Investor Protection in Indonesia:   Financial Ratios as Early Warning Indicators

Enggar Sukma Kinanthi; Sukmawati Sukamulja

doi:10.14414/jebav.v27i3.4851

Vol. 27 No. 3 (2025), Articles

Vol. 27 No. 3 (2025)

Investor Protection in Indonesia: Financial Ratios as Early Warning Indicators

Articles

DOI: 10.14414/jebav.v27i3.4851

Published 27-03-2025

Enggar Sukma Kinanthi⁺⁻
Sukmawati Sukamulja⁺⁻

Enggar Sukma Kinanthi

Universitas Atma Jaya Yogyakarta

Sukmawati Sukamulja

Universitas Atma Jaya Yogyakarta

PDF

Keywords

Financial distress prediction
Emerging Market
Indonesia stock exchange
Investor protection

How to Cite

Enggar Sukma Kinanthi, & Sukmawati Sukamulja. (2025). Investor Protection in Indonesia: Financial Ratios as Early Warning Indicators . Journal of Economics, Business, and Accountancy Ventura, 27(3), 445-460. https://doi.org/10.14414/jebav.v27i3.4851

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Abstract

The Indonesian government aims to enhance public engagement in the capital market
by strengthening investor protection and financial literacy through the establishment
of a Watchlist Board. This study identifies the most effective financial ratios for dis
tinguishing between the performance of LQ45 and Watchlist Board firms. Using dis
criminant analysis, the research examines a sample of 43 firms from the LQ45 index
and 43 firms from the Watchlist Board between 2020 and 2022. The findings reveal
four key financial ratios with strong differentiating power: Total Asset Growth, Re
turn on Assets (ROA), Operating Cash Flow (OCF) to Current Liabilities, and OCF
to Total Liabilities. Additionally, the study develops a predictive model that can fore
cast company performance and serve as an early warning system for investors. Build
ing on prior research in this area, the results highlight the critical role of profitability,
efficient resource allocation, and robust corporate governance in fostering financial
stability and safeguarding investor interests. This study not only provides a practical
predictive model but also offers valuable insights for interpreting these financial ratios,
particularly in the context of investor protection within emerging markets, such as
Indonesia.

References

Adinegara, G., & Sukamulya, S. (2021). The Effect of Good Corporate Governance on the Market Value of Financial Sector Companies in Indonesia. Jurnal Akuntansi Dan Keuangan, 23(2), 83–94. https://doi.org/10.9744/jak.23.2.83-94

Almeida, H., Campello, M., & Weisbach, M. S. (2005). The Cash Flow Sensitivity of Cash. SSRN Electronic Journal, November 2002. https://doi.org/10.2139/ssrn.345840

Altman, E. I., Danovi, A., Falini, A., & Altman, E. (2013). Z-Score Models’ Application to Italian Companies Subject to Extraordinary Administration. Journal of Applied Finance, 23(1), 1–10. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2686750

Altman, E. I., Iwanicz-Drozdowska, M., Laitinen, E. K., & Suvas, A. (2017). Financial Distress Prediction in an International Context: A Review and Empirical Analysis of Altman’s Z-Score Model. Journal of International Financial Management and Accounting, 28(2), 131–171. https://doi.org/10.1111/jifm.12053

Bates, T. W., Kahle, K. M., & Stulz, R. M. (2009). Why Do U. S. Firms Hold So Much than They Used To? Journal of Finance, 64(5), 1985–2021.

There are 50 references. More references >>

Adinegara, G., & Sukamulya, S. (2021). The Effect of Good Corporate Governance on the Market Value of Financial Sector Companies in Indonesia. Jurnal Akuntansi Dan Keuangan, 23(2), 83–94. https://doi.org/10.9744/jak.23.2.83-94

Almeida, H., Campello, M., & Weisbach, M. S. (2005). The Cash Flow Sensitivity of Cash. SSRN Electronic Journal, November 2002. https://doi.org/10.2139/ssrn.345840

Altman, E. I., Danovi, A., Falini, A., & Altman, E. (2013). Z-Score Models’ Application to Italian Companies Subject to Extraordinary Administration. Journal of Applied Finance, 23(1), 1–10. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2686750

Altman, E. I., Iwanicz-Drozdowska, M., Laitinen, E. K., & Suvas, A. (2017). Financial Distress Prediction in an International Context: A Review and Empirical Analysis of Altman’s Z-Score Model. Journal of International Financial Management and Accounting, 28(2), 131–171. https://doi.org/10.1111/jifm.12053

Bates, T. W., Kahle, K. M., & Stulz, R. M. (2009). Why Do U. S. Firms Hold So Much than They Used To? Journal of Finance, 64(5), 1985–2021.

Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital structures in developing countries. Journal of Finance, 56(1), 87–130. https://doi.org/10.1111/0022-1082.00320

Casey, C., & Bartczak, N. (1985). Using Operating Cash Flow Data to Predict Financial Distress: Some Extensions. Journal of Accounting Research, 23(1), 384. https://doi.org/10.2307/2490926

Chan, K. C., & Chen, N. ‐F. (1991). Structural and Return Characteristics of Small and Large Firms. The Journal of Finance, 46(4), 1467–1484. https://doi.org/10.1111/j.1540-6261.1991.tb04626.x

Cheng, S. R., & Shiu, C. Y. (2007). Investor protection and capital structure: International evidence. Journal of Multinational Financial Management, 17(1), 30–44. https://doi.org/10.1016/j.mulfin.2006.03.002

Cooper, M. J., Gulen, H., & Schill, M. J. (2008). Asset growth and the cross-section of stock returns. Journal of Finance, 63(4), 1609–1651. https://doi.org/10.1111/j.1540-6261.2008.01370.x

Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18, 3–42. https://doi.org/10.1016/0165-4101(94)90016-7

Fama, E. F., & French, K. R. (2006). Profitability, investment and average returns. Journal of Financial Economics, 82(3), 491–518. https://doi.org/10.1016/j.jfineco.2005.09.009

Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010

Financial Services Authority. (2023). Indonesia capital market roadmap 2023-2027. https://ojk.go.id/en/berita-dan-kegiatan/publikasi/Pages/Indonesia-Capital-Market-Roadmap-2023-2027.aspx

Fund, I. M. (1994). Building Sound Finance in Emerging Market Economies. In Building Sound Finance in Emerging Market Economies. https://doi.org/10.5089/9781557753809.071

Gentry, J. A., Newbold, P., & Whitford, D. T. (1985). Predicting Bankruptcy: If Cash Flow’s Not the Bottom Line, What Is? Financial Analysts Journal, 41(5), 47–56. https://doi.org/10.2469/faj.v41.n5.47

Ghodrati, H., & Abyak, H. (2014). A study on the relationship between operational cash flow and the return of stockholders. Management Science Letters, 4(7), 1551–1558. https://doi.org/10.5267/j.msl.2014.6.003

Gonenc, H., & Ursu, S. (2018). The Asset Growth Effect and Investor Protection in Emerging Markets: The Role of the Global Financial Crisis. Emerging Markets Finance and Trade, 54(3), 491–507. https://doi.org/10.1080/1540496X.2017.1411258

Gray, P., & Johnson, J. (2011). The relationship between asset growth and the cross-section of stock returns. Journal of Banking and Finance, 35(3), 670–680. https://doi.org/10.1016/j.jbankfin.2010.06.005

Han, S., & Qiu, J. (2007). Corporate precautionary cash holdings. Journal of Corporate Finance, 13(1), 43–57. https://doi.org/10.1016/j.jcorpfin.2006.05.002

Hong, N. T. H., Anh, N. T., Hoang, N. T. V., & Minh, D. N. (2023). Corporate governance, external financing, and earnings management: new evidence from an emerging market. Future Business Journal, 9(1). https://doi.org/10.1186/s43093-023-00206-3

Hope, O.-K., Kang, T., & Zang, Y. (2007). Bonding to the Improved Disclosure Environment in the US: Firms’ Listing Choices and their Capital Market Consequences. Journal of Contemporary Accounting & Economics, 3(1), 1–33. https://doi.org/10.1016/s1815-5669(10)70011-4

Huang, Y., Elkinawy, S., & Jain, P. K. (2013). Investor protection and cash holdings: Evidence from US cross-listing. Journal of Banking and Finance, 37(3), 937–951. https://doi.org/10.1016/j.jbankfin.2012.10.021

IDX. (2023). Improving Investor Protection, IDX Implements Watchlist Board. Indonesia Stock Exchange. https://www.idx.co.id/en/news/press-release/1934

Inam, F., Inam, A., Mian, M. A., Sheikh, A. A., & Awan, H. M. (2019). Forecasting Bankruptcy for organizational sustainability in Pakistan: Using artificial neural networks, logit regression, and discriminant analysis. Journal of Economic and Administrative Sciences, 35(3), 183–201. https://doi.org/10.1108/JEAS-05-2018-0063

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X

Klapper, L. F., & Love, I. (2005). Corporate Governance, Investor Protection and Performance in Emerging Markets. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.303979

La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and Finance. Journal of Political Economy, 106(6), 1113–1155. https://doi.org/10.1086/250042

Lee, S., & Choi, W. S. (2013). A multi-industry bankruptcy prediction model using back-propagation neural network and multivariate discriminant analysis. Expert Systems with Applications, 40(8), 2941–2946. https://doi.org/10.1016/j.eswa.2012.12.009

Liang, D., Lu, C. C., Tsai, C. F., & Shih, G. A. (2016). Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research, 252(2), 561–572. https://doi.org/10.1016/j.ejor.2016.01.012

Love, J., Selker, R., Marsman, M., Jamil, T., Dropmann, D., Verhagen, J., Ly, A., Gronau, Q. F., Šmíra, M., Epskamp, S., Matzke, D., Wild, A., Knight, P., Rouder, J. N., Morey, R. D., & Wagenmakers, E. J. (2019). JASP: Graphical statistical software for common statistical designs. Journal of Statistical Software, 88(1). https://doi.org/10.18637/jss.v088.i02

Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0

Pradipto, Y., Saptono, H., & Mahmudah, S. (2019). Kewenangan Otoritas Jasa Keuangan (OJK) Terhadap Perlindungan Hukum Bagi Investor Pasar Modal di Bursa Efek Indonesia Dengan Menggunakan Sistem Transaksi Online Trading. Diponegoro Law Journal, 8(1), 2–14.

