Profitability, Cash Holdings, and Firm Value: Evidence from Indonesian Manufacturing Companies
Abstract
Purpose – This study examines the effect of profitability and cash holdings on firm value among manufacturing companies listed on the Indonesia Stock Exchange (IDX). Design/methodology/approach – Using an unbalanced panel of 938 firm-year observations from 261 manufacturing companies over 2021–2024, sourced from Bloomberg, this study estimates a firm- and year-fixed-effects model with firm-clustered standard errors. Firm value is measured by Tobin's Q, profitability by ROA, and cash holdings by the ratio of cash and cash equivalents to total assets, with firm size, leverage, and sales growth as controls. Model-selection tests (Breusch–Pagan LM, F-test, Hausman) support the fixed-effects specification. Findings – ROA correlates positively with Tobin's Q, and pooled OLS yields a large positive coefficient, but this weakens under random effects and reverses to negative and significant under fixed effects, indicating that the conventional positive profitability–value relationship is mainly a between-firm rather than a within-firm phenomenon. Cash holdings show no significant association with firm value. Sales growth and the year fixed effects for 2022–2024 (relative to 2021) are negatively associated with firm value, while firm size and leverage are not significant. Research limitations/implications – The four-year window, exclusive focus on manufacturing firms, and linear cash-holdings specification limit generalizability, and the low within-R² suggests unobserved factors remain unexplored. Originality/value – By isolating within-firm variation through fixed effects, this study shows that profitability and cash reserves do not automatically raise market valuation, challenging assumptions in much of the pooled cross-sectional literature on Indonesian firms.
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