The Effects of Liquidity Risk and Interest-Rate Risk on Profitability and Firm Value among Banks in ASEAN-5 Countries

Abstract

This study explores the issues relating to liquidity risk and interest-rate risk, recognizing that existing studies are mostly vague in emerging and developing markets. A panel data estimation technique is employed based on data extracted from 63 commercial banks in ASEAN-5 countries over the period 2009 to 2017, yielding 567 observations. The empirical results reveal that the loan-to-deposit ratio has a positive and significant effect on firm value, while the liquid asset ratio and interest-rate risk (net interest margin and asset interest yield) have a negative and significant effect on firm value in ASEAN. The loan-to-deposit ratio also has a positive and significant impact on return on assets, whereas interest-rate risk and bank size have a significant negative effect on return on assets for ASEAN banks, while GDP and inflation have a positive and significant effect on return on assets. In addition, liquidity risk has a negative and significant effect on return on equity, while interest-rate risk has a positive and significant effect; bank size has a significant negative effect on return on equity, while the inflation rate has a positive and significant impact on return on equity. Hence, this empirical study provides implications emphasizing the need for banks to adhere to prudential and regulatory guidelines and to ensure effective corporate management with respect to liquidity exposure, which is capable of critically affecting banks’ profitability and firm value. The dynamics of interest rate volatility in the banking operating environment necessitate that financial institutions adopt sound risk management practices in order to obtain higher valuations, achieve better financial performance, and experience diminished costs of financial distress. This is useful for policy implementation in ASEAN economies and suggests that further studies can explore the interaction between abnormal loan growth and non-performing loans using a robust econometric model.