The Effect of Return on Equity and Debt-to-Equity Ratio on Firm Value with Price-to-Book Value as a Mediating Variable

Abstract

The value of banks listed on the Indonesia Stock Exchange (IDX) has fluctuated significantly since the Covid-19 pandemic, following changes in profitability and capital structure. This study examines the effect of Return on Equity (ROE) and Debt to Equity Ratio (DER) on firm value, proxied by Tobin's Q, with Price to Book Value (PBV) as a mediating variable. Using an explanatory quantitative approach, the study analyzes ten banks listed on the IDX during 2020-2024, yielding 50 panel observations. Data were processed using Partial Least Squares Structural Equation Modeling (PLS-SEM) in SmartPLS 3 with a 5,000-resample bootstrapping procedure. The results show that ROE has a significant positive effect on PBV, while DER has a significant negative effect on PBV. Neither ROE nor DER directly and significantly affects Tobin's Q, whereas PBV has a strong and significant positive effect on Tobin's Q. Mediation testing confirms that PBV fully mediates the effect of both ROE and DER on Tobin's Q. The model explains 94.3 percent of the variance in firm value. These findings indicate that equity market valuation is the primary channel through which profitability and capital structure affect bank firm value, suggesting that investors and bank management should prioritize strategies that strengthen PBV as a reliable intermediate indicator.