Banks Amid Economic Recovery: Understanding Macroeconomic Influences, Firm Valuation, and the Investor Confidence Paradox

Abstract

This study investigates the intriguing relationship between a robust macroeconomic environment during economic recovery and the signaling of increased firm value within the banking sector. It underscores the importance of macroeconomic factors in investors' evaluation of banking firms and examines the rationale behind investors not exhibiting strong reactions to favorable macroeconomic signals. Utilizing an explanatory research method, the study analyzes secondary data from financial reports of 42 companies listed on the Indonesia Stock Exchange during 2010-2020. A panel data regression approach is employed, incorporating common effect, fixed effect, and random effect models, validated through Chow, Hausman, and Lagrange Multiplier (LM) tests. Resulting insights explain the paradoxical absence of a robust investor response despite banks' resilience amid the economic turmoil. The theoretical implication is that a stable macroeconomic environment typically projects positive signals for the banking sector, enhancing investor confidence and potentially driving up share prices. The study reveals substantial practical implications concerning the macroeconomic influences on firm value signals in the banking industry during economic recovery. Banks are advised to recalibrate their strategies and operations to capitalize on or navigate the risks associated with recovery periods.