PwC. (2023). Towards advanced Indonesia. PricewaterhouseCoopers. https://www.pwc.com/id/en/media-centre/infrastructure-news/august-2023/towards-advanced-indonesia.html#:~:text=With an average economic growth,income class reaching 80%25

Rahadiyan, I.-, & Ambarsari, D. A. (2018). Ketiadaan Batas Waktu Suspensi Dan Implikasinya Terhadap Perlindungan Investor Pasar Modal Indonesia. Jurnal Hukum Ius Quia Iustum, 25(2), 300–319. https://doi.org/10.20885/iustum.vol25.iss2.art5

Rizova, S., & Saito, N. (2020). Investment and Expected Stock Returns. SSRN Electronic Journal, July. https://doi.org/10.2139/ssrn.3646575

Sareen, A., & Sharma, S. (2022). Assessing Financial Distress and Predicting Stock Prices of Automotive Sector: Robustness of Altman Z-score. Vision, 26(1), 11–24. https://doi.org/10.1177/0972262921990923

Soekarno, S., & Azhari, D. A. (2010). Analysis of Financial Ratio to Distinguish Indonesia Joint Venture General Insurance Company Performance using Discriminant Analysis. The Asian Journal of Technology Management, 3(2), 101–122. www.sbm.itb.ac.id/ajtm

Soekarno, S., & Kinanthi, E. S. (2020). Discriminant Function Analysis to Distinguish the Performance of Information and Communication Technology (ICT) Companies (A Study of U.S. Companies Listed in U.S. Stock Market). The Asian Journal of Technology Management (AJTM), 13(2), 113–128. https://doi.org/10.12695/ajtm.2020.13.2.2

Sukamulja, S. (2004). Good corporate governance di sektor keuangan: dampak GCG terhadap kinerja perusahaan. Benefit: Jurnal Manajemen Dan Bisnis, 8(1), 1–25.

Sumadi, T. R. D., Kurniawan, H., & Novando, F. (2023). Perlindungan Investor Di Pasar Modal Di Indonesia Melalui Disgorgement (Fund) Berdasarkan Pojk Nomor 65/Pojk.04/2020. Civilia : Jurnal Kajian Hukum Dan Pendidikan Kewarganegaraan, 3(2). http://jurnal.anfa.co.id

Tian, S., & Yu, Y. (2017). Financial ratios and bankruptcy predictions: An international evidence. International Review of Economics and Finance, 51, 510–526. https://doi.org/10.1016/j.iref.2017.07.025

Titman, S., Wei, K. C. J., & Xie, F. (2004). Capital investments and stock returns. Journal of Financial and Quantitative Analysis, 39(4), 677–700. https://doi.org/10.1017/s0022109000003173

Titman, S., Wei, K. C. J., & Xie, F. (2013). Market development and the asset growth effect: International evidence. Journal of Financial and Quantitative Analysis, 48(5), 1405–1432. https://doi.org/10.1017/S0022109013000495

Toly, A. A., Permatasari, R., & Wiranata, E. (2020). The Effect of Financial Ratio (Altman Z-Score) on Financial Distress Prediction in Manufacturing Sector in Indonesia 2016-2018. 144(Afbe 2019), 47–53. https://doi.org/10.2991/aebmr.k.200606.008

Veronica, S. & Bachtiar, Y. . (2005). Corporate Governance, Information Asymmetry, and Earnings Management. Jurnal Akuntansi Dan Keuangan Indonesia, 2(1), 77–106. https://doi.org/10.21002/jaki.2005.04

Wagenmakers, E. J., Love, J., Marsman, M., Jamil, T., Ly, A., Verhagen, J., Selker, R., Gronau, Q. F., Dropmann, D., Boutin, B., Meerhoff, F., Knight, P., Raj, A., van Kesteren, E. J., van Doorn, J., Šmíra, M., Epskamp, S., Etz, A., Matzke, D., … Morey, R. D. (2018). Bayesian inference for psychology. Part II: Example applications with JASP. Psychonomic Bulletin and Review, 25(1), 58–76. https://doi.org/10.3758/s13423-017-1323-7

Watanabe, A., Xu, Y., Yao, T., & Yu, T. (2012). The Asset Growth Effect: Insights from International Equity Markets. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1787237

World Federation of Exchanges. (2022). Market capitalization of listed domestic companies (% of GDP). World Bank Group. https://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS

Zeytnoglu, E., Akarim, Y. D. (2013). Financial Failure Prediction Using Financial Ratios : An Empirical Application on Istanbul Stock Exchange. Journal of Applied Finance & Banking, 3(3), 107–116.

Investor Protection in Indonesia: Financial Ratios as Early Warning Indicators

Keywords

How to Cite

Download Citation

Abstract

References