Innovation in Financial Performance and CSR: Their Impact on Stock Returns in Indonesian Government and Private Banks

General Background The capital market is an essential intermediary for connecting investors with entities seeking funds, wherein stock return serves as a critical measure of investment performance. Specific Background Indonesian state-owned banks, primarily represented by the Association of State-Owned Banks (HIMBARA) and Regional Development Banks (BPD), operate with dual mandates that encompass commercial profitability and government economic development objectives, distinct from private banks. Knowledge Gap Although numerous studies evaluate banking performance, limited empirical analysis exists on how market-based indicators versus accounting metrics and Corporate Social Responsibility (CSR) simultaneously explain the variations in stock returns across distinct banking ownership structures in Indonesia. Aims This study investigates the effect of financial performance—measured by Capital Adequacy Ratio (CAR), Net Profit Margin (NPM), Return on Equity (ROE), and Price to Earnings Ratio (PER)—and CSR on the stock returns of HIMBARA and regional banks compared to private banks from 2020 to 2024. Results Utilizing the Common Effect Model (CEM) on 85 firm-year observations from 17 banks, the analysis indicates that CAR and NPM exert a negative, albeit insignificant, effect on stock returns. While ROE presents a positive but negligible relationship, CSR demonstrates a negative and insignificant association. Conversely, PER significantly and positively dictates stock returns, serving as the sole explanatory variable with substantial impact. Furthermore, independent-samples t-tests revealed no statistically significant divergence in stock returns between private and state-owned banks. Novelty This study highlights that market valuation, specifically PER, supersedes traditional capital adequacy and CSR disclosures in driving investor behavior within the Indonesian banking sector. Implications Bank management should prioritize transparent market-oriented financial communication and sustainable capital utilization over nominal CSR activities, while future models must incorporate macroeconomic and market-sentiment factors to capture comprehensive stock volatility. HIGHLIGHTS The Price to Earnings Ratio (PER) significantly and positively drives stock returns, overshadowing traditional accounting metrics like capital adequacy and profitability. Corporate Social Responsibility (CSR) disclosures exhibit a negative and statistically insignificant effect on banking stock returns during the observed period. Bank ownership status (state-owned versus private) does not result in a statistically significant difference in realized stock returns for investors.