Exchange Rate, Financial Leverage, and Corporate Profitability: The Moderating Role of Foreign Ownership in Indonesian Manufacturing Companies

Abstract

Purpose: This study aims to examine the effect of the exchange rate and financial leverage on the profitability of manufacturing companies in Indonesia and to investigate the moderating role of foreign ownership in these relationships.

Design/methodology/approach: his study employed an explanatory quantitative approach using secondary panel data. The sample consisted of 34 manufacturing companies listed on the Indonesia Stock Exchange during the 2023–2025 period, resulting in 82 observations after outlier elimination. Profitability, measured by Return on Assets (ROA), served as the dependent variable. The independent variables were the exchange rate, measured by the annual percentage change in the Jakarta Interbank Spot Dollar Rate (JISDOR), and financial leverage, measured by the natural logarithm of the Debt-to-Equity Ratio (DER). Foreign ownership, measured as the percentage of shares held by foreign investors, was used as the moderating variable. Data were analyzed using Moderated Regression Analysis (MRA) with SPSS after satisfying the classical assumption tests, including normality, multicollinearity, heteroscedasticity, and autocorrelation.

Findings: The results indicate that the exchange rate has no significant effect on ROA (p = 0.427), leading to the rejection of H1. Financial leverage has a significant negative effect on ROA (p = 0.022; coefficient = –1.682), supporting H2. Foreign ownership does not moderate the relationship between the exchange rate and ROA (p = 0.732) or between financial leverage and ROA (p = 0.334), resulting in the rejection of H3 and H4. However, foreign ownership has a significant positive direct effect on ROA (p = 0.018; coefficient = 0.060), representing an additional finding. The proposed model explains 11.1% of the variation in ROA, with an Adjusted R² of 0.053.

Practical implications: Manufacturing companies should maintain financial leverage at an optimal level to minimize interest expenses and reduce the risk of financial distress. Increasing foreign ownership may improve corporate profitability through knowledge transfer, technological advancement, and enhanced corporate governance. In addition, investors may consider foreign ownership as a complementary indicator when evaluating corporate performance.

Originality/value: This study integrates Pecking Order Theory, Agency Theory, and Resource Dependence Theory to examine the moderating role of foreign ownership in the relationships between the exchange rate, financial leverage, and profitability. Such an integrated framework remains limited in the existing literature, particularly in the context of Indonesian manufacturing companies during the 2023–2025 period.

Paper type: Empirical