The Nexus of Interest Rate, Foreign Exchange Rate, Profitability, and Leverage on Stock Returns in the Indonesia LQ45 Companies Andewi Rokhmawati, Rifo Firmansyah, Fitri Fitri, Elvi Rahmayanti
Universitas Riau
Abstract
Companies must maintain their stock price high to maximize the existing shareholders^ wealth. Maintaining the companies^ solid fundamentals to cope with the macroeconomic turmoil is crucial to sustaining its excellent financial performance. This study analyzes the effect of interest rates, foreign exchange rates, and leverage on profitability- interest rates, foreign exchange, leverage, and profitability on stock returns- the profitability in mediating the effect of interest rates, foreign exchange rates, and leverage on stock returns. This research was carried out in the Indonesian capital market from 2018 to 2020, involving 37 samples out of 45 Liquid companies (ILQ45). Path analysis with the Sobel test was used to analyze the data. The results found that interest rates and foreign exchange negatively and significantly affect profitability. Interest rate, foreign exchange, and leverage negatively and significantly affect stock returns, and profitability significantly positively affects stock returns. Profitability negatively and significantly mediates the effect of interest and exchange rates on stock returns. These results imply that investors respond negatively to the increase in the interest rate due to the high level of companies^ leverage. The companies^ leverages have reached an optimum level. Companies were vulnerable to interest rate changes and foreign exchange changes. As a result, the companies are exposed to a higher financial risk. Hence, companies should pay more attention to managing their leverage before they have difficulties in cash flows.
