The Effect of Corporate Governance Medied by Capital Adequacy and Credit Risk on Financial Performance (Study on Commercial Banks Listed on the Indonesia Stock Exchange)

Ari Data ,Rolens E. H. Riwu Manu ,Yeheskial Nggandung

doi:10.7176/rjfa/12-20-06

Abstract

This study discusses the causal relationship between bank corporate governance, capital adequacy and the probability of bank failure due to credit risk from the creditor's perspective on the bank's financial performance. The probability of failure of commercial banks in measuring risk-taking behavior. The special characteristics of commercial banks with smaller board sizes, shareholder equity, and long-term loans are associated with significantly lower levels of credit risk. Larger supervisory boards and short-term debt are associated with lower levels of credit risk.This study aims to examine and prove the effect of corporate governance on capital adequacy, and corporate governance directly and mediated by capital adequacy and credit risk impact on financial performance. Test and prove that corporate governance affects credit risk. Test and prove the effect capital adequacy to credit risk, as well as capital adequacy directly and mediated by credit risk have an impact on financial performance. Test and prove the effect of credit risk on financial performance. The analysis technique uses Generalized Structured Component Analysis (GSCA). The unit of analysis is 30 conventional commercial banks listed on the Indonesia Stock Exchange for the period 2016-2020, using panel data, namely time series and cross sectional data, with a number of observations of 30 x 5 years = 150 financial statements.The findings of this study are expected to contribute to the development of science in the study of financial management, especially the theory of corporate governance and credit risk management, namely: corporate governance as a source of value creation, ensuring capital adequacy as a buffer for the risk of losing credit portfolios and managing credit risk at a minimum level. to maintain financial stability and increase Profit which ensures financial performance remains in good or healthy condition. This study concludes that corporate governance has a significant influence on capital adequacy and financial performance, because good corporate governance will manage an optimal capital structure and the availability of capital adequacy that makes the company more able to operate and invest optimally, so as to generate maximum profit to improve financial performance. The influence of corporate governance on bank financial performance is also mediated by capital adequacy. Corporate governance has no significant effect on credit risk. Corporate governance cannot determine credit risk, because credit risk is the responsibility of company management in order to control risk in banking operations. Capital adequacy has a significant influence on credit risk and financial performance, because capital adequacy for the company's operations and investments will improve the bank's financial performance. Capital adequacy has a direct and mediated effect of credit risk on financial performance. Sufficient capital is able to reduce credit risk and improve financial performance, because credit risk which has a negative impact on financial performance has been successfully reduced. Keywords: Corporate Governance, Capital Adequacy, Credit Risk, Financial Performance. DOI: 10.7176/RJFA/12-20-06 Publication date: October 31 st 2021

Highlights

The main function of commercial banks is to borrow from their customers to provide loans to other parties who need funds, so that banks are always faced with the risk of default as the main risk of the banking sector
The effect of corporate governance on credit risk cannot be generalized to the study population, because it is not statistically significant, which means it only applies to certain sample cases
The effect of corporate governance on bank financial performance is mediated by capital adequacy

Summary

Introduction

The main function of commercial banks is to borrow from their customers to provide loans to other parties who need funds, so that banks are always faced with the risk of default as the main risk of the banking sector. The main task of bank managers and owners is to reduce credit risk through one of the corporate governance tools. Effective corporate governance must increase investor confidence in the country's economy. The most common corporate governance practice in the business objective is to maximize shareholder wealth, the main responsibility of management should be to ensure the interests of shareholders. Debt holders have priority right of payment in the event of bankruptcy, but must bear a higher risk of default when the firm has an incentive to invest in high-risk projects www.iiste.org with the expectation of higher returns. If the project is successful, shareholders will benefit, as a result, shareholder-oriented corporate governance can damage the value of the company and harm debt holders (Dao and Pham, 2015)

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