Comparing the Cash Flows’ Influence on Capital Adequacy Ratio of Indonesian and Malaysian Commercial Banks

Abstract

This study examines the difference in the simultaneous impact of Cash Flow from Operating Activities (CFO), Cash Flow from Investing Activities (CFI), and Cash Flow from Financing Activities (CFF) on Capital Adequacy Ratio (CAR) between Indonesian and Malaysian commercial banks. By considering the comparability of capital performance post-financial crisis of 2007 to 2008, this study adopted the purposive secondary data published by the big five banks from 2009 to 2013. An E-view statistical software was applied to the panel data to provide coefficients of discrete multivariate regressions between countries and a hypothesis test. The results showed that all Indonesian banks’ CF items negatively correlated with the CAR. Similar correlations also occur for both CFO and CFF on CAR of Malaysian commercial banks, but on the other hand, a positive correlation occurs in the CFI and CAR relationship for Malaysian Commercial banks. Based on a Chow test on the regression outputs, this study concludes that the CFI is the distinguishing factor in the CF’s impact on CAR in the comparison scenario. The finding confirms that Malaysian commercial banks enjoy the Cash Flow stemming from the gains of past investing activities to increase the CAR under study. On the Indonesian side, the negative correlations of CFI, along with CFO and CFF against the CAR alert that refers to the basic CAR formula, the increases in CAR occur concurrently with the annual CFI decreases to spend on investing activities by long term financing. Even though the newest investment contributes to low gains that are inadequate to raise the banks’ equity capital over the increase of risk-weighted assets sooner in the short run.