Cash Flows and Capital Adequacy Ratio of Indonesian Commercial Banks

Abstract

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.