Scholar
  43. Reilly, F. K., & Brown, K. C. (2012). Investment analysis and portfolio management (10th ed.) Mason, OH: South-Western Cengage Learning.
     Google Scholar
  44. Rose, P. S., & Hudgins, S. C. (2013). Bank management & financial services (9th ed.). New York: McGraw-Hill.
     Google Scholar
  45. Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10th ed.). New York: McGraw-Hill.
     Google Scholar
  46. Roy, A. (2016). Low RWA but high GNPA? Risk performance of some Indian banks under Basel II-SA. Journal of Risk Management in Financial Institutions, 9(1), 85–98.
     Google Scholar
  47. Sangmi, M. U. D., & Nazir, T. (2010). Analyzing financial performance of commercial banks in India: Application of CAMEL model. Pakistan Journal of Commerce and Social Sciences (PJCSS), 4(1), 40-55.
     Google Scholar
  48. Schroeder, ‎ R. G., Clark, M. W., & ‎Cathey, J. M. (2016). Financial accounting theory and analysis-text readings and cases (12th ed.). New York: John Wiley & Sons.
     Google Scholar
  49. Sepe, S. M. (2012). Regulating risk and governance in banks: A contractarian perspective. Emory Law Journal, 62, 327–406.
     Google Scholar
  50. Sepehrdoust, H., & Aeini, T. (2013). Determinant factors of capital adequacy ratio in banks of Iran (2006-2010). Financial Accounting Research, 5(4), 35–50.
     Google Scholar
  51. Siddiqua, M., & Hossan, M. (2012). Cash flow statement disclosures in pharmaceutical companies: Bangladesh perspective. ASA University Review, 6(2), 209-221.
     Google Scholar
  52. Singh, M., & Vyas, R. K. (2011). The impact of portfolio risk on performance of scheduled commercial banks in India. IUP Journal of Bank Management, 10(3), 34–48.
     Google Scholar
  53. Stowell, D. P. (2013). Investment banks, hedge funds, and private equity (2nd ed.). Waltham, MA: Elsevier.
     Google Scholar
  54. Subramanyam, K. R. (2014). Financial statement analysis (11th ed.). New York, NY: McGraw-Education.
     Google Scholar
  55. Teres, Y. (2018). The main directions of reduction of debt risks in the medium-term perspective. Skhid, 2(154), 55-63. https://doi.org/10.21847/1728-9343.2018.2(154).132805.
     Google Scholar
  56. Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2018). Financial reporting, financial statement analysis, and valuation: A strategic perspective (9th ed.). Mason, OH: South-Western Cengage Learning.
     Google Scholar
  57. Warren, C. S., Reeve, J. M., & Duchac, J. E. (2016). Financial accounting (14th ed.). Mason, OH: South-Western Cengage Learning.
     Google Scholar
  58. Xiong, W., & Wang, Y. (2018). The impact of Basel III on money creation: A synthetic theoretical analysis. Economics: The Open-Access, Open-Assessment E-Journal, 12(41), 1–34. http://dx.doi.org/10.5018/economics-ejournal.ja.2018-41.
     Google Scholar